The Commodity Futures Trading Commission (CFTC) has initiated legal proceedings against Kentucky in response to the state’s recent enforcement actions targeting prediction market platforms Kalshi and Polymarket. In a separate move, Kalshi has filed a lawsuit against Illinois following the introduction of a tax and regulatory framework for sports-event contracts.
Both legal actions assert that the Commodity Exchange Act (CEA) grants the CFTC exclusive authority over event contracts traded on federally regulated designated contract markets (DCMs), thereby overriding state gambling regulations.
This legal clash highlights the escalating tensions between the prediction market sector and state regulatory bodies. Kentucky becomes the first Republican-led state to face a lawsuit from the CFTC, joining eight other states already embroiled in similar disputes.
In its complaint, the CFTC contends that Kentucky’s enforcement actions and the newly imposed tax on prediction markets unlawfully disrupt federally regulated exchanges. The agency is contesting lawsuits initiated by Kentucky Attorney General Russell Coleman against Kalshi, Polymarket, Robinhood, Coinbase, and Webull, which accuse these companies of facilitating unauthorized sports betting and breaching consumer protection laws.
The CFTC describes these lawsuits as part of Kentucky’s ongoing efforts to eliminate prediction markets from the state, while also challenging the recently introduced tax on prediction market revenue. Kentucky's House Bill 757 imposes a 14.25% tax on earnings from prediction markets, and House Bill 904 prohibits licensed sportsbooks from collaborating with prediction market platforms starting July 15.
The CFTC argues that this tax effectively hinders federally regulated exchanges from operating within Kentucky, referencing the Supreme Court's assertion that “the power to tax involves the power to destroy.”
On the same day, Kalshi filed its lawsuit against Illinois, targeting Senate Bill 3019, which was enacted as part of the state’s fiscal year 2027 budget. This legislation categorizes sports-event contracts on prediction markets as sports wagering, establishes a tax framework, and mandates that operators secure state licenses.
Kalshi claims this law places the company in a difficult position, as it must either cease offering sports-event contracts to Illinois residents or comply with a state licensing system that contradicts federal regulations governing designated contract markets. The company argues that this law directly conflicts with CFTC regulations that require federally regulated exchanges to provide nationwide access.
The complaint asserts that Senate Bill 3019 is repeatedly preempted by federal law. Kalshi maintains that this measure infringes on the CEA’s exclusive jurisdiction clause and encroaches upon the domain of exchange-traded derivatives, which Congress has reserved for federal oversight. Furthermore, Kalshi emphasizes that the law forces regulated exchanges to choose between adhering to federal or state law.
Additionally, the CFTC has already filed a separate lawsuit against Illinois, having recently amended its complaint to directly challenge Senate Bill 3019.