CFTC sues Kentucky for trying to block prediction markets
The Commodity Futures Trading Commission (CFTC) is suing the US state of Kentucky for trying to shut down federally regulated prediction markets.
The CFTC action comes after lawsuits issued by the state’s Attorney General Russell Coleman, as well as the introduction of a prediction market excise tax.
In a statement issued on 23 June, the CFTC said that Kentucky was seeking to impose “large monetary penalties” on prediction markets, referencing the introduction of a 14.25% excise tax on operators’ transaction fees.
According to the Associated Press, a coalition of prediction market operators – including Kalshi, Polymarket, and Crypto.com – filed a lawsuit against the state earlier this month, arguing that the state’s action was discriminatory and unconstitutional, given the companies’ protection under federal law.
Unrelated to the excise tax, on 17 June, the state’s Attorney General also filed three lawsuits against Kalshi and Polymarket (including both of their affiliates) and sweepstakes operator VGW, alleging that all three were offering illegal gambling products in the state. Coleman described Kalshi and Polymarket as “illegal sportsbooks” that were breaking Kentucky laws.
In his statement, Coleman reiterated that, under state law, the Kentucky Horse Racing and Gaming Commission holds the power to regulate sports wagering, not the CFTC.
Speaking about the excise tax and lawsuits, CFTC Chairman Michael Selig said that the federal body was committed to maintaining its regulatory authorities over prediction markets and that its lawsuit against the state was “another example of the Commission protecting its federal interests.”
Kentucky is not an outlier. The CFTC has also filed lawsuits against Minnesota, Illinois, and Rhode Island, after each tried to block prediction markets in its own way, alleging illegal gambling operations.
Charlotte Capewell brings her passion for storytelling and expertise in writing, researching, and the gambling industry to every article she writes. Her specialties include the US gambling industry, regulator legislation, igaming, and more.
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The Backstory
Federal regulator pushes back on states
The Commodity Futures Trading Commission’s lawsuit against Kentucky is the latest escalation in a fast-moving jurisdictional fight over whether sports event contracts are federally regulated derivatives or state-regulated gambling. The dispute has grown from isolated cease-and-desist threats into a national legal campaign involving state attorneys general, gaming regulators, prediction market exchanges and now the federal agency that supervises designated contract markets.
At the center is a basic conflict: states say platforms such as Kalshi, Polymarket and Crypto.com are offering sports betting without local licenses, while the CFTC says Congress gave it exclusive authority over event contracts traded on federally regulated exchanges. That clash has become more urgent as sports contracts have drawn large trading volumes, expanded across state lines and blurred the practical distinction between a financial market and a sportsbook.
Kentucky’s actions gave the federal regulator a direct target. The state moved on two fronts, with lawsuits by Attorney General Russell Coleman and a 14.25% excise tax on prediction market transaction fees. The CFTC said those measures threatened federally regulated markets with large penalties and interfered with its authority under the Commodity Exchange Act. Its complaint fits a broader pattern: when states try to force prediction market operators out, the federal regulator increasingly responds in court.
Kentucky framed the products as illegal sportsbooks
The immediate backdrop came when Coleman filed separate lawsuits against online sweepstakes casino VGW and prediction market operators Kalshi and Polymarket, accusing them of illegal gambling in Kentucky. In the Kentucky lawsuits against prediction and sweepstakes operators, the attorney general argued that sports event contracts are functionally wagers and should be licensed, taxed and supervised like sports betting.
The state’s claims against Kalshi and Polymarket focused on sports markets, where users can buy and sell contracts tied to outcomes of athletic events. Kentucky said those products avoided the consumer protections, responsible gambling controls and tax obligations imposed on licensed sportsbooks. The Kalshi suit also named affiliates including Coinbase, alleging fee-sharing tied to trades, while the Polymarket action referenced relationships with companies including Robinhood and Webull.
Coleman’s argument reflected a view gaining traction among state gaming officials: labeling a product a derivative does not change its consumer-facing function. If users are risking money on whether a team wins, a tournament result or another sports outcome, states contend the product belongs under gambling statutes. Kentucky also emphasized that its Horse Racing and Gaming Commission, not a federal commodities regulator, oversees legal sports wagering within the state.
The CFTC’s response turns that argument around. It says a state cannot reclassify federally listed event contracts as illegal gambling simply because they resemble sports bets. The agency’s position is that once a contract is listed on a regulated exchange, state enforcement that blocks trading threatens national market uniformity. That federal preemption claim now sits at the core of litigation in multiple jurisdictions.
Arizona, Wisconsin and others became test cases
Kentucky is not the first state to confront prediction markets. The legal map expanded after regulators in Arizona warned Kalshi that it could face penalties or criminal charges for offering event contracts without a state gambling license. Kalshi responded by suing in federal court, arguing that Arizona could not apply gaming law to CFTC-regulated contracts. The Kalshi lawsuit against Arizona regulators underscored the industry’s strategy: seek federal protection before state enforcement can halt operations.
