Federal Government Sues Three States Over Prediction Market Crackdowns

Key Takeaways

• Federal regulators launched lawsuits against Illinois, Connecticut, and Arizona for attempting to close down prediction market operators.
• State authorities issued cease-and-desist orders to companies like Kalshi and Polymarket, labeling their offerings as unlawful gambling.
• The Commodity Futures Trading Commission maintains it holds sole federal authority over these markets through the Commodity Exchange Act.
• A total of 11 states have initiated legal proceedings against prediction market companies.
• CFTC Chairman Mike Selig cautioned that state interference threatens market stability for participants and licensed entities.

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Federal authorities have taken legal action against three states this week following their efforts to eliminate prediction market platforms such as Kalshi and Polymarket. The CFTC maintains that federal law grants it singular regulatory power over these operations, while state governments contend the platforms operate as unregulated gambling businesses.

The Commodity Futures Trading Commission, alongside the Department of Justice, submitted the legal challenges on Thursday, April 2, 2026.

The conflict originated after Illinois, Connecticut, and Arizona delivered cease-and-desist notifications to prediction market operators throughout 2025. State regulators asserted that these platforms provided sports wagering services requiring proper licensing under their respective gambling regulations.

Federal regulators hold a different position. The CFTC contends that prediction markets facilitate event contracts, which qualify as derivative swaps. According to the Commodity Exchange Act, such financial products belong under federal oversight rather than state control.

The federal lawsuit targeting Illinois names Governor JB Pritzker, Attorney General Kwame Raoul, and the Illinois Gaming Board as defendants. The state gaming authority had categorized event contracts as “wagers” or “sports betting,” a classification the CFTC contests as incorrect.

The Jurisdictional Clash

State officials further criticized the platforms for generating “record profits” while providing products lacking “any basic consumer protections.” Illinois vowed to persist in defending its citizens.

Selig further argued that Congress had previously dismissed the concept of allowing individual states to create their own frameworks for these markets, characterizing it as a “fragmented patchwork” that diminishes consumer safeguards and elevates fraud risks.

The situation extends beyond these three states. A total of eleven jurisdictions — including Nevada, New Jersey, New York, Maryland, and additional states — have pursued enforcement actions against prediction market operators.

Nevada’s Gaming Control Board recently obtained a temporary restraining order targeting Kalshi, with court proceedings scheduled for Friday.

The Road Ahead

Congressional involvement continues to grow. Federal legislators are advancing bills that would completely prohibit sports-related event contracts and prevent political insiders from participating in prediction markets connected to military operations.

The CFTC has a scheduled appearance before the Ninth Circuit Court of Appeals in late April. That consolidated proceeding includes Kalshi, Robinhood, and the North American Derivatives Exchange.

According to the CFTC, the agency initially granted official recognition to event contracts in 1992 and has maintained regulatory oversight continuously since that time.

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