Federal vs state/tribal jurisdiction, SEC/CFTC enforcement, lawsuits, and political pressure on prediction markets

US Regulation & Legal Turf Wars

The prediction markets sector is currently embroiled in a high-stakes legal and regulatory showdown that pits federal agencies against state and tribal authorities. This intensifying jurisdictional conflict, coupled with escalating enforcement actions and growing political pressures, is shaping the future governance and operational landscape of prediction markets in the United States and beyond.

Intensifying Legal Battles: Nevada v. Kalshi and Massachusetts v. Polymarket

At the core of the sector’s legal turmoil are landmark lawsuits challenging the scope of federal versus state jurisdiction:

Nevada v. Kalshi
Nevada regulators have sued Kalshi, asserting that its sports event prediction contracts violate state gambling laws. This suit directly contests the Commodity Futures Trading Commission’s (CFTC) 2025 Tennessee federal court ruling, which affirmed that certain prediction contracts qualify as swaps under the Commodity Exchange Act (CEA), thus falling under federal jurisdiction. The CFTC has filed strong amicus briefs defending its preemption claim and warning against the dangers of a fragmented regulatory patchwork. Chair Michael Selig has publicly declared:

“We will see you in court — federal oversight is essential to foster innovation while protecting market integrity.”
Massachusetts v. Polymarket
This case similarly challenges Polymarket’s operations under state gambling statutes, raising critical questions about the boundaries between federal derivatives law and state regulatory authority. Both cases are poised to set pivotal precedents that will determine whether prediction markets can operate under a uniform federal framework or face a labyrinth of state-level restrictions.
Additional Litigation Pressures
Beyond these cases, class-action lawsuits accuse platforms like Polymarket of facilitating illegal sports betting, further compounding legal uncertainties and pressuring operators to clarify their compliance postures.

Federal Agencies Jockeying for Regulatory Authority

Two key federal regulators are intensifying their efforts to assert authority over prediction markets, often with competing visions:

CFTC’s Federal Preemption Push
Chair Michael Selig and the CFTC have aggressively championed exclusive federal jurisdiction over prediction markets, classifying them as swaps subject to the CEA. The agency’s Innovation Advisory Committee has expanded to include experts in blockchain, AI, and fintech, signaling an intent to create a unified, technology-forward regulatory framework. Recent congressional testimonies emphasize the CFTC’s concerns about a “patchwork of inconsistent and conflicting state gambling laws” undermining market integrity and accessibility.

The CFTC’s legal and public advocacy signals a determined effort to shield prediction markets from state-level gambling restrictions, arguing that federal oversight will better balance innovation, consumer protection, and market stability.
SEC’s Escalating Enforcement on Securities-Like Products
Parallel to the CFTC’s actions, the Securities and Exchange Commission (SEC), under Chair Gary Gensler, has escalated scrutiny of prediction market products it deems securities-like, particularly those intertwined with cryptocurrencies and hybrid instruments. The SEC’s crackdown on Bitwise’s “PredictionShares” ETFs exemplifies this intensified enforcement, with delayed ETF launches reflecting regulatory caution. An SEC spokesperson emphasized:

“Investor protection remains our guiding principle as we navigate these complex new instruments.”

The SEC’s expanding reach highlights a complex regulatory overlay where some prediction market products may simultaneously attract both securities and derivatives oversight.

State and Tribal Authorities Amplify Enforcement and Legislative Pushes

In response to federal assertions, numerous state and tribal regulators have escalated their own enforcement efforts:

State-Level Actions and Legislative Initiatives
State regulators in Nevada, Arizona, and Maryland have taken active steps to regulate or restrict prediction market operations. Arizona’s Department of Gaming reported nearly $822 million wagered on prediction contracts, issuing stern warnings that operators failing to comply with state laws risk license revocation. New York lawmakers introduced the ORACLE Act, aiming to ban or heavily regulate prediction markets, reflecting broader societal concerns over gambling proliferation and potential abuses.

Nevada Representative Dina Titus has been vocal about protecting state authority, warning licensed sportsbooks about the consequences of facilitating unregulated prediction market wagers.
Tribal Sovereignty and Enforcement
Tribal authorities, notably the Mohegan Tribal Gaming Authority, have intensified crackdowns on unlicensed prediction market operators on tribal lands, citing threats to tribal gaming exclusivity and economic sovereignty. These efforts underscore the complex interplay between tribal rights and federal-state jurisdictional disputes.

