The Federal Government Once Tried To Restrict Prediction Markets. Now It's Suing States To Save Them.

“When will traffic at the Strait of Hormuz return to normal?” Depending on when you believe this will happen and which prediction market you’re using, a $100 position on this event contract could net as much as $400. But if you live in one of the states suing the prediction market Kalshi, you might not be able to profit off your hunch.

In April, Wisconsin sued Kalshi and several other prediction markets—platforms that let people make bets on the outcomes of various events—alleging that they facilitate illegal sports gambling. The platforms, and their millions of users, have found an unlikely ally: the federal government.

Shortly after Wisconsin filed suit, the U.S. Commodity Futures Trading Commission (CFTC)—the federal body that regulates prediction markets—filed a legal challenge against the state. The CFTC argues that the Commodity Exchange Act (CEA) gives it “exclusive jurisdiction” in the “operation of federal law in regulating financial markets,” including prediction markets, which operate more like marketplaces than gaming houses.

Wisconsin isn’t the only state treating prediction markets as traditional gambling. Arizona, Connecticut, Illinois, New Jersey, and Massachusetts have all pursued legal action against these platforms. The CFTC has countersued these states too, and has filed amicus briefs in the U.S. Court of Appeals for the 9th Circuit and the Supreme Judicial Court of Massachusetts in support of prediction markets.

Ironically, the federal government itself was eager to regulate these platforms strictly. In 2023, the CFTC blocked Kalshi from trading contracts on the political party most likely to control Congress, labeling them “political event contracts” linked to illegal gaming and contrary to the public interest.

Kalshi challenged the order, and the U.S. District Court for the District of Columbia found in the platform’s favor, ruling that contracts on elections involve neither illegal activity nor gaming. The U.S. Court of Appeals for the D.C. Circuit later upheld the ruling.

But with prediction markets growing in popularity over the last five years and with more Americans concerned about the effects of legalized gambling, several states are moving against these platforms. In 2025, Massachusetts became the first state to sue a prediction market, charging Kalshi with “neglecting age restrictions, player protection programs, state taxes, and other consumer protections.”

An amicus brief from 38 states and D.C. supporting Massachusetts’s lawsuit against Kalshi argues that the CEA bans event contracts tied to illegal acts—such as war or gaming—or to activities that the CFTC deems, “by rule or regulation,” to be contrary to the public interest.

Yet Judge Jia M. Cobb already rejected this argument when the U.S. District Court for D.C. ruled in Kalshi’s favor in 2024. Cobb stated that the CEA “specifically preempts the application of state law to derivative markets” and that event contracts do not “amount to” terrorism, assassination, or war.

The CFTC can, for example, reject a contract on whether a plane sabotaged by terrorists will crash, because a payout based on criminal conduct is both illegal and against the public interest. But it couldn’t reject a contract on a routine policy decision, such as whether the Federal Reserve will raise interest rates.

Cobb also found that the CEA’s prohibitions on prediction markets apply only “if the contract’s subject itself” is related to the terms. In fact, the 2024 circuit court ruling seems to nullify each state’s major point of contention, since it found that prediction markets for sports are not “gaming”—that term, it determined, describes playing a game rather than trading on its outcome.

This could render Massachusetts’ entire argument moot, as the state specifically alleges that Kalshi runs afoul of laws governing “sports gaming.”

It’s unclear how these court challenges will turn out. But if you’re an adult who uses these aggregators of public opinion and who wants to spend your money as you see fit, you now have an unlikely ally in the federal government. Perhaps there’s a way to cash in on that.

The post The Federal Government Once Tried To Restrict Prediction Markets. Now It’s Suing States To Save Them. appeared first on Reason.com.

Source: https://reason.com/2026/05/01/the-federal-government-once-tried-to-restrict-prediction-markets-now-its-suing-states-to-save-them/