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Prediction Markets Emerging as New Flash Point Between Federal and State Regulators

By  |  December 10, 2025
Prediction Markets Emerging as New Flash Point Between Federal and State Regulators

Prediction markets, which let users bet on everything from the future price of Bitcoin to the future president of the United States, are the latest flash point between federal and state regulators. Real-money prediction markets technically fall under the jurisdiction of the Commodities Futures Trading Commission (CFTC), but a growing number of states have sought to shut down the markets they view as unlicensed or illegal gambling operations.

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    On Monday, a federal judge temporarily blocked Connecticut from enforcing gambling laws against Kalshi pending resolution of the platform’s motion for a preliminary injunction. The Gaming Division of the state’s Department of Consumer Protection had sent cease-and-desist letters to Kalshi, Robinhood and Crypto.com last week, per Decrypt, ordering them to stop offering sports event contracts to residents or face civil penalties.

    On Tuesday, a Massachusetts judge questioned whether Kalshi could legally offer residents the ability to bet on the outcome of sporting events without running afoul of the state’s gaming laws.

    New York, New Jersey, Nevada, Maryland, Arizona and Illinois have also recently sought to shut down the markets.

    In November, however, the CFTC gave permission to the off-shore market Polymarket to operate in all 50 U.S. states, while a federal judge in April granted Kalshi a preliminary injunction in New Jersey, finding that the CFTC’s jurisdiction likely preempted the state’s gambling laws. However, Kalshi failed in its bid for a preliminary injunction in Nevada, where it had also argued for federal preemption.

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    Read more: European Authorities Dismantle Major Bitcoin-Mixing Platform

    The conflict stems from the form of bets on prediction markets. The markets are generally structured as exchanges and allow users to purchase binary contracts—typically yes or no, or over/under—that pay off if the event unfolds as the user expects. The price of the event contract depends on the odds, which are calculated based on the contracts already purchases for an event.

    Kalshi and the others argue that the contracts are swaps of the kind that in the U.S. are regulated by the CFTC. State efforts to ban the sales of contracts, therefore, are prohibited by the CFTC’s exclusive jurisdiction over swap markets.

    At this week’s hearing in the Massachusetts case, however, assistant state attorney general Louisa Castrucci argued that Congress gave the CFTC oversight responsibility for swaps in the wake of the 2008 financial crisis to try to prevent a repeat of the crash, not to regulate sports betting.

    “A sports wager by any other name is still a sports wager,” she told the court, per Reuters.

    Fueling the controversy is the explosive recent growth in online prediction markets and flow of venture capital money into the industry. Total trading volumes exceeded $28 billion globally in 2025, with weekly peaks of $2 billion. The largest market, Kalshi, has backing from Sequoia, Andreessen Horowitz, Meritech Capital, IVP, ARK Invest, Anthos Capital, CapitalG, and Y Combinator, at a $11 billion valuation.

    The platform currently hosts about 3,500 markets.