The US Commodity Futures Trading Commission (CFTC) is moving toward a major legal confrontation over the regulation of prediction markets, arguing that federally registered exchanges should not restrict access to customers based on their state of residence.
The regulator's position directly conflicts with a series of recent court decisions that have required prediction market platforms, including Kalshi and Polymarket, to suspend operations in certain jurisdictions.
Prediction market companies offer event-based contracts covering topics such as sports, weather, politics, and other real-world outcomes. Platforms registered with the CFTC as Designated Contract Markets (DCMs) operate under federal derivatives regulations.
The CFTC argues that these federally registered platforms should be allowed to operate nationwide and should not selectively block customers based on state boundaries. Under the regulator's latest demand, affected companies have 30 days to restore access in restricted regions or explain why reopening those markets is not feasible.
Kalshi has already restricted customers in several states, including Nevada, Washington, and Michigan, while dealing with legal disputes over its operations. Other jurisdictions, including Utah, have taken a more aggressive approach, challenging prediction market activities through civil proceedings and criminal charges.
The dispute has intensified following several court developments that have gone against prediction market companies and the CFTC's broader regulatory position.
A recent decision by the US Court of Appeals for the Second Circuit involving Kalshi and Coinbase could allow enforcement actions to proceed in Connecticut and New York. Meanwhile, the Ninth Circuit ruled that Kalshi was likely to face difficulties in its argument that its contracts do not violate tribal gambling laws. The case was sent back to a federal judge in California, who subsequently ordered restrictions on access in certain tribal jurisdictions.
Consumer advocacy organization Better Markets welcomed the court decisions, arguing that prediction market platforms should be subject to existing gambling laws and enforcement measures. The organization has strongly criticized the CFTC's approach, claiming that it gives prediction markets excessive freedom.
At the center of the dispute is a fundamental question: whether prediction markets should primarily be regulated under federal derivatives law or remain subject to state gambling restrictions.
The conflict could have significant consequences for the future of the industry. If the CFTC succeeds in defending its nationwide regulatory approach, prediction market companies could gain broader access to US customers. However, if state authorities continue to prevail in court, platforms may face a fragmented regulatory environment, with access varying significantly across jurisdictions.
The coming weeks could therefore become an important test of the balance between federal regulatory authority, state gambling laws, and the growing prediction markets industry.
