Illinois regulators face setback after judge sides with prediction markets
The regulation of prediction markets by state gaming regulators has taken another turn after a judge in Illinois sided with Kalshi and Polymarket, ruling that event contracts fell under federal regulation by the Commodity Futures Trading Commission (CFTC).
The injunction was handed to the prediction markets on Friday by Judge Martha Pacold. “Many of the financial instruments at issue are likely swaps as defined by the Commodity Exchange Act – they just happen to be swaps that people find entertaining and fun,” she wrote in her decision.
“Under the Act and precedent interpreting it, some Illinois law is likely preempted. Plaintiffs are therefore likely to succeed – at least in part,” she furthered.
The decision followed cease-and-desist orders issued by Illinois Gaming Administrator Marcus Futcher in April, targeting Kalshi, Polymarket, Crypto.com, and Robinhood, after the regulator argued that they engaged in “illegal gambling in violation of Illinois law.”
The following month, Illinois Governor JB Pritzker signed Senate Bill 3019, part of the state’s 2027 budget, that would introduce a prediction markets and fantasy sports tax starting on 1 July 2026. Under the bill, prediction markets would be taxed 1.75% on the first five million trades, and then 3.5% thereafter.
Kalshi sued Illinois after the state imposed a tax on prediction markets, arguing that Illinois lacked jurisdiction to do so. However, despite Judge Pacold siding with prediction markets in court, she ultimately withheld a decision on Illinois’ prediction-market tax, stating that she was open to upholding it.
“The other laws Illinois seeks to enforce cause a conflict because they regulate what can be sold, as well as where it can be sold and to whom. Taking a cut of Kalshi and Coinbase’s profits, without more, might not pose the same conflict as regulating an entire market,” she wrote.
Illinois’ outcome takes a different stance from a Sixth Circuit decision in September that decreed that sports event contracts were not swaps and therefore did not fall under CFTC oversight. With differing decisions from courts nationwide, it’s only a matter of time before the Supreme Court rules on who can regulate prediction markets.
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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Federal preemption fight moves to Illinois
The Illinois ruling marks another turn in a fast-moving legal battle over whether prediction markets that list sports-event contracts should be treated as federally regulated derivatives markets or state-regulated gambling operations. For Kalshi, Polymarket and similar platforms, the distinction is existential. If the contracts are swaps under the Commodity Exchange Act, operators can argue they fall under the Commodity Futures Trading Commission’s national framework. If they are sports wagers, state gaming regulators can demand licenses, taxes, compliance controls and, in some cases, exclusion from the market.
Judge Martha Pacold’s preliminary injunction in Illinois gave the prediction-market industry a meaningful win by finding that many of the instruments at issue are likely swaps and that parts of Illinois law are likely preempted. But the ruling did not settle the broader question. Pacold left open the possibility that Illinois could impose a tax on prediction-market activity, distinguishing revenue collection from rules that dictate what contracts can be offered, where they can be sold and to whom.
That distinction matters because Illinois has become one of the most aggressive states in gaming taxation. Its broader push to extract more revenue from online betting operators already triggered industry resistance, including a DraftKings surcharge on Illinois wagers after lawmakers raised sports-betting taxes. The prediction-market tax, scheduled to begin July 1, 2026, puts the state at the center of a second front: whether it can tax federally registered exchanges even if it cannot otherwise regulate their products as gambling.
A patchwork of court rulings
The Illinois decision landed against a fractured national backdrop. Federal courts have split on basic questions that will determine the future of sports-event contracts: whether the products are swaps, whether federal commodities law preempts state gambling statutes and whether state regulators can bring enforcement actions while those questions remain unresolved.
In Tennessee, Kalshi recently won a preliminary injunction when a federal judge concluded that its sports-event contracts qualify as swaps under the Commodity Exchange Act. The court rejected the state’s argument that a contract tied to a game’s outcome cannot be an event contract, reasoning that an outcome can also be an occurrence. That decision, detailed in a Tennessee injunction blocking enforcement against Kalshi, aligned with the industry’s argument that Congress assigned oversight of such markets to the CFTC, not to 50 separate gambling regulators.
But Kalshi has not won everywhere. The 6th U.S. Circuit Court of Appeals later ruled that Ohio and Tennessee could enforce their gambling laws against the company, rejecting Kalshi’s claim that its sports contracts were necessarily swaps under federal law. The appellate panel also said that even if the contracts qualified as swaps, the Commodity Exchange Act would not automatically bar states from applying gambling rules. That ruling, covered in the 6th Circuit decision allowing state regulation of prediction markets, gave regulators a powerful counterweight to district-court rulings favoring Kalshi.
