Federal Government Challenges State Regulation of Prediction Markets

On April 2, 2026, the federal government initiated lawsuits against Connecticut, Arizona, and Illinois, contesting their regulatory actions against online prediction market operators, specifically Kalshi and Polymarket. The states have issued cease and desist orders, claiming these companies are engaging in illegal online gambling under their respective laws. Arizona has escalated the situation by filing criminal charges against Kalshi for purported violations of state gambling laws and a prohibition on betting related to elections.

UsNews and World ReportFederal Government Sues Three States Over Prediction Market Regulation

The Commodity Futures Trading Commission (CFTC) asserts that it holds exclusive regulatory authority over prediction markets, arguing that state-level regulations create a "fragmented patchwork" that increases the risk of fraud and undermines consumer protection. CFTC Chairman Michael S. Selig emphasized the agency's commitment to defending market participants against what he describes as "overzealous state regulators." He stated, “The CFTC will continue to safeguard its exclusive regulatory authority over these markets and defend market participants against overzealous state regulators.”

Federal Government Sues Three States Over Prediction Market Regulation

In contrast, Connecticut Attorney General William Tong criticized the federal government's position, accusing it of "recycling industry arguments" that have been dismissed in various district courts. Tong maintained that the contracts offered by Kalshi and Polymarket are "plainly unlicensed illegal gambling under time-worn state law" and vowed to "aggressively defend Connecticut’s commonsense consumer protection laws."

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This legal confrontation is poised to have significant implications for the future of financial technology, online gambling, and sports betting regulation in the United States. The outcome may influence how prediction markets are governed, potentially reshaping the landscape of consumer protection and regulatory authority between state and federal levels.

Federal Government Sues Three States Over Prediction Market Regulation

Critics of the federal lawsuits, particularly from state officials like William Tong, argue that the federal government is undermining state laws designed to protect consumers. They contend that allowing prediction markets to operate without stringent state oversight could lead to increased risks for consumers and a rise in fraudulent activities.

Federal Government Sues Three States Over Prediction Market Regulation

The lawsuits filed by the federal government are expected to lead to a protracted legal battle over the jurisdiction and regulation of prediction markets. As the case unfolds, it will likely draw attention from various stakeholders in the financial and gambling sectors, as well as from consumer advocacy groups concerned about the implications for consumer protection.

Federal Government Sues Three States Over Prediction Market Regulation

“'The CFTC will continue to safeguard its exclusive regulatory authority over these markets and defend market participants against overzealous state regulators.'” — Michael S. Selig, CFTC Chairman

Federal Government Sues Three States Over Prediction Market Regulation

“'These contracts are plainly unlicensed illegal gambling under time-worn state law, and we will aggressively defend Connecticut's commonsense consumer protection laws.'” — William Tong, Connecticut Attorney General

Federal Government Sues Three States Over Prediction Market Regulation