High-Profile Enforcement Examples Highlight Market Integrity Risks

Recent enforcement actions by prediction market platforms illustrate growing vigilance toward maintaining market fairness and compliance:

Kalshi’s Insider Trading Sanctions
Kalshi has publicly disclosed suspensions and fines for insider trading violations. Notably, an employee of YouTube star MrBeast was fined and suspended after allegedly trading on video outcome contracts. In a precedent-setting move, Kalshi banned a former California gubernatorial candidate for wagering on his own race, signaling a zero-tolerance policy on insider abuses. Additionally, politically connected individuals, including allies of Representative Eric Swalwell, have faced betting restrictions on sensitive political events.
Investigations into Market Manipulation
Suspicious trading patterns have drawn regulatory attention. A wallet linked to an Axiom user profited following a crypto exchange naming by influencer ZachXBT, prompting concerns over insider advantage. Similarly, a Polymarket user reportedly gained $400,000 betting on the ZachXBT investigation, fueling further scrutiny of market transparency.
Federal White-Collar Crime Focus
Federal agencies are reportedly increasing oversight concerning white-collar risks such as fraud, anti-corruption violations, and market manipulation within prediction market operations, emphasizing the need for robust compliance frameworks.

Heightened Political and Content Moderation Pressures

Political oversight and societal concerns have sharpened, influencing both regulatory approaches and platform policies:

Bipartisan Congressional Pressure
A bipartisan group of senators has urged the CFTC to impose stricter controls on prediction market contracts related to ethically sensitive or socially fraught topics such as death, disease outbreaks, and other potentially exploitative categories. Their advocacy underscores the demand for “reining in prediction markets tied to harmful or exploitative event categories” to protect consumers and societal interests.
Platforms’ Moderation and Compliance Enhancements
Prediction market operators have responded by intensifying content moderation and compliance protocols. Suspension and banning of users engaging in insider trading or politically sensitive wagers have become more frequent, reflecting a recognition that legal risk mitigation and content governance are intertwined and critical to sustaining regulatory trust and operational legitimacy.

International Regulatory Developments and Cross-Border Challenges

The regulatory pushback against prediction markets is not confined to the U.S.:

The Dutch financial regulator recently banned Polymarket’s operations in the Netherlands, citing unlicensed financial service provision and consumer protection concerns. This ban signals growing international skepticism toward decentralized and blockchain-enabled prediction platforms.
Such regulatory fragmentation poses significant challenges for operators seeking global expansion, necessitating complex compliance strategies to navigate divergent legal regimes.

Near-Term Catalysts That Will Shape the Sector

Several pivotal developments loom on the horizon, poised to influence the prediction markets’ regulatory and operational landscape:

Decisive Court Rulings
The outcomes of Nevada v. Kalshi and Massachusetts v. Polymarket will clarify the interplay between federal derivatives law and state gambling statutes, potentially establishing lasting jurisdictional precedents.
SEC Rulemaking and CFTC Guidance
Anticipated SEC regulatory frameworks addressing securities-like prediction products will impact product design, disclosure, and registration requirements. Meanwhile, the CFTC Innovation Advisory Committee’s forthcoming guidance on AI, blockchain, and fintech integration will be critical in balancing innovation with regulatory compliance.
Escalating State and Tribal Enforcement
Legislative proposals such as the ORACLE Act and intensified tribal crackdowns are expected to further fragment the regulatory environment, demanding sophisticated multi-jurisdictional compliance strategies from operators.

Conclusion

Prediction markets have emerged as mainstream financial and informational platforms, with weekly trading volumes consistently surpassing $100 million and millions of engaged users. However, this success is shadowed by an escalating jurisdictional conflict between federal agencies and state/tribal authorities, along with mounting regulatory scrutiny and political pressures.

The CFTC’s assertive push for federal preemption, the SEC’s vigilant enforcement of securities laws, and state and tribal crackdowns create a complex compliance landscape. High-profile enforcement actions against insider trading and market abuses highlight growing integrity concerns, while international regulatory developments add layers of complexity.

Leading platforms such as Kalshi, Polymarket, and DraftKings are navigating this turbulent environment through innovation, diversified product offerings, enhanced compliance, and operational agility. The sector’s near-term trajectory will be decisively shaped by landmark court rulings, federal regulatory rulemaking, and evolving enforcement dynamics.

Stakeholders must combine legal sophistication with proactive regulatory engagement and technological adaptability to sustain momentum, uphold legitimacy, and maintain consumer confidence in an increasingly contested and fragmented ecosystem.

Key Quotes:

Michael Selig, CFTC Chair:
“We will see you in court — federal oversight is essential to foster innovation while protecting market integrity.”

SEC Spokesperson:
“Investor protection remains our guiding principle as we navigate these complex new instruments.”

Mohegan Tribal Gaming Authority:
“Prediction markets threaten tribal gaming exclusivity and must be stopped.”

Kalshi CEO Tarek Mansour:
“We’re pricing the future — prediction markets are becoming critical tools for hedging, speculation, and information aggregation across a broad spectrum of events.”

Sources (56)