The One Question That Will Decide the Prediction-Market War

CFTC Chairman Michael Selig has a definition for what Kalshi and Polymarket sell.

Congress did not intend for derivatives exchanges to be regulated under a patchwork of state gaming laws. — Michael S. Selig

New York Attorney General Letitia James has another. She sued Coinbase and Gemini for operating without state gaming licenses, arguing that gambling by another name is still gambling. ^[1] The entire conflict turns on a single category determination: whether event contracts are financial instruments under the Commodity Exchange Act or gambling under centuries of state police power. That question is now working through multiple federal and state courts simultaneously. The answer will determine whether a federal charter becomes a universal bypass for state consumer protection law. The Trump administration is building a federal regulatory architecture for crypto and prediction markets, and the scaffolding is visible in the sequence of national trust bank charters the Office of the Comptroller of the Currency has granted since January. Ripple received conditional approval in January. Bridge, the stablecoin platform acquired by Stripe, followed in February. Coinbase got its charter in April. Circle in July. And on August 14, the OCC granted preliminary approval to World Liberty Trust, the crypto venture founded by Donald Trump and his sons, to issue and safeguard the USD1 stablecoin. ^{[2][3][4][5][6]} Each charter moves a crypto firm from state-by-state licensing into a single federal framework. Bridge applied explicitly to avoid state money-transmitter licenses. ^[7] Circle's CEO Jeremy Allaire called his company's charter a defining step in bringing blockchain technology and digital assets into the core of the U.S. financial system. ^[5] The charter pipeline is one beam of a larger structure. In January, the SEC and CFTC launched "Project Crypto," a joint initiative to build a unified federal taxonomy for digital assets covering prediction markets, perpetual futures, and tokenized collateral. ^[8] In March, the two agencies signed a formal memorandum of understanding establishing a Joint Harmonization Initiative; SEC Chair Paul Atkins said prior agency turf wars had stifled innovation and pushed market participants to other jurisdictions. ^[9] In May, the Federal Reserve proposed limited master accounts for crypto firms, giving them access to central bank payment rails previously reserved for traditional banks. The Kansas City Fed had already granted one to Kraken in March. ^[10] And the OCC had laid the foundation in November 2025 with Interpretive Letter 1186, allowing national banks to hold crypto assets on their balance sheets. Comptroller Jonathan Gould said digital asset activities have a place in the federal banking system. ^[11] President Trump made the objective explicit in May, endorsing CFTC exclusive authority over prediction markets as critically important and tying it to making the U.S. the crypto capital of the world. ^[12] The CFTC has escalated in parallel with the charter pipeline. In February, it defended exclusive federal jurisdiction and Kalshi sued Utah. In April, the CFTC sued Arizona, Connecticut, and Illinois. In May, it sued Minnesota and five other states. And on August 11, it used emergency authority to order Kalshi to continue operating in New York despite Attorney General James's lawsuit seeking roughly $36 billion in civil penalties. ^{[13][14][15][16][17]} Selig described what New York was attempting.

New York has no business regulating these interstate financial markets. — Michael S. Selig

More than 30 states have filed suits or actions against Kalshi and Polymarket, which together hold roughly $40 billion in combined valuation and process some $13 billion in monthly volume. ^[18][19] The states are not advancing a single theory. They are deploying multiple legal frameworks simultaneously. Connecticut Attorney General William Tong called the contracts unlicensed illegal gambling under time-worn state law. ^[14] Louisiana AG Liz Murrill said the platforms will let people bet on anything imaginable and called it gambling. ^[18] Washington Attorney General Nick Brown catalogued the subjects Kalshi had monetized.

Kalshi has gotten rich promoting wagers on sports, elections, natural disasters, events related to the Iran War, and more. — Nick Brown

Some states are using election law. Wisconsin's Elections Commission warned that betting on elections is illegal and can strip voting rights. Colorado declared its election wager ban covers prediction markets. Maryland's elections administrator requested a criminal investigation. ^[20] Others are using consumer protection and market manipulation theories: New York sued Kalshi over manipulative betting activity in August. ^[21] Revenue protection is in play as well. State lotteries fund municipal bonds for infrastructure and education in states like Florida, Oregon, and West Virginia, and officials warn prediction markets threaten billions in tax revenue by competing with state lotteries. ^[22] The escalation is not just in the number of theories but in the severity of the response. Minnesota enacted the first-in-the-nation felony ban on prediction markets, signed by Governor Tim Walz and effective August 1, making hosting prediction markets punishable by up to five years in prison. AG Keith Ellison argued the markets are designed to be addictive and prey especially on young people and low-income folks. ^[15] The courts are split. A federal judge in Arizona, Michael Liburdi, issued a temporary restraining order blocking the state's criminal gambling case against Kalshi, ruling that event contracts are swaps under the Commodity Exchange Act and fall under exclusive federal jurisdiction. It was the first federal court victory for the CFTC's preemption strategy. ^[23] But a Washington state judge issued a preliminary injunction ordering Kalshi to cease most operations in the state by September 2, requiring IP and residency-based geofencing with $120,000 daily penalties for noncompliance. That ruling directly rejected the CFTC's preemption argument. ^[24] The federal push is not monolithic. On June 18, CME Group — a federally regulated derivatives exchange, the very kind of institution the CFTC exists to oversee — sued the CFTC to block approval of crypto perpetual futures for Kalshi and Coinbase, arguing they are swaps under Dodd-Frank, not futures. ^[25] Selig's response treated the lawsuit as an act of incumbent panic.

Rather than compete in the marketplace, the CME has decided to undertake lawfare against the agency and the Trump Administration’s pro-innovation agenda. — United States Commodity Futures Trading Commission

Former CFTC Chairman Gary Gensler publicly challenged the agency's authority claim, asserting the CFTC lacks power under the 2010 Dodd-Frank Act to oversee prediction markets and suggesting regulation should reside with states. ^[12] The American Bankers Association urged the OCC to slow crypto charter approvals, warning the agency to be patient and not measure its application decisioning progress against traditional timelines. ^[3] Congressional Democrats are advancing multiple restrictive bills: the BETS OFF Act banning wagers on government actions, the Prediction Markets Security and Integrity Act, and the DEATH BETS Act. Senator Richard Blumenthal called the platforms a haven for insider trading, market manipulation and underage gambling that are turning war into a casino game. ^[26] The American Gaming Association and the Indian Gaming Association urged Congress to intervene, arguing prediction market contracts undermine tribal sovereignty and risk facilitating match-fixing. ^[13] The entire conflict reduces to a single category determination. If event contracts are financial instruments under the Commodity Exchange Act, the CFTC's preemption strategy has a legal foundation, and the federal charter becomes a bypass for state consumer protection law. If they are gambling, states retain an authority they have exercised for centuries. That question is now working through multiple federal and state courts simultaneously. The Washington injunction and the Arizona TRO point in opposite directions. The CFTC's emergency order in New York has not yet been tested on appeal. Minnesota's felony ban is being challenged in federal court. No single venue can settle the question for all of them, and the Supreme Court has not weighed in. The answer, when it comes, will not just decide who regulates a $13-billion-a-month industry. It will determine whether a federal charter — the kind the president's own company just received — can override the consumer protection laws of every state in the union.