Kalshi and Polymarket are fighting a 50-state war

Over a dozen states are involved in a major legal battle concerning daily fantasy sports and sports betting. The dispute, which includes criminal charges in Arizona and lawsuits involving Native American tribes and a federal agency against state regulators, centers on whether these activities should be classified as financial commodities or simply gambling. This has become one of the most significant conflicts over the balance of power between states and the federal government in recent years, and a single commissioner is leading the charge to determine how these platforms will be regulated going forward.

Summary

The United States is facing a unique legal situation involving prediction markets like Kalshi and Polymarket. These companies allow people to make bets on future events – processing over $1 billion this year, including more than $1 billion just on the Super Bowl according to Kalshi. However, their legality varies dramatically depending on location; they are considered lawful in some states but illegal and even subject to criminal charges in others, creating a complex legal battle with at least twelve states, notably Arizona where criminal charges have been filed.

Several states and companies are locked in legal battles over cryptocurrency regulation. While judges in New York, Tennessee, Ohio, and Arizona have supported the platforms, Massachusetts and Nevada have taken action against them, and cases involving California tribes are ongoing. The Commodity Futures Trading Commission (CFTC), which would be the main regulator under new crypto laws, is currently suing Connecticut, Arizona, and Illinois to protect the platforms’ ability to operate – all with only one confirmed commissioner. The industry describes this as a disagreement over compliance, but it’s more accurately a major test of legal boundaries with far-reaching consequences beyond just gambling.

How a betting question became a federalism war

The legal basis for this dispute is straightforward, which is likely why it’s spread to so many different locations.

Kalshi and Polymarket are both legally operating exchanges in the US, authorized by federal regulators since 2020. They offer unique contracts that pay out based on the results of real-world events – things like elections, weather, or sports games – and prices are determined by traders, not traditional betting odds. Their operation is based on a federal law that gives the CFTC complete control over trading on registered exchanges. This means states have no power to regulate these contracts any more than they would regulate traditional commodity trading, and federal law takes precedence.

The traditional approach to regulating sports betting is straightforward: if a platform operates like a sportsbook – accepting wagers and paying out winnings – it should be regulated as one, either through licensing and taxation or by being prohibited altogether. From New York to Nevada, state gambling regulators issued warnings and demands to stop operating through early 2026. Tennessee asked platforms to cancel pending bets, while Arizona even pursued criminal charges, including those related to betting on elections. The platforms’ consistent response to these actions has been to immediately file lawsuits in federal court, claiming federal law overrides state regulations. This strategy has become so common that Kalshi, a platform, actually sued Illinois *before* the state even took action against it.

The situation escalated from isolated incidents to a full-blown conflict when the Commodity Futures Trading Commission (CFTC) got involved. In April, the CFTC sued Connecticut, Arizona, and Illinois, arguing that states don’t have the right to regulate in this area – it’s federal jurisdiction. The agency’s chairman, Michael Selig, even vowed to protect businesses from what he considered overly aggressive state regulators. This is a highly unusual move: a federal financial regulator actively suing states to defend contracts related to sports betting on behalf of its registered companies. It clearly shows where the current administration stands – the president’s son works with both platforms involved, and the CFTC’s legal actions now seem driven by the industry itself.

The scoreboard, honestly kept

Neither side is winning, which is the most important fact about the war and the least reported.

The legal challenges against these platforms have been successful. Courts have stopped states from enforcing their laws in Tennessee, Arizona, Ohio, and Connecticut, with one judge issuing a temporary order just days after the state’s deadline. The Ninth Circuit Court also issued an injunction supporting the idea that federal law takes precedence. The core message from these rulings is clear: if federal law allows something, a state can’t make it illegal.

States are increasingly winning legal battles against prediction markets like Kalshi and Polymarket. Massachusetts and Nevada have already blocked these platforms, and Maryland ruled that its gambling laws apply to these types of contracts. Just this month, a New York judge sided with the state against Kalshi, though the company is appealing. Adding another layer of complexity, three California tribes are arguing these contracts violate federal laws governing tribal gaming. After initially losing in district court, they’ve appealed to a higher court, creating a direct conflict between federal commodities law and tribal gaming regulations. This is no longer a simple question of federal law overriding state law; it’s a major legal dispute likely to be decided by the Supreme Court.

