The prediction market turf war: who actually regulates Kalshi and Polymarket

The CFTC used emergency authority to override New York. Nine states have been sued. FlightAware added a data rights claim. The legal architecture of prediction markets is being built in courtrooms, not in Congress.

The Commodity Futures Trading Commission does not typically make headlines on a Monday in August. The agency is best known for its quiet oversight of agricultural futures and interest rate swaps, the kind of financial plumbing that runs in the background of the American economy without attracting much public attention. That changed on August 11, 2026, when Chairman Mike Selig signed an emergency order that placed the federal government in direct confrontation with the State of New York over a category of financial product that did not exist in any meaningful commercial form five years ago.

The order, published as Release 9281-26, directed KalshiEX to continue operating in accordance with the Commodity Exchange Act’s Core Principles. The trigger was a lawsuit filed on July 31 by New York Attorney General Letitia James, who accused Kalshi of violating state gambling laws by offering sports related prediction markets without obtaining a license from the New York State Gaming Commission. James sought a temporary restraining order that would have prohibited Kalshi from offering all event contracts nationwide, along with more than $36 billion in damages.

The CFTC’s response was immediate and jurisdictional. Selig described New York’s approach as an attempt to impose an “iron curtain of state gaming laws” before federal courts could issue final rulings on the question. The agency argued that prediction markets are federally regulated swaps, not gambling products, and that allowing individual states to shut them down would undermine the uniform national market that Congress intended the Commodity Exchange Act to create.

This is not a dispute about whether prediction markets should exist. It is a dispute about who gets to regulate them, and the answer will reshape every platform in the sector. The CFTC has now sued nine states. FlightAware has added a data rights claim against Kalshi that opens an entirely separate legal front. And Polymarket, the largest prediction market by volume, sits in the crossfire with a different regulatory posture but identical jurisdictional exposure. The fight is happening in courtrooms across the country, and it is moving faster than any legislative process could match.

What the CFTC emergency order says

The legal basis for the CFTC’s action rests on Section 8a(9) of the Commodity Exchange Act, which grants the Commission authority to take emergency action to protect market integrity and ensure orderly operations. The agency has used this provision sparingly in its history, most notably during the 2020 oil futures crisis when West Texas Intermediate contracts traded below zero for the first time.

In this case, the emergency was triggered by Kalshi’s own notification to the Commission. After James filed her complaint, Kalshi informed the CFTC that the lawsuit posed an existential threat to its ability to operate as a designated contract market. The state’s request for a nationwide temporary restraining order, if granted, would have forced Kalshi to suspend all trading, not just in New York but across every state where it offers contracts.

The CFTC’s order does not rule on the merits of New York’s gambling claims. It does not say that prediction markets are definitively exempt from state regulation. What it does is assert that, until federal courts resolve the jurisdictional question, a CFTC registered exchange cannot be shut down by a single state acting unilaterally. The Commission framed this as a matter of market stability, arguing that abrupt closure of a regulated exchange would harm customers who hold open positions and undermine public confidence in the derivatives market.

Chairman Selig’s statement made the jurisdictional claim explicit. He argued that prediction market exchanges “match the bid from a resident of one state with the offer of a resident from another state” and submit trades to a clearinghouse that backstops transactions for customers across the country. In his framing, these are interstate financial markets that fall squarely under federal authority, and New York’s attempt to regulate them through gaming law is an overreach that Congress never intended.

The order also noted that this is not the first time the CFTC has intervened to protect a prediction market from state enforcement. The Commission previously moved to prevent Kalshi from canceling trades after a Michigan court ruling went against the platform earlier in 2026.

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The state lawsuit map

The CFTC’s fight with New York is the most visible front in a much broader conflict. The agency has now filed lawsuits against nine states: Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island, and Wisconsin. It has also filed amicus briefs in the U.S. Court of Appeals for the Sixth and Ninth Circuits and the Supreme Judicial Court of Massachusetts.

Each state lawsuit follows the same basic pattern. A state attorney general or gaming commission alleges that prediction markets, particularly those offering contracts tied to sporting events, operate as unlicensed gambling platforms under state law. The state seeks injunctions, fines, or both. The CFTC then intervenes, arguing that its regulatory authority over designated contract markets preempts state gaming law.

The legal theory behind the states’ position is straightforward. State gambling statutes have existed for decades, and they typically define gambling broadly enough to encompass any wager on the outcome of a future event. Sports betting, in particular, was illegal in most states until the Supreme Court struck down the Professional and Amateur Sports Protection Act in Murphy v. NCAA in 2018. Since then, states have built elaborate licensing and tax regimes around sports gambling, generating billions in revenue. Prediction markets that offer sports related contracts without obtaining state licenses are, in the states’ view, simply unlicensed sportsbooks.

The CFTC’s counterargument is that prediction markets are not sportsbooks. They are derivatives exchanges that offer event contracts, a financial instrument that the Commodity Exchange Act explicitly authorizes the CFTC to regulate. The distinction matters because derivatives exchanges operate under a federal regulatory framework that includes customer protection rules, margin requirements, clearing obligations, and trade surveillance, none of which exist in state gambling law.

