U.S. and CFTC Sue States Over Prediction Market Jurisdiction

The United States and CFTC sued regulators in Illinois, Arizona, and Connecticut, alleging that the states are improperly preventing federally regulated trading platforms from offering event contracts to customers.

In the Complaints (see here, here, and here), the plaintiffs explained that CFTC-regulated Designated Contract Markets ("DCMs") and Futures Commission Merchants—such as KalshiEx LLC ("Kalshi"), Crypto.com, Polymarket, and Robinhood Derivatives LLC—offer event contracts tied to future events, including sports, economic indicators, and elections. They argued that applying state gambling and sports wagering laws to these federally regulated event contracts is inconsistent with the uniform system of commodity derivatives regulation established by Congress under the Commodity Exchange Act.

In the Complaints, filed in the respective U.S. District Courts for the Northern District of Illinois, the District of Arizona, and the District of Connecticut, the CFTC and the U.S. Government alleged that the state regulators:

• Exceeded their authority: The plaintiffs argued that the CEA grants the CFTC exclusive jurisdiction over futures, options, and swaps (which include event contracts) traded on designated contract markets, expressly preempting state gambling laws and leaving no role for states to regulate or license trading on these exchanges;
• Improperly criminalized federally authorized markets: The lawsuits highlighted that regulators in all three states issued cease-and-desist letters to CFTC-regulated entities, threatening civil and criminal penalties for unlicensed "sports wagering" or "gambling." The plaintiffs emphasized that Arizona went so far as to file a 20-count criminal information against Kalshi for alleged "betting and wagering" and "election wagering";
• Threatened market uniformity: The plaintiffs claimed that state enforcement actions make it impossible for regulated DCMs to comply with federal law, which mandates that DCMs provide impartial, nationwide access to traders. Subjecting DCMs to a fractured patchwork of state-by-state licensing and hardware requirements would derail Congress’s goal of a nationally uniform market; and
• Undermined federal oversight: The CFTC maintained that only injunctive and declaratory relief can put an end to state efforts to subvert federal law, protect market participants, and preserve the CFTC’s congressionally mandated authority over commodity derivatives markets.

The U.S. Government and CFTC are seeking (i) a permanent injunction prohibiting the defendants from enforcing their respective state gambling, sports wagering, and criminal statutes against transactions on CFTC-Designated Contract Markets, (ii) a declaratory judgment that such enforcement violates the Supremacy Clause and is therefore preempted, unconstitutional, and invalid, and (iii) any other relief the Courts deem just and proper.