Where the feds are fighting states over prediction markets

As prediction markets volumes grow at a brutal pace, their businesses are threatened by states across the country. The federal government is waging a multi-front fight to stop state actions and assert its regulatory authority.

Sixteen states have taken legal action against prediction market platform companies, while one state has moved to ban them outright.

The Commodity Futures Trading Commission maintains that it is the only entity that can regulate these platforms, and the agency has sued six states to assert what it describes as its “exclusive jurisdiction” over prediction markets.

became Minnesota Latest developments on the government’s target on TuesdayWhen the commission sued the state after Gov. Tim Walz signed a law As part of a broader online security package that will ban prediction markets from operating in the state, in a first in the country.

Jeff Le Riche, the CFTC’s former chief attorney and now a partner at Husch Blackwell, said the aggressive strategy is not unique to the federal agency. “It’s unusual for states to file lawsuits,” he said. “This is definitely a different tactic.”

CFTC Chairman Michael Selig has been clear since his views on the agency’s oversight of prediction markets were confirmed by the U.S. Senate in December. That’s it for now single member The commission usually consists of five people.

“States cannot circumvent Congress’s clear directive,” Selig said. Press release in April He announced that a lawsuit would be filed against Wisconsin. “Our message to Wisconsin is the same message we are sending to New York, Arizona and others: If you interfere with federal law’s regulation of financial markets, we will sue you.”

Partisan divisions are mixed

The fight between states and the federal government over control of prediction markets has further complicated typical partisan divisions.

Eleven states with ongoing legal actions against prediction markets have Democratic attorneys general, while five states have Republican attorneys general. Minnesota, where state lawmakers have moved to ban prediction markets, has passed legislation in both the state House and Senate. vast majoritydespite the fact that these chambers are narrowly divided between parties.

“I wouldn’t say it’s that surprising because of the state and federal issues,” said Jon Ammons, a partner at law firm Reed Smith, which focuses on regulatory issues related to commodities, derivatives and digital assets. “I think states have this idea that they are the ones regulating games and things that look like games.”

Regulators in the 16 states involved in legal action related to prediction markets come from both sides of the aisle, while the six states the CFTC has sued so far — Wisconsin, New York, Connecticut, Illinois, Arizona and Minnesota — all have Democratic attorneys general.

“I cannot answer on behalf of the Trump Administration as to why they chose to sue only certain states with Democratic leadership, bypassing others that have taken similar enforcement stances,” Connecticut Attorney General William Tong, a Democrat, told CNBC.

The CFTC’s only case against a state with a Republican attorney general was in Ohio. summary of a friend defends the sole jurisdiction ground.

Richie Taylor, a spokesman for Arizona Attorney General Kris Mayes, said in an email that his ability to comment was limited due to ongoing litigation but noted the bipartisan nature of the states’ action.

“Like red states and blue states, AG Mayes believes the CFTC is improperly encroaching on states’ right to enforce gambling laws,” Taylor said.

Fighting for oversight of event contracts

States allege that prediction market platforms operate illegal sports betting transactions through their respective event contracts that drive the majority of the volume on the platforms. The CFTC argues that its right to regulate swaps and derivatives brings all event contracts under its jurisdiction, regardless of their content.

A spokesman for the CFTC denied that the commission’s legal strategy included anything beyond an attempt to assert its regulatory power.

“These states attempted to regulate or prosecute legitimate CFTC-regulated exchanges that operated entirely in accordance with federal law, requiring the CFTC to intervene,” an agency spokesperson said in a statement. “It is the CFTC’s sole responsibility to ensure that states do not interfere with the commerce of event contracts issued under federal law.”

CFTC has won the cases it has filed so far interim injunction In Arizona, to block criminal charges against Kalshi, the state’s largest local prediction market platform. Cases are still ongoing in five other states and no initial decisions have been made.

Separately, the U.S. Court of Appeals for the Third Circuit ruled that New Jersey cannot enforce gambling laws in prediction markets. But the legal battles are still in their early stages, and many who follow them say the final decision will likely come in the nation’s highest court.

“There are implications for an actual circuit split, which suggests there is a good chance this will end up in the Supreme Court,” Ammons said.

Disclosure: CNBC and Kalshi have a business relationship that includes customer acquisition and minority investment.