Minnesota was the first state to test this theory in court. A judge there ruled in favor of the state, finding that Kalshi’s sports related contracts were gambling products subject to state regulation. Kalshi appealed, and the CFTC filed an amicus brief supporting the platform’s position. The case is now before the Sixth Circuit, where the first appellate ruling on prediction market classification could set a precedent that shapes every subsequent case.

The geographic spread of the lawsuits is itself significant. Nine states span four federal circuits, which means that even if one appellate court rules in favor of the CFTC, another could rule differently. A circuit split would almost certainly send the question to the Supreme Court, a process that could take years. In the meantime, the legal landscape for prediction markets remains fragmented, with platforms operating under federal registration in some states and facing enforcement actions in others.

FlightAware and the data rights question

While the CFTC and the states argue over jurisdiction, a different kind of legal challenge has emerged from an unexpected source. FlightAware, the flight tracking company, filed a complaint on Monday accusing Kalshi of using its data without permission to settle prediction markets tied to individual flight cancellations.

The dispute centers on markets that Kalshi introduced last month, allowing users to trade on whether specific flights will be canceled. Kalshi tells users that contract outcomes are “verified from FlightAware,” according to the filing. FlightAware says it never agreed to have its data used for that purpose and was not informed that its information would determine whether traders received payouts.

The lawsuit accuses Kalshi of breach of contract, trademark infringement, and unfair competition. FlightAware argues that by naming it as the verification source, Kalshi created the impression that the two companies had a commercial partnership, causing reputational harm to a company whose services are used across commercial and private aviation.

Beyond the contractual claims, FlightAware raised safety concerns about the markets themselves. The company argued that allowing traders to profit from flight cancellations creates incentives for attempts to influence aviation operations, even though Kalshi excludes payouts for cancellations caused by malicious acts. FlightAware described “widespread outrage and concern” that the contracts could encourage unsafe behavior that would “strand travelers, disrupt airline operations, and threaten safety.”

This lawsuit matters for the prediction market industry beyond the specific facts of the FlightAware case. As platforms expand into new categories of event contracts, they increasingly rely on third party data sources to determine outcomes. Weather data, election results, economic indicators, and corporate earnings all flow through private data providers. If courts rule that using third party data for contract settlement requires explicit authorization from the data provider, the operational cost of launching new prediction markets will increase substantially. Every new market category would require negotiated data licensing agreements before the first contract could trade.

The FlightAware case also highlights a tension between prediction markets and the entities whose real world activities generate the events being traded. Airlines did not ask to have their flight schedules turned into betting products. Athletes did not consent to having their game performances priced on derivatives exchanges. The data rights question is, at its core, a question about who controls the commercial value of information about real world events.

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The $36 billion damages claim

New York’s lawsuit against Kalshi includes a damages claim that exceeds $36 billion. That figure deserves scrutiny because it reveals how the state calculates the economic harm it believes prediction markets cause.

The number appears to derive from the total volume of contracts traded on Kalshi that the state considers to be unlicensed gambling. Under New York’s gambling statutes, the state can seek disgorgement of profits, civil penalties per violation, and tax revenue that would have been collected had Kalshi obtained a gaming license. New York’s licensed sports betting operators paid an effective tax rate of 51% on gross gaming revenue in 2025, the highest in the nation. If the state applies that rate retroactively to Kalshi’s total trading volume, the resulting figure quickly reaches the tens of billions.

The arithmetic matters because it reveals the economic stakes driving the states’ position. New York collected approximately $2.4 billion in sports betting tax revenue in fiscal year 2025. Licensed operators paid for the privilege of offering bets to New York residents, and they passed some of those costs to consumers through wider spreads and less favorable odds. A prediction market that offers similar contracts without paying state taxes and without obtaining a license represents, in the state’s view, both lost revenue and unfair competition with licensed operators.

This is also why the CFTC’s preemption argument carries such high stakes. If federal courts rule that prediction markets are exempt from state gambling regulation, states stand to lose tax revenue from a rapidly growing category of financial product. Kalshi processed $1.7 billion in notional volume in June 2026 alone. Polymarket’s numbers are larger. If these platforms operate without state gaming licenses indefinitely, states lose both the tax base and the regulatory leverage to impose consumer protection standards that differ from the CFTC’s framework.

The $36 billion figure is almost certainly uncollectable in practice. Courts rarely award damages at that scale in regulatory enforcement cases, and Kalshi’s actual revenue is a fraction of its trading volume. But the number serves a strategic purpose: it signals to other prediction market platforms that the cost of operating without a state license could be ruinous, and it puts pressure on the CFTC to negotiate a framework that gives states some role in overseeing event contracts tied to activities they already regulate.

