Kalshi And Polymarket Face Legal Battle Over Sports Betting Contract

TLDR

• Kalshi obtained a temporary restraining order against Tennessee’s enforcement of its cease-and-desist.
• Tennessee claims sports event contracts are illegal gambling under state law.
• The CFTC granted Kalshi status as a federally regulated contract market in 2020.
• Platforms face a Jan. 31 deadline to void unsettled sports-related trades in Tennessee.

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Kalshi and Polymarket, two leading prediction markets, are facing legal scrutiny in Tennessee. The state’s regulator has demanded they halt sports-related event contracts, triggering a legal standoff over whether such trades are federally regulated financial instruments or unlicensed gambling. A court decision could soon determine whether your trades stay active—or are canceled.

Legal Challenge Over State and Federal Jurisdiction

On January 9, 2026, the Tennessee Sports Wagering Council issued cease-and-desist letters to Kalshi, Polymarket, and Crypto.com. The letter instructed the platforms to stop offering sports-related event contracts to state residents and to void unsettled trades by January 31. The state claimed the platforms were operating illegal gambling businesses without proper licenses.

Kalshi responded by filing in federal court. The company argues it is a federally regulated entity under the Commodity Futures Trading Commission (CFTC). A federal judge in Nashville granted Kalshi a temporary restraining order on January 12, blocking the state from enforcing the cease-and-desist while the case proceeds. A hearing for a longer-term injunction is scheduled for January 26.

CFTC Oversight vs State Gambling Laws

Kalshi is registered as a designated contract market under the Commodity Exchange Act. This status, granted by the CFTC in 2020, gives it the right to offer derivatives contracts. Kalshi argues that this federal oversight gives the CFTC exclusive authority over its trading platform.

Tennessee, however, argues that if a product functions as sports betting, it must follow state gambling laws. The state said the platforms were violating age restrictions, licensing rules, and consumer protection standards. This places Kalshi and similar platforms in the center of a debate over regulatory control.

The outcome could reshape how prediction markets are treated under U.S. law. It raises the question of whether a yes/no trade on a sports event is gambling or a financial product.

CFTC Rules and Market Uncertainty

The CFTC allows event contracts if they serve an economic purpose and are not related to banned categories such as terrorism or gaming. Under Rule 40.11, contracts referencing “gaming” are restricted. Whether sports contracts fall under this rule remains uncertain.

In 2025, the CFTC issued an advisory noting that some sports-related contracts had been self-certified by exchanges, but the agency had not formally approved them. This ambiguity has left platforms in a difficult position as state regulators challenge their operations.

Nevada previously ruled that Kalshi’s contracts fell under state gambling regulations. That decision is under appeal, but it has encouraged other states to pursue similar actions.

Platforms Caught Between Compliance and Litigation

Faced with state demands, platforms must choose between compliance and litigation. If they comply by geofencing users and voiding trades, they may reduce legal risks but give up the argument that federal law preempts state rules. If they fight, they may face penalties and long court battles.

According to Reuters, Kalshi is currently fighting similar cases in multiple states. Tennessee’s case adds urgency due to its January 31 deadline for user refunds and contract cancellations.

The decision could lead to nationwide access for prediction markets or force them into fragmented, state-by-state compliance structures. As the court battle unfolds, the industry waits to see how regulators will define these products.

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