This year has been a busy one for the CFTC when it comes to prediction markets. In early 2026, the CFTC did away with a proposed rule from the Biden administration and announced plans to issue new rules for prediction markets, as we previously discussed in this column.

Since then, the CFTC has amped up its game. Asserting exclusive authority over prediction markets and arguing that its approval of prediction markets preempts any attempts by states to regulate or penalize them under state gambling laws, the CFTC has filed lawsuits against five states that have attempted to do just that.

So far, the CFTC has already obtained a preliminary injunction against Arizona, but the dispute between states and prediction markets, and now between states and the CFTC, is moving at lightning speed, and it is only widening. The CFTC’s aggressive posture may seem like a striking amount of support from a regulator toward its regulated entities—and perhaps it is—but the key issue for the CFTC appears to be whether prediction markets will be governed by one federal regulator or by a patchwork of state regimes.

I. The Legal Fight Over Prediction Markets and Gambling

Although the precise legal arguments vary slightly across the various lawsuits, the core dispute between the CFTC and the states is one of preemption.

Prediction markets allow traders to bid on whether events will or will not occur—for example, whether a sports team will win a particular game. The payout if a “yes” or “no” bid comes to pass is fixed, but the price of purchasing one of those bids varies depending on the number of people purchasing each bid.

The more people who buy a “yes” bid, predicting that the event is likely to occur, the more expensive a “yes” bid will be, and vice versa. Many states view bids like this, particularly those involving sports, as gambling. Regulation of gambling generally falls under the states’ broad “police powers,” and these states argue that the prediction markets are essentially unlicensed gambling regimes under state law.

On the flip side, the CFTC asserts that it may regulate prediction markets on the theory that these bids on outcomes, referred to as “event contracts,” qualify as “swaps” under the Commodities Exchange Act (CEA). Only entities that the CFTC registers as “swap execution facilities” or “designated contract markets” (DCM) may operate “a facility for the trading or processing of swaps.” 7 U.S.C. §7b-3(a)(1).

Because Congress granted the CFTC “exclusive jurisdiction” over all “transactions involving swaps,” 7 U.S.C. §2(a)(1)(A), the CFTC argues that the CEA preempts any attempt by states to prohibit under state gambling laws the operations of any prediction market registered with the CFTC.

II. The Fast-Moving and Widespread Litigation Landscape

KalshiEX LLC, whose Kalshi prediction marketplace dominates the U.S. prediction market space alongside its competitor Polymarket, led the charge against the application of state gambling laws to prediction markets. It has filed numerous lawsuits around the country seeking injunctions against states’ attempts to apply their gambling laws to Kalshi.

Kalshi has had mixed success. In KalshiEX LLC v. Hendrick, 2025 WL 1073495 (D. Nev. Apr. 9, 2025), for example, it obtained a preliminary injunction against Nevada’s enforcement of its gambling laws. But following another federal court’s denial of a similar injunction in Maryland, see KalshiEX LLC v. Martin, 793 F. Supp. 3d 667 (D. Md. Apr. 21, 2025), appeal docketed, No. 25-1892 (4th Cir. Aug. 6, 2025), and the Hendrick judge’s denial of a similar injunction brought in another case by Crypto.com, see N. Am. Derivatives Exch., Inc. v. Nevada on Rel. of Nevada Gaming Control Bd., 2025 WL 2916151 (D. Nev. Oct. 14, 2025), the Hendrick judge changed course and dissolved its previously issued injunction. See also, e.g., KalshiEX LLC v. Orgel, 2026 WL 474869 (M.D. Tenn. Feb. 19, 2026) (injunction granted); KalshiEX LLC v. Schuler, 2026 WL 657004 (S.D. Ohio Mar. 9, 2026) (injunction denied), appeal docketed, No. 26-3196. Kalshi’s most high-profile win recently came from the Third Circuit on April 6, in which a divided panel affirmed a preliminary injunction against New Jersey’s application of gambling laws to prediction markets. KalshiEX, LLC v. Flaherty, 172 F.4th 220 (3d Cir. 2026).

An early CFTC foray into this space was an amicus brief urging the Ninth Circuit to reverse the Hendrick judge’s denial of the injunction in the Crypto.com case (that appeal is pending). See Dkt. No. 37.2, N. Am. Derivatives Exch., Inc. v. Nevada, No. 25-7187 (9th Cir. 2025). Since then, the CFTC has adopted a more aggressive approach.

On April 2, it filed federal lawsuits against Illinois, Connecticut and Arizona, seeking declaratory and injunctive relief barring those states from enforcing gambling laws against prediction markets. The CFTC brought each of those lawsuits in response to those respective states’ own criminal charges or cease-and-desist letters against prediction markets for violating state gambling laws. See United States v. Illinois, No. 26-cv-03659 (N.D. Ill. 2026); United States v. Connecticut, No. 26-cv-00498 (D. Conn. 2026); United States v. Arizona, No. 26-cv-02246 (D. Ariz. 2026).

In announcing these lawsuits, the CFTC argued that “[d]espite the CFTC’s clear and longstanding exclusive jurisdiction to regulate event contracts under the Commodity Exchange Act, various states have attempted to outlaw, regulate, or otherwise restrain the activities of DCMs that facilitate trading in lawful event contracts. Congress long ago decided that a national framework for commodity derivatives markets was preferable to a fragmented patchwork of state regulations.” See CFTC Rel. No. 9206-26 (April 2, 2026).

