Why Prediction Markets Are Federally Legal But State-Restricted
Same company, same federal license, and still a state lawsuit. That sounds contradictory until you see how the two legal systems overlap.
Short answer
Federal law governs commodity contracts. State law governs gambling. States argue prediction markets belong in the second bucket, not the first. That's why a federally licensed company can still end up fighting state regulators in court.
Two Legal Systems, One Industry
Federal Level (CFTC)
Law: Commodity Exchange Act (CEA)
Agency: Commodity Futures Trading Commission (CFTC)
License type: Designated Contract Market (DCM)
Kalshi: CFTC-licensed DCM — legally authorized to offer event contracts as commodity derivatives under federal law.
Federal position: prediction markets are commodity contracts, so the CFTC controls and state gambling laws should not apply.
State Level (AG / Gaming Boards)
Law: State gambling statutes + police power
Authority: State Attorneys General, Gaming Control Boards
Legal hook: 10th Amendment — states regulate health, safety, morals
State position: prediction markets look and operate like gambling — users risk money on uncertain outcomes for profit.
State position: prediction markets are gambling operations, so state gambling law controls and a federal license does not override it.
How Dual Sovereignty Works
The Supremacy Clause makes federal law override state law in areas of federal jurisdiction. For commodity contracts, the CFTC rules. But states retain police power over gambling — and if a court decides prediction markets are gambling, the Supremacy Clause does not help. The threshold issue is classification.
Under the 10th Amendment, states have broad authority to regulate gambling as a matter of public health and morals. This is "police power." State AGs argue that letting residents risk money on uncertain outcomes — even on a CFTC-regulated platform — is still gambling, regardless of the federal label.
The Third Circuit became the first federal appeals court to weigh in on April 6, 2026, ruling 2-1 that CFTC has exclusive jurisdiction over DCM trades. But there is no Supreme Court precedent yet, and a circuit split may emerge: the 9th Circuit is hearing Nevada's case, Maryland's district court ruled against Kalshi, and cases in Washington, Massachusetts, Arizona, and New York are still testing the same core issue.
The Legal Question at Stake
Are prediction market contracts commodity contracts (so the CFTC wins and states lose) or gambling contracts (so states win and the CFTC loses)?
Platform position (Kalshi, Robinhood)
These are commodity contracts. The CFTC reviewed and licensed them, so the Supremacy Clause should block state gambling law from applying.
State position (WA, NV, MA, AZ, NY, CT, IL, MI)
These are gambling. A federal license does not override state gambling authority. The Supremacy Clause only matters if federal law was meant to preempt state gambling regulation — and the CEA does not say that explicitly. The dissent in the Third Circuit's April 6, 2026 ruling echoed this argument, with Judge Roth writing that Kalshi's offerings are "virtually indistinguishable from the betting products available on online sportsbooks."
The Third Circuit ruled on April 6, 2026 that CFTC has exclusive jurisdiction over DCM trades — the first federal appeals court to weigh in. But a circuit split may emerge depending on the 9th Circuit's ruling in the Nevada case.
Active State Actions
These are the states currently challenging prediction markets, along with the basic legal theory behind each action.
