The Commodity Futures Trading Commission and the U.S. Department of Justice have filed lawsuits against the states of Illinois, Connecticut, and Arizona, escalating a legal battle over who has authority to regulate prediction markets in the United States.
Federal vs state control
The CFTC argues that prediction markets fall under its exclusive jurisdiction as derivatives markets, specifically under the framework governing Designated Contract Markets (DCMs) in the Commodity Exchange Act. According to the regulator, these platforms operate as swaps markets and should therefore be overseen at the federal level.
The lawsuits come after several states issued cease-and-desist orders against platforms such as Kalshi and Polymarket, claiming that event-based contracts violated local gambling laws and licensing requirements.
Illinois at the center of the dispute
In one complaint, the CFTC challenged actions taken by Illinois officials, including Governor JB Pritzker and Attorney General Kwame Raoul, as well as the Illinois Gaming Board. The regulator contends that the state wrongly classified event contracts as wagers or sports betting rather than financial derivatives.
The agency further argued that Illinois’ actions interfere with a federal regulatory system designed to oversee national financial markets, warning that continued enforcement by states could undermine that framework.
Broader regulatory clash
The legal fight is part of a wider trend, with at least 11 U.S. states taking action against prediction market operators over the past year. At the same time, lawmakers are considering new rules that could restrict or ban certain types of event contracts, particularly those tied to sports or geopolitical outcomes.
Despite mounting regulatory pressure, the sector continues to grow rapidly. Prediction markets have seen a surge in activity, with trading volumes rising sharply over the past year as more users turn to these platforms.