Where Polymarket sits in the crossfire

Polymarket is the largest prediction market by trading volume, but it occupies a different regulatory position than Kalshi. While Kalshi operates as a CFTC registered designated contract market based in the United States, Polymarket runs on Polygon, an Ethereum scaling network, and restricts U.S. users from its main trading interface following a 2022 settlement with the CFTC in which the platform paid a $1.4 million fine.

That settlement did not end Polymarket’s exposure to the jurisdictional fight. The platform’s U.S. regulatory status remains ambiguous, and the legal theories being tested in the Kalshi cases apply with equal force to any platform that offers event contracts to American residents. If courts rule that prediction markets are gambling products subject to state law, the ruling would apply regardless of whether the platform is registered with the CFTC or operates offshore.

Polymarket’s scale makes it impossible for regulators to ignore. The platform processed $4.3 billion in volume on its World Cup Winner market alone, a record for any single prediction market contract. Its total monthly volume has exceeded $8 billion in multiple months of 2026. The platform has been seeking a $1 billion fundraise at a $20 billion valuation, according to industry reports, which would make it one of the most valuable private companies in the crypto sector.

The regulatory asymmetry between Kalshi and Polymarket creates a two tier market. Kalshi submits to CFTC oversight, pays for compliance infrastructure, and faces state enforcement actions. Polymarket operates with lighter regulatory overhead but cannot legally serve U.S. customers on its primary platform. If the CFTC wins the preemption fight and prediction markets are classified as federal derivatives, Polymarket would have a clear path to U.S. registration. If the states win and prediction markets are classified as gambling, Polymarket’s offshore structure becomes a permanent feature rather than a temporary arrangement.

The World Cup illustrated this dynamic. Prediction markets captured 27% of total sports betting volume during the tournament, according to industry data, up from less than 5% during the 2022 tournament. That growth rate is what makes the jurisdictional question urgent for both sides. States see a gambling category that is growing faster than any licensed product. The CFTC sees a derivatives market that is proving the demand thesis for event contracts. Neither side can afford to lose.

The strongest case for state authority

The prediction market industry’s preferred narrative frames the jurisdictional dispute as federal efficiency versus state overreach. But the states’ legal position is not frivolous, and the strongest version of their argument deserves examination.

States regulate gambling because gambling creates social costs that states bear. Problem gambling treatment, law enforcement, consumer protection against fraud, and the externalities of gambling addiction all fall on state budgets. In exchange for bearing those costs, states collect tax revenue and impose licensing requirements that fund oversight. This is the same model that applies to casinos, lottery systems, and sports betting operators.

Prediction markets that offer contracts on sporting events look, from the perspective of a state gambling regulator, identical in function to sports bets. A user deposits money, selects an outcome, and receives a payout if the outcome occurs. The fact that the contract is structured as a derivative and clears through a CFTC registered clearinghouse does not change the user experience or the social costs. A person who develops a gambling problem through prediction markets imposes the same costs on the state as a person who develops one through DraftKings or FanDuel.

The states also point to the selective nature of the CFTC’s preemption claim. The CFTC does not argue that all event contracts are derivatives, only the ones offered on registered exchanges. But if the definition of a derivative depends on where it is offered rather than what it is, the classification becomes circular: a sports bet is a derivative if Kalshi offers it, but a gambling product if DraftKings offers it, even though the economic substance is identical.

This argument has found some judicial support. The Minnesota court that ruled against Kalshi cited the functional similarity between prediction market contracts and traditional sports bets, concluding that the instrument’s legal classification should depend on its economic substance rather than the regulatory status of the platform offering it.

The Supreme Court, if it eventually takes the case, will likely need to address this circularity directly. The answer may involve drawing a line based on contract design, margin requirements, or clearing obligations rather than platform registration, a framework that would require both sides to compromise.

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What to watch

The New York transfer motion. Kalshi has moved to transfer the state’s lawsuit to federal court. If the motion succeeds, the case will be heard by a federal judge who may be more receptive to the CFTC’s preemption argument. If it fails, the case proceeds in New York state court under New York gambling law.

The Sixth Circuit ruling on Minnesota. The first appellate decision on prediction market classification will shape every subsequent case. A ruling in Kalshi’s favor would create persuasive authority for the CFTC’s position nationwide. A ruling against Kalshi would embolden other states to pursue enforcement actions.

CFTC rulemaking on event contracts. The Commission has signaled interest in issuing formal rules that define which event contracts qualify as regulated derivatives. If the CFTC acts before the courts rule, it could narrow or expand the category in ways that affect the jurisdictional dispute.

FlightAware discovery. The data rights case will proceed through discovery, which could reveal how prediction markets source and use third party data across their entire product line. The precedent could affect every platform that relies on external data feeds for contract settlement.

Polymarket’s U.S. licensing decision. If Polymarket applies for CFTC registration or pursues a state gaming license, the choice will signal which regulatory framework the largest platform by volume believes will prevail.

Disclaimer: This article is for informational purposes only and does not constitute legal or financial advice. Prediction market regulations vary by jurisdiction. Always consult a qualified professional before making investment decisions. Information is current as of August 11, 2026.