| State | Legal Claim | Status | User Access |
|---|---|---|---|
| New Jersey | State gaming enforcement | lawsuit | Kalshi remains available in New Jersey after the Third Circuit's April 6, 2026 ruling upholding Kalshi's injunction. Access could still change if New Jersey wins en banc rehearing or Supreme Court review. |
| Washington | CEA preemption | lawsuit | Restricted — Kalshi and Kalshi-powered apps blocked for WA residents |
| Nevada | State gambling statute | injunction | Kalshi blocked in Nevada. Polymarket separately blocked (January 2026). Robinhood PM may still be available. |
| Massachusetts | State gambling statute | lawsuit | Kalshi sports contracts blocked for MA residents by court order (January 2026). |
| Arizona | Criminal gambling charges | criminal | Kalshi access restricted for AZ residents. First criminal case against a CFTC-regulated prediction market in the US. |
| New York | State gambling statute | cease-and-desist | Both Kalshi and Polymarket restricted for NY residents. |
| New York | Unlicensed gambling (NY civil) | civil-lawsuit | No immediate change — civil suit only, no TRO or preliminary injunction at filing. NY residents remain blocked from Kalshi and Polymarket under the prior 2025-06-01 C&D; Coinbase and Gemini prediction-market products remain active pending proceedings. |
| Connecticut | State gambling statute | cease-and-desist | Kalshi and Polymarket restricted in CT. CFTC sued CT April 2, 2026 to block enforcement. |
| Illinois | State gambling statute | cease-and-desist | Kalshi blocked in Illinois. CFTC sued IL April 2, 2026 to block enforcement. |
| Michigan | State sports betting law | lawsuit | Kalshi sports contracts restricted in MI. |
| Ohio | State gaming law enforcement + $5M fine | regulatory-fine | Kalshi remains operational in Ohio while the fine is contested. The federal preemption case from the March 9, 2026 ruling (Judge Sarah D. Morrison) is on appeal to the Sixth Circuit. Political and economic markets are unaffected. |
| Kentucky | Statutory prohibition on licensee-operated PMs in KY | statute | KY residents can still access Kalshi, Polymarket US (QCX LLC d/b/a Polymarket US), and Robinhood Predictions today. The law primarily forces sports-betting licensees (DraftKings, FanDuel, Fanatics) to choose between their KY sportsbook license and offering prediction markets in KY. Effective approximately 90 days after enactment. |
| Kentucky | Proposed 14.25% excise tax on standalone PM exchanges | tax-proposed | No change to access today. HB 757 is proposed, not enacted; vote stage and effective date both pending the legislative record. |
| Minnesota | Proposed state-law felony ban (broadest state ban to date) | lawsuit | All platforms remain fully operational for MN residents today. SF 4511 is not yet law — it advanced unanimously out of Senate committee on 2026-04-14. House companion HF 4437 was laid over on 2026-04-09 and is likely to die in House this session. |
What Happens Next: Three Possible Outcomes
Court: PMs = Commodity Contracts
The CFTC wins. State bans are preempted by federal commodity law. Platforms can operate nationwide, and state gambling laws would not apply. This scenario received its strongest legal support on April 6, 2026 when the Third Circuit ruled 2-1 in KalshiEX v. Flaherty that federal commodity law preempts New Jersey gaming enforcement.
Court: PMs = Gambling Contracts
States win. Platforms would need state-by-state gambling licenses to operate legally, or exit those states. A federal license alone would not be enough.
Congress Passes Prediction Market Legislation
Congress steps in. Bipartisan bills have been introduced in both chambers to address prediction market jurisdiction directly. That's separate from the Clarity Act, which deals with digital asset market structure, not event contracts. As of April 2026, no prediction market-specific bill has passed.
Regulatory Status Note
Some platform-specific regulatory details are currently being updated to reflect the latest CFTC guidance and Third Circuit ruling. Check back for updates.
Frequently Asked Questions
Related Pages
Live tracker of active state lawsuits, C&Ds, and injunctions by state.
Which federal bills could restrict or ban prediction markets — and their status.
Which states restrict or block access to prediction market platforms.
How IGRA tribal compacts add a third legal layer beyond federal vs. state.
Editorial note: The dual-sovereignty framework described here reflects constitutional law (Supremacy Clause, 10th Amendment, Commodity Exchange Act) and is editorial, not legal advice. Third Circuit ruling sourced from Reuters (Nate Raymond, April 6, 2026) and the court opinion in KalshiEX LLC v. Flaherty, No. 25-1922 (3d Cir. 2026). State litigation status is sourced from the State Prediction Market Actions tracker and related primary sources. Last updated: April 7, 2026.