When Federal Regulators Make the Rules Against States
The regulatory standoff over prediction markets is taking a dramatic turn in the United States. The Commodity Futures Trading Commission (CFTC), the federal watchdog for derivatives markets, has just sued the State of New York. The reason? New York was trying to apply its gambling laws to these online platforms that let users bet on the outcome of real-world events — elections, Federal Reserve decisions, sports results, and even weather phenomena.
For those new to the concept: a prediction market is a platform where you buy contracts worth $1 if an event occurs, and $0 if it doesn’t. The price of these contracts therefore reflects the probability perceived by participants. Simple enough on the surface, but ambiguous enough to have kept lawyers and regulators pulling their hair out for years.
An Offensive That Goes Well Beyond New York
What makes this case particularly notable is its scope. The action against New York represents the fourth lawsuit launched by the CFTC in just three weeks against American states. An aggressive pace that testifies to a deliberate strategy by the federal regulator: to establish clearly, and if necessary in court, that it — and it alone — holds authority over these financial instruments.
The timing is also delicious: this action against New York comes exactly three days after that state’s attorney general had himself sued Coinbase and Gemini, two giants of the crypto industry. New York seemed to be in an offensive regulatory mood when it comes to digital assets. The CFTC gave it a taste of its own medicine with remarkable speed.
Meanwhile, 38 attorneys general from other states chose to support Massachusetts in a similar case involving Kalshi, one of the major prediction market platforms. This united front of states against the CFTC reveals a deep regulatory fracture between federal and state authorities.
The Heart of the Debate: Gambling or Financial Instrument?
The legal question at the center of these lawsuits is fundamental: are prediction markets gambling activities falling under state laws, or are they financial contracts subject to the CFTC’s federal oversight?
The CFTC defends a firm position: these platforms offer futures contracts on events, and as such, they fall exclusively under the Commodity Exchange Act — the federal law that grants it its powers. Allowing each state to impose its own rules would create an unmanageable regulatory patchwork that would stifle innovation.
The states don’t see it that way. Allowing their residents to wager money on election results or sports outcomes looks, by all accounts, exactly like online gambling — a sector historically regulated at the local level. And anti-gambling laws exist for good reason: to protect consumers from potential excesses.
Both sides have valid arguments, which explains why this battle is now being fought in courtrooms rather than around a negotiating table.
Kalshi in the Eye of the Storm
Kalshi, the platform that obtained CFTC approval in 2023 to offer contracts on U.S. elections after a long legal battle, finds itself back at the center of the debate. Massachusetts is trying to apply its own restrictions to it, and 38 attorneys general believe this approach is legitimate.
For Kalshi — and for other players in the sector like Polymarket — the stakes are existential. If states succeed in imposing their own laws, potentially access to tens of millions of Americans closes down, market by market. An operational nightmare compounded by permanent legal uncertainty.
Putting It in Perspective
This regulatory war illustrates a tension far broader than prediction markets alone. In the United States, the question of jurisdiction between federal and state regulators over new financial technologies is a perennial issue. We’ve seen it with cryptocurrencies, where the SEC, CFTC, the Treasury, and state banking regulators have long fought over authority.
Prediction markets crystallize this problem particularly sharply because they sit at the intersection of several worlds: finance, gambling, information, and even democracy (when betting on elections). Their regulation raises questions that go well beyond technical considerations.
What’s certain is that the courts will have to settle a question that American legislators have so far deliberately avoided posing clearly. In the meantime, the CFTC seems determined to play the federal sheriff — and not let states encroach on what it considers its territory. All without ever missing an opportunity to strike back, even when the opponent just launched its own hostilities the week before.