Prediction markets: Litigation spreads as Congress acts

The Commodity Futures Trading Commission filed a federal lawsuit against Kentucky, saying the state’s enforcement actions and a new prediction-market law interfere with the agency’s authority over federally regulated derivatives exchanges. The complaint makes Kentucky the ninth state the CFTC has challenged in disputes over prediction markets and is the first challenge against a Republican-led state.

On the same day, Kalshi filed a constitutional challenge to Illinois’ new law that classifies sports-event contracts as sports wagering, imposes taxes and requires state licensing. Kalshi argues the Illinois statute conflicts with the Commodity Exchange Act and the CFTC’s jurisdiction over derivatives exchanges.

In Michigan, U.S. District Judge Paul Maloney remanded Attorney General Dana Nessel’s lawsuit against Kalshi to state court after finding Kalshi had not met the standard for federal jurisdiction. The judge concluded Michigan’s claims did not necessarily present federal questions and were not completely preempted by the federal derivatives statute.

Ohio’s attorney general cited the Michigan decision as supplemental authority in a Sixth Circuit appeal over Kalshi’s challenge to Ohio’s cease-and-desist order. The filing references the Michigan court’s treatment of a preemption theory and its finding that federal derivatives law does not clearly displace states’ regulation of gambling.

Kalshi moved to dismiss a federal complaint brought by several New Mexico tribes, arguing tribal gaming laws cannot be enforced against a federally regulated derivatives exchange operated by non-members and that the Commodity Exchange Act preempts the tribes’ claims. Separately, a coalition of tribal organizations and 31 federally recognized tribes sought permission to file an amicus brief in Rhode Island supporting the state’s opposition to preliminary injunction requests from Kalshi, Polymarket and the CFTC. The proposed brief contends that accepting the exchanges’ preemption arguments could affect tribal authority under the Indian Gaming Regulatory Act and funding for tribal services.

The House Administration Committee voted 5-4 to advance the Stop Lawmakers From Predicting Act, the first of more than two dozen federal prediction-market bills introduced this year to move beyond introduction. The proposal would bar members of Congress, their spouses and dependent children from trading certain prediction-market contracts tied to government policy, government actions, political outcomes or events that become known to them through official duties. Meanwhile, a group of Senate Democrats led by Richard Blumenthal and Jeff Merkley asked the Appropriations Committee to prevent the CFTC from using federal funds to sue states over their efforts to regulate prediction markets, arguing states should retain authority to enforce their gambling laws while legal questions about sports-event contracts are unresolved.

Commercial activity continued despite legal disputes. Meta is developing a prediction-market app called Arena that would initially use points rather than real-money wagers. Kalshi added India to its restricted jurisdictions list and is reported to be seeking investment at a valuation near $40 billion. Novig added executives ahead of launch. Rebet and Realtime Sports applied to join the National Futures Association. Underdog filed its first rule submissions with the CFTC after acquiring Aristotle Exchange. Polymarket entered a commercial partnership to serve as the official prediction-market partner for Bundesliga coverage in the United States.

Courts, regulators and legislatures are issuing different rulings and statutes on whether contracts tied to sports events and other real-world outcomes are federal derivatives under the Commodity Exchange Act or fall under state gambling laws. Tribal entities are asserting separate regulatory claims, and Congress is considering limits on lawmakers’ participation in prediction markets.