When the feds fight the states over the prediction markets

As the value of predictive markets increases at a relentless pace, their businesses are being challenged by states across the country. The federal government is fighting a multi-faceted battle to stop the actions of the state and claim its regulatory authority.

Sixteen states are involved in legal proceedings against prediction market platform companies, while one state has moved to ban them entirely.

The Commodity Futures Trading Commission says it is the only agency that can regulate these platforms, and the agency is suing six states to protect what it describes as its “exclusive jurisdiction” over the futures markets.

Minnesota became the latest in the state on Tuesday, when a commission sued the state after Gov. Tim Walz signed legislation as part of a broader cyber security package that would ban prediction markets from operating in the state — a first in the country.

Jeff Le Riche, a former senior litigator at the CFTC and now a partner at Husch Blackwell, said the aggressive strategy is uncharacteristic of a federal agency. “Suing the states is unusual,” he said. “That’s a very different strategy.”

CFTC Chairman Michael Selig has been clear since his confirmation by the US Senate in December about his views on the agency’s oversight of futures markets. And, at the moment, he is the only member of the commission, which is a group of five.

“States cannot override a clear order of Congress,” Selig said in an April press release announcing the lawsuit against Wisconsin. “Our message to Wisconsin is the same as New York, Arizona, and others: if you interfere with the enforcement of federal law in regulating the financial markets, we will sue you.”

The breakup of the movement group

The battle between the states and the federal government to oversee the prediction markets has drawn a general partisan divide.

Eleven of the states with ongoing legislative action against prediction markets have Democratic lawmakers, and five have Republicans. Minnesota, where state legislatures have moved to ban prediction markets, passed legislation in both the Senate and House with large majorities, though those chambers are narrowly divided by party.

“I wouldn’t say that’s surprising because of the problems the state is facing,” said Jon Ammons, a partner at the law firm Reed Smith who specializes in regulatory issues related to assets, derivatives and digital assets. “I think the states have this idea that they control games and things that look like games.”

Although regulators in the 16 states involved in legal proceedings regarding prediction markets come from both sides of the aisle, the six states the CFTC has sued so far — Wisconsin, New York, Connecticut, Illinois, Arizona and Minnesota — all have Democratic attorneys general.

“I cannot answer the Trump administration why they would choose to sue only certain states and Democratic leadership, over others who have already taken similar enforcement actions,” Connecticut Attorney General William Tong, a Democrat, said in a statement to CNBC.

The only action the CFTC has taken against a state and a Republican attorney general is in Ohio, where it filed an amicus brief defending its sole cause.

Richie Taylor, a spokesman for Arizona Attorney General Kris Mayes, said in an email that he was limited in his ability to comment because of the ongoing litigation but noted the status of both sides of the state’s action.

“Like red states and blue states alike, AG Mayes believes the CFTC is unduly intruding on states’ right to enforce their gambling laws,” Taylor said.

The battle to oversee contract events

States argue that the prediction market platforms operate illegal sports betting activities, due to their contracts for related events, which drive most of the volume on the platforms. The CFTC argues that its prerogative to regulate swaps and derivatives puts all event contracts, regardless of their content, under its purview.

A CFTC spokesman denied there was any involvement in the commission’s legal proceedings other than efforts to protect its regulatory authority.

“These states sought to regulate or prosecute legitimate, CFTC-regulated exchanges that were operating in full compliance with state law, requiring the CFTC to intervene,” a spokesperson for the agency said in a statement. “It is based solely on the CFTC’s obligation to ensure that states do not interfere with the sale of event contracts regulated under federal law.”

In its cases so far, the CFTC has won the first injunction in Arizona to stop the state from pursuing criminal charges against Kalshi, the world’s largest domestic market prediction platform. In five other states, cases are still ongoing and no decisions have been made.

Separately, the U.S. Court of Appeals for the Third Circuit ruled that New Jersey cannot enforce gambling laws on prediction markets. But the legal battles are in their early days, and many who follow them say the final decision is likely to come from the nation’s highest court.

“There are real redistricting plans, which seems to indicate that there is a good chance this will go to the Supreme Court,” Ammons said.

Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a small investment.