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If you live in Phoenix, can you put down money on the outcome of the 2026 Arizona governor’s race? What about a resident of Hartford who wants to bet on a University of Connecticut basketball game?
Until recently, the answers were pretty clear. Arizona has banned election-related wagers for more than a century, and Connecticut forbade bets on local college teams when it legalised other forms of sports gambling in 2021.
But national prediction markets including Kalshi and Polymarket have clouded the picture significantly. These rapidly growing businesses offer “events contracts” that match customers who want to take the opposite side of binary outcomes. Some bets turn on share prices and interest rates so they look very much like investments. Others focus on Oscar winners and sporting events and feel a lot more like gambling.
At the same time, suspiciously well-timed bets ahead of the US attacks on Venezuela and Iran have raised fears that the platforms are being used to profit from inside information.
Now lawsuits are flying that could fundamentally alter not just betting markets but the balance of power within the US federal system of government. Arizona last month filed criminal charges against Kalshi accusing it of operating an unlicensed gambling business that offers illegal wagers on elections. At least 20 other states have gone down the civil litigation route, and a federal judge temporarily banned Kalshi from operating in Nevada.
But Kalshi, which lists Donald Trump Jr as a “strategic adviser”, says its contracts are legal under federal rules and has called in help from high places. Last week the US Commodity Futures Trading Commission sued Arizona, Connecticut and Illinois to prevent them from applying state laws to prediction markets.
The Trump administration says it is protecting the national financial market for swaps from unnecessary red tape. “The CFTC will continue to safeguard its exclusive regulatory authority . . . against overzealous state regulators,” said CFTC chair Michael S Selig, a Trump appointee.
But the states contend they are fulfilling their longstanding duty to protect citizens from industries that could do them harm. “Arizona will not be bullied into letting any company place itself above state law,” said state attorney-general Kris Mayes. Her Connecticut counterpart William Tong said: “We will aggressively defend Connecticut’s commonsense consumer protection laws.”
The fight highlights the conflicts that emerge when innovative businesses blur the lines — or exploit the holes — between the national markets that the federal government is charged with regulating and day-to-day activities that traditionally fall within state control. These clashes are only going to become more common and more heated.
As Donald Trump has sought to shrink the federal government and cut regulation, state attorneys-general have jumped in to use their laws to bring enforcement cases in areas such as cryptocurrency, consumer finance and antitrust, where they think the US government has dropped the ball.
The Trump administration is also publicly committed to preventing states from regulating AI, even though the president and Congress have yet to come up with rules of their own.
That situation in some ways mirrors what is happening in prediction markets. In 2010, Congress gave the CFTC the power to prevent regulated exchanges like Kalshi from offering events-related contracts that are “contrary to the public interest” as part of the Dodd-Frank financial reform law. The acceptable reasons for such a ban include derivatives that involve “gaming” or “activity that is unlawful under any federal or state law”.
But the law is silent about what happens if the CFTC opts for light-touch regulation and lets events contracts go ahead that conflict with state laws on gambling and electioneering.
Some gaming lawyers think that could spell trouble for Kalshi because the Supreme Court has been sceptical when administrative agencies have tried to grab new regulatory powers. “Congress wouldn’t create CFTC exclusive jurisdiction over something as consequential as sports gambling through a side door without using clear and explicit language,” says Daniel Wallach.
But the first federal appeals court to consider the issue ruled the other way, finding on Monday that CFTC swaps regulation “pre-empts” New Jersey state laws on gambling. Two other appeals courts are due to take up the subject shortly.
Someone, somewhere has money riding on the ultimate outcome.
