Forecast: Market operators face 20 lawsuits, and users may bear cross-state regulatory risks

U.S. state regulators have recently filed over 20 lawsuits against prediction market operators Kalshi and Polymarket, sparking conflicts between federal regulators and local governments over jurisdiction. Kevin Frankel, a partner at Benesch Law, told Forbes editor Maggie McGrath that the Commodity Futures Trading Commission (CFTC) supports open prediction markets and is in strong opposition to state and local governments implementing bans. For users who enjoy prediction markets, the unclear regulatory authority at federal and state levels adds extra risks when placing bets on these markets.

CFTC aims to take jurisdiction through federal law, with Nevada leading the rejection

After Michael Selig took office as the new chairman of the CFTC at the end of 2024, his stance on prediction markets changed significantly. The agency, which previously adopted a wait-and-see and passive approach, has now shifted to active intervention. In a friend-of-the-court brief filed with the Ninth Circuit Court of Appeals in the Nevada lawsuit, the CFTC argued that federal law should fully cover the jurisdiction, and states have no authority to interfere. This claim is based on the Commodity Exchange Act, asserting that prediction markets fall under federal jurisdiction. However, the Ninth Circuit immediately rejected this argument and sent the case back to the local courts for further review.

Currently, there is disagreement within Congress over jurisdiction, with some lawmakers concerned that CFTC relinquishing oversight could impact sensitive events like war, terrorism, or political assassinations. Several states, including New Jersey, Maryland, and Massachusetts, are already involved in lawsuits. Kevin Frankel believes these cases will continue to delay proceedings, ultimately ending up before the Supreme Court, with legal processes expected to take more than two years.

Gambling sparks regulatory and ethical debates

The core conflict between state regulators and prediction market operators revolves around whether “prediction contracts” constitute gambling. State governments argue that prediction markets, especially those involving sports outcomes, are essentially sports betting and should be regulated under state law with specific licenses, including age restrictions of 21 and over. Conversely, operators contend that these contracts are more akin to traditional futures contracts, like soybean or pork futures, serving as financial tools for hedging and risk management. The market is highly competitive, with traditional betting platforms like DraftKings and FanDuel developing their own prediction markets for hedging purposes. Data shows that a single Super Bowl event contract traded up to $1.6 billion, involving substantial licensing fees and tax revenues. States worry that if the CFTC takes over regulation, they will lose tax income. Additionally, some contracts involve public interest issues, such as the survival of foreign political figures, raising legal and ethical questions about allowing individuals to profit from events with insider trading risks.

Legally, operators like Kalshi argue for “field preemption,” claiming federal regulation has fully occupied the space, leaving states no authority. However, the Commodity Exchange Act does not explicitly specify that federal law takes precedence over state law, making the “explicit preemption” argument difficult to establish.

States emphasize concerns over gambling addiction and the demographic of users, mainly aged 18 to 21, which conflicts with existing state casino age restrictions. CFTC Chairman Selig has criticized media outlets, arguing that overly eager state governments are undermining public interests, claiming these markets can provide valuable data, such as predicting presidential election outcomes.

Legal vacuum increases user risks

Until the Supreme Court issues a final ruling, prediction markets face prolonged regulatory uncertainty and regional service disruptions. Consumers may experience regional regulatory environments, such as Kalshi operating legally in Tennessee but being forced to shut down certain features in Nevada or Maryland. Operators might need to implement geofencing to restrict access from certain states, which conflicts with the internet’s borderless nature and could lead to operational failures. A more complex issue arises if users move to jurisdictions where betting is not permitted after executing contracts—affecting payout and contract validity—creating a legal vacuum that could erode consumer confidence and distort market data. Legal experts expect these frictions to resemble digital content regulation, with frequent regional access restrictions becoming normal until federal and state jurisdictional boundaries are clarified by the Supreme Court.

This article predicting prediction market operators facing 20 lawsuits and users risking cross-state regulatory issues first appeared on Chain News ABMedia.