Other courts have added to the uncertainty. In Connecticut, a federal judge denied Kalshi’s request for an injunction and found that its sports-event contracts did not fit the statutory definition of swaps because they depended on outcomes or in-game occurrences rather than whether an underlying event occurred. The court emphasized the long-standing role of states in policing sports wagering and found that public-interest concerns outweighed harm to Kalshi users. The decision in Connecticut’s enforcement case against Kalshi underscored how differently courts are reading the same federal statute.
Regulators press gambling-law theory
State gaming agencies have largely framed sports-event contracts as functionally equivalent to sports bets. Their argument is straightforward: customers stake money on the results of games or game-related occurrences, the platform takes fees and the products compete with regulated sportsbooks that must meet state licensing, tax, consumer-protection and responsible-gambling requirements.
That theory drove Illinois Gaming Administrator Marcus Futcher’s cease-and-desist orders against Kalshi, Polymarket, Crypto.com and Robinhood earlier this year. It has also appeared in enforcement actions and litigation in Michigan, Ohio, Tennessee, Connecticut, Nevada and New Jersey. Regulators say allowing prediction markets to operate outside state gambling systems would undercut licensed sportsbooks and tribal or commercial gaming compacts while depriving states of tax revenue.
Michigan has been among the most forceful states. After a state judge temporarily blocked Kalshi from offering sports contracts, the CFTC ordered the company to honor pending trades from Michigan residents rather than cancel them based on customer location. Michigan Attorney General Dana Nessel’s office criticized the federal intervention, arguing that Kalshi should have to follow state law like other companies operating in Michigan. The dispute, described in Michigan’s clash with the CFTC over Kalshi trades, shows the practical consequences of the jurisdictional fight: even the handling of existing customer positions can become a federal-state conflict.
For regulators, the risk is that a federal preemption ruling could create a nationwide sports-betting alternative not subject to state-level licensing caps, tax rates, advertising rules or responsible-gaming mandates. For exchanges, the countervailing risk is that each state could effectively veto or reshape products approved for a national market, undermining the uniformity that commodities law is supposed to provide.
Tax policy raises separate stakes
Illinois adds a tax dimension that could outlast the immediate injunction. The state’s budget law would tax prediction markets at 1.75% on the first five million trades and 3.5% after that. Kalshi challenged Illinois after the state imposed the levy, arguing the state lacked jurisdiction. Pacold’s ruling gave Kalshi and other platforms room to resist gambling enforcement, but her comments suggested the tax may receive a different analysis.
The distinction could shape legislative strategy nationwide. If courts block states from banning or licensing prediction markets but allow states to tax revenue or trading activity, lawmakers may pivot from prohibition to extraction. That would mirror the broader online sports-betting landscape, where states increasingly view mature digital wagering markets as budget tools.
Illinois has already shown a willingness to test the limits. Its graduated sports-betting tax and per-wager structure pushed major operators to pass costs to customers through transaction fees. The same fiscal logic applies to prediction markets. Even if state gaming agencies lose some regulatory authority, lawmakers may look for ways to capture revenue from platforms serving residents inside their borders.
That approach, however, may create its own legal conflict. Federally regulated exchanges argue they must operate as single national markets with impartial access. State-by-state taxes, restrictions or product rules could make that model difficult to administer. A platform that must treat a trade differently because a user is in Illinois, Michigan or Connecticut may no longer be operating under a uniform national framework.
Supreme Court pressure builds
The widening split among district courts and appellate courts makes eventual Supreme Court review increasingly likely. Courts have reached different answers on the swap question, the scope of CFTC authority and the force of state gambling laws. Those disagreements are not technical side issues; they determine who controls a potentially large market at the intersection of finance, sports and online gaming.
The industry’s growth has sharpened the conflict. Prediction markets pitch sports contracts as event-based financial products that can reflect public expectations and hedge economic exposure tied to sports outcomes. States view that framing as a way to repackage sports betting without accepting the obligations imposed on licensed operators. The same contract can look like a derivative in one courtroom and a wager in another.
Until higher courts provide a definitive answer, operators face a shifting map. A platform may win an injunction in one state, lose one in another and face an appellate reversal elsewhere. Regulators, meanwhile, must decide whether to bring enforcement actions that could be preempted or wait while prediction markets build customer bases outside traditional gaming controls.
Illinois now sits near the center of that uncertainty. Pacold’s ruling strengthens the preemption argument but leaves unresolved whether states can tax the activity. That partial win reflects the larger state of the law: prediction markets have gained momentum, but not enough to secure a clear national safe harbor. The next phase will test whether courts treat sports-event contracts as part of the federal derivatives system, the state gambling system or a hybrid category that forces both sides to adjust.
