The rapid expansion of prediction markets is facing increasingly aggressive pushback from state officials pursuing a sprawling patchwork of lawsuits and cease-and-desist orders.
The stakes in these legal battles were amped up on Tuesday after Arizona’s attorney general brought criminal charges against Kalshi, the largest prediction market platform in the US, accusing it of running an illegal gambling operation in the state.
Prediction markets have exploded in popularity over the past year by offering novel financial contracts that make it possible to bet on the outcome of everything from the Super Bowl to the leadership struggles in Iran.
While federal regulators have claimed oversight, and allowed the markets to grow, states, many of which rely on tax revenue from gambling companies, have stepped into the fold to take on prediction markets, which don’t pay state gambling taxes. The Arizona criminal charges come on top of more than a dozen other lawsuits currently moving forward in courts across the country.
Kalshi co-founder Tarek Mansour pushed back against the new charges on Wednesday, calling them “a total overstep” in an interview with Bloomberg Television. “These charges have nothing to do with gambling or the merits,” Mansour said. “If it was about gambling or the merits, they would let the judicial process run its course in the federal courts.”
The mounting court clashes underscore how states have emerged as the most potent source of resistance to prediction markets, moving into the vacuum left by the federal regulators and lawmakers.
“As the federal government steps away from consumer protection, state AGs have stepped up,” Massachusetts attorney general Andrea Joy Campbell said in an email to Bloomberg this week. Campbell’s office won an injunction against Kalshi in January in a civil enforcement case. That has been fast-tracked to the state’s supreme court after Kalshi challenged it.
The Commodity Futures Trading Commission, which oversees Kalshi and other US prediction market platforms as derivatives exchanges, restricted their growth during the Biden administration. But since Donald Trump took office last year, the agency has effectively allowed Kalshi and its competitors to expand into new areas, such as sports betting, and to offer trading nationwide, even in states where gambling is illegal.
The freewheeling activity has attracted criticism from foreign governments, former regulators, Democrats in Congress and state officials, who have raised several concerns about the exchanges. The criticism has focused most of all on their vulnerability to manipulation, but also on the lack of consumer protections of the sort that traditional gambling companies have to offer.
These critics, though, aren’t expecting much of a response out of Washington, in part because of the president’s ties to the industry. Donald Trump Jr. is an adviser to both Kalshi and Polymarket. And the Trump Media & Technology Group has also created its own prediction market version — Truth Predict — in partnership with Crypto.com, which is facing several state enforcement actions.
Several recent bills proposed by Democrats in Congress are not likely to make much progress as long as Republicans are in charge.
State officials, on the other hand, have looked to take advantage of the fact that casinos and sportsbooks have traditionally come under state oversight. A number of states have reported in recent months that legal gambling activity has declined as prediction markets have become more popular.
Attorneys general and gaming regulators in over a dozen states, including Massachusetts, Tennessee and Ohio have argued in enforcement letters and court documents that Kalshi and its peers are violating state gambling laws. Several states have joined forces by filing legal briefs backing each other’s efforts in court.
Kalshi has had some success in fighting off these lawsuits, arguing that if it answers to the CFTC it cannot also answer to state regulators. The company has continued doing business across the country and has preemptively sued several states that have talked about bringing enforcement actions, including Arizona. After the charges were filed on Tuesday, a spokesperson for Kalshi said the company is not going to back down.
“States like Arizona want to individually regulate a nationwide financial exchange, and are trying every trick in the book to do it,” the Kalshi spokesperson said. “As other courts have recognized and the CFTC affirms, Kalshi is subject to federal jurisdiction.”
Michael Selig, who recently took the helm of the CFTC, has taken the unusual step of directing the agency to support prediction markets in their fights with states, arguing that these exchanges answer only to his agency. He reiterated that support on Tuesday after Arizona announced its charges.
“This is a jurisdictional dispute and entirely inappropriate as a criminal prosecution,” Selig wrote in a post on X on Tuesday afternoon. “The @CFTC is watching this closely and evaluating its options.”
A number of recent court decisions have suggested that the states have begun to gain something of an edge in at least some of the cases making their way through federal courts. Soon after the Arizona charges were filed this week, a federal judge denied Kalshi’s previous request for a restraining order against enforcement in the state.
Another federal judge ruled this month against Kalshi and in favor of the Ohio Casino Control Commission, which had sent the company a cease-and-desist letter. A few weeks earlier, though, a judge in Tennessee ruled in Kalshi’s favor in a similar case.
Many legal analysts anticipate that the wide array of states pushing the issue — and the split court decisions — will elevate the battles to the Supreme Court, where the fate of the industry is likely to be decided.
“We’re in uncharted waters,” said Kevin Frankel, a lawyer who works in the state attorneys general practice at Benesch. “None of this is going to be resolved in any of these state court proceedings. It’s going to be hard to do that before it gets to the Supreme Court.”
So far, Nevada, the home of America’s gambling industry, has had some of the most success in using the courts to shut prediction markets down. As of February, Kalshi is the only prediction market operating legally in the state, after the state won injunctions against its competitors Polymarket, Coinbase, Robinhood and Crypto.com.
The Nevada Gaming Control Board is now pursuing a civil enforcement action to ban Kalshi as well. The company failed to move that case to federal court, and it’s possible that the Nevada court will force Kalshi to geofence its offerings to keep out customers in the state.
In the meantime, the criminal case in Arizona may change the legal calculus for prediction market platforms, especially if other states pursue a similar strategy. Arizona has opted to bring misdemeanor, rather than more serious felony charges, and the potential fines are relatively small. But Daniel Wallach, founder of Wallach Legal, said the Arizona case could allow the state to attempt to shut down operations rather than merely impose fines.
“It may reflect a fine-tuning of states’ strategies on how to attack prediction markets,” Wallach said, “by using state court civil and criminal enforcement remedies instead of the tired approach of sending cease-and-desist letters.”
In some states, legislators have also introduced bills trying to restrict certain aspects of prediction markets operations. New York and Connecticut both have pending legislation that would prohibit individuals under 21 from placing bets on prediction markets, a limit that is already in place for gambling companies, but not for other financial products.
“From my point of view, it’s much better if the feds take the lead on this rather than having 50 states do their own thing,” Connecticut Governor Ned Lamont said in an interview. “But since the feds aren’t doing anything really significant about this, I wanted to start by having a level playing field with say, the sports betting we’ve got right now, and protecting young people.”
These bills, though, are expected to be dependent on whether the courts ultimately give the states any jurisdiction over prediction markets.
There are now several different federal courts where judges are close to reaching decisions on whether the states have any authority over prediction markets. In Maryland, after a federal judge sided with the state, Kalshi appealed to the 4th US Circuit Court of Appeals, where arguments are scheduled to start in May. The Supreme Court often takes up issues when multiple circuit courts offer conflicting opinions.