Currently, how these platforms determine legality is backwards from standard regulatory practice. Whether a product is legal depends on the specific location, court rulings are changing at higher levels of appeal, and users are being advised to limit amounts, withdraw funds quickly, and keep detailed records – guidance usually seen with unregulated or ‘gray market’ activities, not official exchanges. Rhode Island’s attorney general, who filed a lawsuit in May, summarized the states’ argument: these companies are intentionally avoiding gambling laws, and that avoidance *is* their core business strategy. Kalshi argues the opposite, claiming these are simply assets traded on an exchange with value determined by supply and demand, and states shouldn’t be able to regulate federal markets just because they disagree with what is being traded.

What each side is actually fighting for

Strip the doctrine and the stakes are industrial, which explains the ferocity on both sides.

Sports are the main driver of business for these platforms. Around 90% of the trading on Kalshi and about half on Polymarket revolves around sports events; while political events initially gained them attention, sports offer year-round activity. The Super Bowl, with its massive trading volume, demonstrated that event contracts had finally found a winning formula. This market exists alongside a $150 billion licensed sports betting industry, which pays state taxes and operates with consumer protections that these platforms currently avoid. States are taking notice, especially those where licensed sportsbooks contribute the most in taxes. The platforms argue their operations shouldn’t be regulated by states, a position that, if successful, could create a significant tax advantage worth billions of dollars annually.

States are currently battling over whether their traditional control of gambling will last in the face of new financial technologies. For decades, states have independently decided how to regulate gambling – some allowing it freely (like Nevada), others prohibiting it completely (like Utah), and more recently creating different rules for sports betting. However, these platforms argue that any activity structured as a tradeable contract falls under federal control, bypassing state laws altogether, regardless of what it’s based on. They’ve already started listing contracts not just on sports, but also on events like awards shows and even the weather. If this argument succeeds, state gambling regulators would become largely irrelevant, and consumer protections – such as self-exclusion lists and funding for problem gambling – would only apply to a shrinking traditional industry while most of the growth happens outside of state oversight.

The current legal battle over prediction markets offers a glimpse of what’s to come for the broader cryptocurrency industry. The Commodity Futures Trading Commission (CFTC) is claiming sole authority over these markets, which mirrors a proposed law aiming to give the federal government complete oversight of digital assets, overriding state-by-state regulations. Both prediction markets like Polymarket and crypto platforms benefited from a period of regulatory success under the Trump administration, but the CFTC is currently operating with limited staffing, a point of concern during ongoing negotiations about market rules. If courts rule that the CFTC’s authority doesn’t extend to areas traditionally regulated by states, this decision will likely set a precedent that impacts all future attempts to federally preempt state laws regarding crypto. Essentially, prediction markets – considered a controversial product – are testing the constitutional limits of crypto regulation on a large scale.

The tribal front, examined

Among all the areas where this war is being fought, the legal battle concerning tribal lands – currently being considered by the Ninth Circuit Court – receives the least attention, despite being the one with the strongest legal basis and potentially bringing the conflict to a conclusion.

The Indian Gaming Regulatory Act of 1988 isn’t simply about gambling; it’s fundamentally about establishing economic self-governance for Native American tribes. This law created the system for tribal casinos, specifically ‘Class III’ gaming which requires agreements between tribes and states. These agreements are key to modern tribal economies: states allow tribes exclusive or limited access to certain types of gaming, tribes share a portion of their revenue with the state and agree to regulations, and this creates an industry that provides significant funding for tribal governments – more so than any other economic sector. The current legal dispute in California centers around agreements that give California’s tribes the secure position in gaming they’ve worked decades to achieve, including the right to prevent commercial sports betting, a stance recently supported by voters when they rejected a statewide ballot measure on the issue.