That pattern has repeated—on April 21, New York sued prediction markets, and four days later the CFTC sued New York, United States v. New York, No. 26-cv-3404 (S.D.N.Y. 2026), and following Wisconsin’s April 24 lawsuits against prediction markets, the CFTC filed its own suit against Wisconsin four days later, United States v. Wisconsin, No. 26-cv-749 (E.D. Wis. 2026).

The CFTC has had early success. On May 5, the district court presiding over the CFTC’s lawsuit against Arizona (consolidated with Kalshi’s suit against Arizona) granted a preliminary injunction barring Arizona from enforcing its gambling laws against any prediction markets operating in the state. KalshiEX LLC v. Jackie Johnson, 2026 WL 1223373 (D. Ariz. May 5, 2026).

III. The Preemption Arguments

As is evident by the mixed outcomes being issued in quick cadence, the preemption question is decidedly unsettled.

The first question courts face in these cases is whether the event contracts offered by prediction markets even qualify as “swaps” under the CEA. The CEA defines swaps as any agreement that provides for payment or delivery that “is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.” 7 U.S.C. §1a(47)(A)(ii).

The Third Circuit found that, at least in the context of a prediction-market bid on the outcome of sporting events, these event contracts fall within this definition because the “outcome of a sports event certainly can be associated with a potential financial, economic, or commercial consequence” to stakeholders like “sponsors, advertisers, television networks, franchises, and local and national communities.” Flaherty, 172 F.4th at 227.

The Hendrick district judge however, viewed it differently, finding that the definition requires that “the event or contingency itself has some potential financial, economic, or commercial consequence without looking at externalities like potential downstream financial consequences such as parties extrinsic to the event betting on it.” Hendrick, 2025 WL 3286282, at *6. These types of event contracts, it held, are not “swaps” because “those contracts are based on the outcome of sports events or are based on things that take place during an event (such as a coin flip) but that are not events or contingencies themselves within the CEA’s meaning.”

The answer to that first question is the linchpin for any attempts by the CFTC to regulate prediction markets. But even if the law settles in the CFTC’s favor on that point, it still must demonstrate that state gambling laws as applied to prediction markets are preempted by the CEA. The Third Circuit has held that the CFTC’s “exclusive jurisdiction” over swaps was sufficient evidence of Congressional intent to apply field preemption—that is, “when federal law occupies a field of regulation so comprehensively that it has left no room for supplementary state legislation.” Flaherty, 172 F.4th at 228 (citation omitted) (cleaned up).

But a district court in Ohio has held that, despite the CFTC’s exclusive jurisdiction, the CEA’s provision that “nothing contained in this section shall... supersede or limit the jurisdiction at any time conferred on... other regulatory authorities under the laws of the United States or of any state,” 7 U.S.C §2(a)(1)(A), “leaves ample room for states to legislate and regulate, as Ohio has, on matters tangential to trading swaps and commodity futures on DCMs.” KalshiEX, LLC v. Schuler, 2026 WL 657004, at *8 (S.D. Ohio Mar. 9, 2026).

As to conflict preemption, which “occurs when a state law conflicts with federal law such that compliance with both state and federal regulations is impossible, or when a challenged state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of a federal law,” Flaherty, 172 F.4th at 229 (3d Cir. 2026) (citation omitted), the Third Circuit reasoned that “Congress created the CFTC and amended the [CEA] to do away with the patchwork of state regulations and bring futures trading on DCMs under the exclusive jurisdiction of the CFTC.”

“Allowing New Jersey to enforce its gambling laws and state constitution would create an obstacle to executing the [CEA] because such state enforcement would prohibit Kalshi, which operates a licensed DCM under the exclusive jurisdiction of the CFTC, from offering its sports-related event contracts in New Jersey. This state regulation is exactly the patchwork that Congress replaced wholecloth by creating the CFTC.”

The Ohio court’s reasoning to the contrary focused on the so-called “special rule,” under which the CFTC prohibits DCMs from listing any event contract “that involves, relates to, or references... gaming.” 17 C.F.R. §40.11(a). The court did “not endeavor to explain why the CFTC has not exercised its authority under the special rule or §40.11(a) with respect to the sports-event contracts. But the agency’s inaction is not proof that the sports-event contracts are regulated by or permissible under the CEA—and the court has concluded they are not.” Schuler, 2026 WL 657004, at *9.

Kalshi further argued that conflict preemption applied because “it would be impossible to comply with” CFTC regulations requiring nationwide, “impartial access to its markets and services” under 17 C.F.R. §38.151(b), at the same time as complying with “Ohio’s sports gambling laws [that] restrict licensees from accepting wagers made by individuals who are not physically present in Ohio.”

The Ohio court rejected this argument, finding that “Kalshi offers nothing but its own ipse dixit that the CFTC would view geographic restrictions predicated on compliance with state law as ‘partial.’” The strength of the court’s reasoning on these two points is likely to be swiftly tested in cases brought by the CFTC itself.

IV. Conclusion

The fight over prediction markets between U.S. states and the CFTC (and the prediction markets themselves) is only gearing up and is poised to be an area of rapid development and uncertainty until Congress steps in or the Supreme Court settles the issue. At stake in these lawsuits is more than the legality of any single prediction market operating in any particular state.

The broader question is how federalism and the administrative state operate in an era of digital financial markets. If federal agencies can greenlight products that states think look and feel like gambling, states may see their traditional regulatory domains shrink. Conversely, if states can effectively veto federally regulated conduct, national markets could become unworkable. Market participants, regulated entities, and even those simply interested in administrative law should watch this space.

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This article first appeared in the May 8, 2026, edition of the “New York Law Journal” © 2026 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.