The CFTC filed lawsuits against Arizona, Connecticut, and Illinois on April 2, declaring state gambling laws “unconstitutional and invalid” when applied to prediction markets. Joined by the Department of Justice, the suits represent the most aggressive assertion of federal authority over the booming prediction market industry to date, and set the stage for a constitutional showdown that legal experts say will likely reach the Supreme Court.
KEY FACTS AT A GLANCE
- Who: CFTC and DOJ filed civil lawsuits against Arizona, Connecticut, and Illinois
- What: Seeks to declare state gambling laws unconstitutional when applied to federally regulated prediction markets
- Why: States issued cease-and-desist orders and criminal charges against platforms like Kalshi, Polymarket, and Crypto.com
- Named defendants: Governors Katie Hobbs (AZ), Ned Lamont (CT), JB Pritzker (IL) and their attorneys general
- What’s next: Over 30 active federal cases, emerging circuit split, Supreme Court review likely
What the CFTC Filed
The Commodity Futures Trading Commission, backed by the Department of Justice, filed civil actions in three federal district courts on April 2, 2026. The lawsuits name six defendants: Arizona Governor Katie Hobbs and Attorney General Kris Mayes, Connecticut Governor Ned Lamont and Attorney General William Tong, and Illinois Governor JB Pritzker and Attorney General Kwame Raoul.
The CFTC is seeking both declaratory and injunctive relief. It wants federal courts to rule that state gambling laws are “unconstitutional and invalid” when applied to prediction markets operated by CFTC-registered designated contract markets. The suits also seek injunctions blocking states from enforcing cease-and-desist orders, criminal charges, and new licensing demands against prediction market operators.
The filings arrive after months of escalating state enforcement actions, culminating in Arizona’s landmark criminal charges against Kalshi on March 17. The CFTC also announced an Advanced Notice of Proposed Rulemaking to clarify its regulatory framework for prediction markets going forward.
The Money Behind the Fight
The regulatory clash is fueled by staggering growth. Prediction market trading volume hit $44 billion in 2025, up from roughly $300 million in 2024. By early 2026, the industry is on pace to exceed $200 billion annually, with March 2026 setting a record: Kalshi processed $13.07 billion and Polymarket processed $10.57 billion in notional volume that month alone.
The financial stakes explain why states are fighting back. According to the American Gaming Association, states have collectively lost over $600 million in tax revenue from wagers placed on unregulated prediction markets. Kalshi processed nearly $1.9 billion in college basketball wagers in February 2026, and approximately 90% of its contracts are sports-related, putting it in direct competition with state-licensed sportsbooks. The power shift between sportsbooks and prediction markets has become impossible for state regulators to ignore.
The Legal Arguments
At the heart of the CFTC's case is a classification question: are prediction market contracts financial derivatives or gambling bets? The CFTC argues they are "swaps" under Section 1a(47) of the Commodity Exchange Act, which defines swaps broadly as derivative instruments that allow parties to speculate on future conditions without owning the underlying asset. The agency first recognized event contracts in 1992 through the Iowa Electronic Markets at the University of Iowa, and successive Congressional amendments in 1982, 1992, 2000, and the Dodd-Frank Act in 2010 reinforced CFTC jurisdiction using "deliberately broad" definitional language.
The CFTC makes two preemption arguments. First, an impossibility conflict: federal regulations require designated contract markets to provide "impartial access" to all eligible participants nationwide, and simultaneous compliance with a state ban and the federal access mandate is irreconcilable. Second, obstacle preemption: applying state-by-state gambling licensing, fees, and infrastructure requirements to national commodity exchanges would recreate the regulatory patchwork that Congress eliminated when it created the CFTC in 1974.
Over 3,000 self-certified event contracts currently exist on registered platforms, covering everything from cryptocurrency prices and GDP releases to election outcomes and commodity movements. The CFTC warns that excluding event contracts from the swap definition would leave "no principled boundary" preventing other event-based derivatives from falling outside federal oversight, threatening the regulation of weather, energy, and agricultural derivatives across commodity markets. The emerging circuit split across federal courts has only intensified the stakes.
"The CFTC will continue to safeguard its exclusive regulatory authority over these markets and defend market participants against overzealous state regulators."
— Michael Selig, CFTC Chairman
"The Trump Administration is recycling industry arguments that have been rejected in district courts across the country. These contracts are plainly unlicensed illegal gambling under time-worn state law."