Let’s apply the idea that federal law overrides state and tribal agreements to this situation. If agreements about sports events are considered regulated commodities under federal law, then tribal compacts offering exclusive rights to those events become meaningless when a competitor operates under federal regulation. The three California tribes involved in this lawsuit claim that prediction markets are essentially running illegal gambling operations within their protected areas, violating a federal law specifically designed for gaming. They argue this is happening under the guise of a federal law intended for grain futures trading. While a lower court initially rejected their request to stop this, the appeal presents a direct conflict between two federal laws to a court overseeing the largest tribal gaming market in the U.S. – a type of conflict the Supreme Court is designed to resolve, especially given the current focus on tribal sovereignty cases.

The involvement of tribal governments is crucial for a key reason beyond just their own interests: it fundamentally alters the entire debate around sports betting. While regulators often seem focused on taxes and sportsbooks on profits, tribes have a strong legal and moral position when defending their agreements. This shifts the discussion from simply innovation versus protection to a question of whether financial strategies can invalidate legal commitments the U.S. government has made. Lawmakers who might oppose companies like DraftKings are likely to support tribes, and the alliance between tribes, states, and sportsbooks is the most likely path to a legislative solution. A favorable ruling for the tribes in the Ninth Circuit would also strengthen the legal standing of all other parties involved, offering a clear federal legal basis that can’t be dismissed by arguments about federal power. The legal teams representing the betting platforms understand their biggest challenge isn’t in state capitals like Albany or Boston, but in convincing a court that existing laws have silently overturned the economic agreements made with Native American tribes. Courts are hesitant to find ‘silent repeals,’ and this legal hurdle, more than any gambling law, is what the opposing side must overcome.

The three ways it ends

Conflicts like these typically end in one of three ways, so understanding those potential outcomes is more helpful than focusing on specific details or decisions along the way.

The Supreme Court is considering whether federal law should override state regulations in cases involving digital asset trading – specifically, whether the Commodity Futures Trading Commission (CFTC) has exclusive authority. Different courts are currently disagreeing on how this law applies across several states and a case involving tribal lands adds further complexity that the Supreme Court feels compelled to address. If the Court sides with the CFTC, it could establish a national standard for crypto contracts under federal control. However, if the Court upholds state power, crypto platforms would face a complicated web of licensing requirements varying by state. Either decision would significantly change how financial regulations work in the U.S., which is likely why the Supreme Court might be hesitant to rule immediately.

The second potential path forward involves Congress creating clear rules for these contracts. Currently, event-based betting doesn’t quite fit into existing laws designed for traditional commodities trading – those regulations were created long before today’s complex sports betting markets existed. A simple amendment could resolve issues that are currently tied up in court cases across the country. Sportsbooks, tribal organizations, and states all want this kind of clarity, while the platforms themselves have influence with regulators. Keep an eye out for any added provisions to larger bills (like CLARITY) – that’s often how crypto regulations get passed: they arrive late in the process, are debated fiercely, and usually only happen after the market has already pushed things forward.

The third option is a prolonged legal battle where success depends on who can last longer. Sports revenue allows platforms to fund lawsuits endlessly, and states can initiate legal actions more quickly than appeals can be processed. This results in a fragmented legal landscape – legal in some places, illegal in others – becoming the new normal. This is the path the industry is currently taking, claiming it’s just a temporary situation. However, the costs are steadily increasing: each month of legal uncertainty leads partners, payment processors, and data providers to view these platforms as risky and unreliable. It also highlights that theoretical market strategies often fail when faced with determined opposition, as real-world incentives come into play.

The debate over whether exchanges should allow betting or trading seems minor, but it’s actually crucial. It centers on whether these exchanges can legally handle any activity they properly organize, or if certain behaviors are still regulated by individual states, regardless of the contract details. Cryptocurrency faced a similar question and endured fifteen years of legal uncertainty before Congress acted. Prediction markets experienced the same struggle in just eighteen months, leading to issues across twelve states, one criminal case, and conflict within a federal agency. This issue *must* be resolved because the current situation – where legality depends on location and court rulings – is unacceptable to everyone involved. Crypto.news has also provided guidance for traders on how to analyze these markets in a way similar to traditional derivatives.

Frequently asked questions

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2026-07-22 12:58