Arizona became especially important because its warning letter said state law bars wagers not only on sports but also on other unknown or contingent future events. That language went beyond conventional sports betting and struck at the broader event-contract model. Kalshi argued that its products are closer to futures contracts than gambling, a distinction it has advanced in other states with mixed results. Temporary injunctions in Tennessee and New Jersey gave operators some relief, while other courts have allowed state scrutiny to proceed.
The CFTC later adopted a more aggressive posture of its own. In the CFTC’s lawsuit against Wisconsin, the agency sought to block the state from enforcing gambling laws against federally regulated prediction platforms. Wisconsin had sued Kalshi, Polymarket, Crypto.com, Robinhood and Coinbase, asserting felony gambling violations. The federal regulator asked the court to declare Wisconsin’s laws invalid as applied to listed event contracts and to bar enforcement.
That Wisconsin case followed CFTC actions involving New York, Connecticut, Illinois and other states, along with amicus filings in appellate courts. Chairman Michael Selig has cast those cases as defense of congressional authority over financial markets. States, by contrast, see federal oversight as an opening for platforms to bypass local gambling regimes that were built state by state after the Supreme Court cleared the way for legal sports betting in 2018.
Sports contracts changed the political stakes
Prediction markets have existed for years, but the political pressure intensified as operators moved deeper into sports. Contracts tied to elections, economic data or weather events raised regulatory questions, but sports products triggered a more direct conflict with state gaming systems. Licensed sportsbooks pay fees, taxes and compliance costs. Tribal gaming entities also operate under compacts that can be affected if sports wagering migrates to federally supervised platforms outside those arrangements.
The issue reached Congress through a bipartisan proposal from Sen. Adam Schiff, D-Calif., and Sen. John Curtis, R-Utah. Their Senate bill to prohibit sports betting on prediction markets would amend the Commodity Exchange Act to stop CFTC-registered entities from listing contracts tied to sporting events, athletic competitions and casino-style games such as poker and blackjack.
The bill signaled that the dispute is no longer only about enforcement authority. It is also about whether Congress should narrow what federally regulated exchanges may list. Supporters of a ban argue sports contracts are bets under another name, undermine state consumer protections, intrude on tribal sovereignty and generate no state gambling tax revenue. Prediction market operators and their allies counter that event contracts can serve hedging, forecasting and price-discovery functions, even when the underlying event is a game.
Large trading volumes have made the question harder to ignore. Lawmakers cited major activity around March Madness and the Super Bowl as evidence that sports contracts are not niche products. For states that spent years building controlled sports betting markets, a national exchange model could redirect consumer activity away from licensed books and into platforms that answer primarily to a federal derivatives regulator.
The CFTC tried to set guardrails, not retreat
Before its latest wave of lawsuits, the CFTC had already tried to address the rapid growth of sports event contracts through supervisory guidance. In guidance to prediction markets on sports event contracts, the regulator told designated contract markets to assess sports-related products carefully, especially those vulnerable to manipulation.
The agency singled out contracts based on individual player actions or performance, which can resemble sportsbook prop bets and may be easier for one person to influence. That concern showed the CFTC recognizes risks familiar to gambling regulators: insider information, market manipulation, integrity of sporting events and protection for retail users. The difference is the remedy. Rather than concede state gambling jurisdiction, the CFTC has sought to build federal oversight around exchange listing standards, surveillance obligations and market integrity rules.
The guidance also came with a broader consultation on investor protections, insider information and sensitive markets. That process suggested the regulator was trying to accommodate innovation while warning exchanges not to assume every event is appropriate for listing. It also gave states ammunition to argue that the products carry gambling-like risks, even if supervised through commodities law.
This tension is likely to define the next phase. If courts side with the CFTC, states may have limited ability to block sports event contracts listed on federally regulated venues. If states prevail, prediction markets could face a patchwork similar to online sports betting, where access depends on local licensing, tax rates and gaming statutes. Congress could still intervene by clarifying whether sports outcomes belong in commodities markets at all.
Why Kentucky matters now
Kentucky adds a sharper financial dimension because of its excise tax on transaction fees. The measure does not merely accuse operators of unlawful conduct; it seeks revenue from activity the state says should be regulated as gambling. For the CFTC, that type of tax threatens to make federally regulated trading subject to state-by-state economic penalties, undermining the uniform market structure it says Congress intended.
The state also brings political symbolism. Kentucky has a major horse racing industry and a regulated sports wagering system, giving officials a strong incentive to protect licensed gaming channels. Coleman’s lawsuits framed prediction markets as multibillion-dollar companies using legal terminology to escape gambling rules. The CFTC’s suit frames the state as attempting to override federal law through enforcement and taxation.
The outcome will matter beyond Kentucky. Operators want certainty that a CFTC license can support national access. States want to preserve authority over sports betting within their borders. Tribal governments, sportsbooks, exchanges, brokerages and consumers all have stakes in where the line is drawn. The litigation now asks courts to decide whether sports event contracts are primarily financial instruments, gambling products or something Congress must define more clearly.