— William Tong, Connecticut Attorney General
States Fight Back
The three defendant states have shown no signs of backing down. Arizona raised the stakes highest on March 17, when Attorney General Kris Mayes filed a 20-count criminal information against Kalshi, making it the first-ever criminal prosecution of a prediction market platform. The charges include accepting bets from Arizona residents on professional and college sports, proposition bets on individual player performance, and four counts of election wagering covering races from the 2028 presidential contest to local Arizona primaries. Mayes said Kalshi "may brand itself as a 'prediction market,' but what it's actually doing is running an illegal gambling operation."
Connecticut and Illinois took a different but equally forceful approach, issuing cease-and-desist orders to Kalshi, Polymarket, Crypto.com, and Robinhood for allegedly enabling unlicensed sports wagering. An Illinois spokesperson characterized the Trump administration as "carrying water" for prediction market companies that prioritize profits over consumer protection.
The states are not alone. A 39-state coalition filed an amicus brief in the Ninth Circuit supporting state regulatory authority over prediction markets. In total, 11 states have issued cease-and-desist orders against prediction market operators, and 11 states have introduced new legislation targeting the industry in 2026. Hawaii has already passed a full ban, while Kentucky implemented a 17.25% tax on prediction market operator transaction fees. The NFL has also entered the fray, requesting that prediction markets stop offering what it called manipulable trading contracts.
Congress Steps In
While the CFTC fights to protect federal jurisdiction, Congress is simultaneously debating whether to restrict what prediction markets can offer. Senators John Curtis and Adam Schiff introduced bipartisan legislation to prohibit federally regulated prediction platforms from offering contracts tied to sporting events. Separately, Representative Jamie Raskin and Senator Jeff Merkley introduced the STOP Corrupt Bets Act, which would ban prediction market bets on elections, sports, war, and government activity.
Representative Richie Torres has pushed the Public Integrity in Financial Prediction Markets Act, which has gathered 42 Democratic co-sponsors. The legislative push from both sides of the aisle reflects growing bipartisan unease with the escalating prediction market wars, even as the executive branch moves to protect the industry from state interference.
What Comes Next
The CFTC's lawsuits add to more than 30 active federal cases involving prediction markets, spanning preemption battles, state enforcement actions, tribal gaming challenges, and consumer class actions. District courts in the Third, Fourth, and Ninth Circuits have reached conflicting conclusions, creating an emerging circuit split that makes Supreme Court review increasingly likely.
The central constitutional question remains unresolved: does federal commodity derivatives law preempt state gambling regulation when it comes to event contracts? The answer will determine not just the future of Kalshi and Polymarket, but the regulatory framework for a market that barely existed two years ago and is now on track to process over $200 billion this year. With Kalshi's legal battles heading toward the Supreme Court, the CFTC's aggressive intervention signals that the federal government is prepared to fight for jurisdiction over one of the fastest-growing financial markets in American history.
KEY TAKEAWAYS
- CFTC and DOJ sued three states — Arizona, Connecticut, and Illinois face lawsuits seeking to invalidate their gambling laws as applied to prediction markets
- Federal preemption is the core argument — the CFTC claims the Commodity Exchange Act gives it exclusive jurisdiction over event contracts classified as swaps
- States are not backing down — 25+ states have taken action through criminal charges, cease-and-desist orders, or legislation, with a 39-state coalition backing state authority
- The money is enormous — prediction market volume grew from $300M in 2024 to $44B in 2025, with $200B+ projected for 2026, while states report $600M+ in lost tax revenue
- Supreme Court likely — conflicting rulings across three circuits have created a split that makes high court review probable within years
Sources
- CFTC Sues Trio of States to Reaffirm its Exclusive Jurisdiction Over Prediction Markets — Commodity Futures Trading Commission
- CFTC Reaffirms Exclusive Jurisdiction over Prediction Markets in U.S. Circuit Court Filing — Commodity Futures Trading Commission
- Attorney General Mayes Charges Kalshi With Illegal Gambling Operation — Arizona Attorney General's Office
- Curtis, Schiff Introduce Bipartisan Legislation to Ban Sports Prediction Market Contracts — U.S. Senate
- Raskin, Merkley Legislation Would Ban Prediction Market Gambling — U.S. House of Representatives
