Feds Target Three States With Lawsuits Over Prediction Market Regulation

The lawsuits are the most forceful move yet by the Trump administration assert federal authority over the markets and mark a significant escalation in the ongoing tug-of-war between state and federal regulators for oversight of the rapidly growing sector, particularly regarding sports-related wagers. Illinois, Arizona and Connecticut are among several states that have sued or taken other action against the markets for operating what they claim are simply illegal sports-gambling operations by a different name. The CFTC classifies the platforms as “Designated Contract Markets” (DCMs), no different from the markets in soybean futures or options it has exclusive authority to oversee.

“The CFTC will continue to safeguard its exclusive regulatory authority over these markets and defend market participants against overzealous state regulators,” the agency’s chairman, Michael Selig, said in a statement. “This is not the first time states have tried to impose inconsistent and contrary obligations on market participants, but Congress specifically rejected such a fragmented patchwork of state regulations because it resulted in poorer consumer protection and increased risk of fraud and manipulation.”

Although the three lawsuits differ in the details, reflecting the specific actions each state took, their general thrust is the same.

Read more: SEC and CFTC Release First-Ever Crypto Classification Framework 

“Defendants misapprehend both the nature of these contracts offered on CFTC-regulated DCMs and the federal regulatory framework.  Event contracts, including sports-related or political event contracts that are listed on DCMs, are covered by the [Commodity Exchange Act], and the CEA prohibits States from invading the CFTC’s exclusive jurisdiction over event contract transactions offered by and executed on federally regulated DCMs,” the Arizona complaint argues. “Unless restrained and enjoined by the Court, Defendants are likely to continue their attempts to subvert federal law and the exclusive jurisdiction to regulate event contract swaps conferred on the CFTC by Congress.”

Apart from the jurisdictional dispute, the targeting of the three states sued last week may have a political aspect as well, according to Decrypt. Both Illinois and Connecticut are deep blue states that voted against President Trump in 2024. Trump has also feuded openly with Illinois Governor J.B. Pritzker, a potential 2028 Democratic presidential candidate, over the administration’s aggressive immigration enforcement tactics.

Arizona went narrowly for Trump in 2024, but it has a Democratic governor and two Democratic U.S. senators. Gov. Katie Hobbs also previously served as Arizona’s Secretary of State from 2019 to 2023, during which she resisted Trump’s efforts to investigate the state’s role in his 2020 election loss.

Several Republican-controlled states have also challenged the prediction markets, including Tennessee, Utah and Nevada—the latter of which managed to secure a preliminary injunction last month against Kalshi—but have not yet been sued. Trump’s son, Donald Trump, Jr., also serves as an adviser to both Kalshi and Polymarket.

“The CFTC recently issued an Advanced Notice of Proposed Rulemaking to assist the agency with identifying areas of confusion regarding the proper application of the CEA and the CFTC’s regulations to prediction markets and expects to move forward with regulation reinforcing those obligations,” the agency said in announcing the lawsuits.