States defend authority over gambling

The CFTC has tried to block state regulation in court by filing lawsuits against Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island, and Wisconsin. It has also filed briefs supporting Kalshi in appeals court cases.

State attorneys general and governors throughout the country say they view sports bets on prediction markets as nothing more than gambling that should be firmly under the states’ regulatory control. “No matter what they call themselves, prediction markets like Kalshi are gambling platforms, plain and simple,” New York Attorney General Letitia James, a Democrat, said in July. “By ignoring our laws, Kalshi is running an illegal operation and harming New Yorkers in the process.”

In states where sports betting is legal, state governments collect tax revenue on licensed sports gambling. Nevada Governor Joe Lombardo, a Republican, said in August that “prediction markets offering sports-event contracts constitute gambling and must comply with Nevada’s gaming laws and regulatory framework.”

State leaders also say they want to use their regulatory authority to protect minors and those with low incomes from compulsive gambling. Some states allow sports betting in general but restrict wagers on college teams.

States have sent cease-and-desist letters to Kalshi, saying it offers an unlicensed gambling operation. Kalshi responded by suing states and asking judges to rule that it doesn’t have to follow state laws because it falls under the CFTC’s exclusive jurisdiction.

Minnesota has taken the strongest stand against prediction markets, banning them entirely. A judge blocked the Minnesota law for being too expansive, but said Minnesota may be able to ban other wagers, such as bets on the outcome of reality TV shows or on what TV announcers say during sports broadcasts.

Controversial bets and insider trading

Besides sports gambling, there are many other concerns about specific types of prediction-market wagers that may be contrary to the public interest. Prediction-market bets on clinical trials, flight cancellations, and wildfires have been the subject of protest. While Polymarket faced scrutiny for allowing bets on wildfires, a spokesperson for Kalshi told Ars recently it has never offered markets on wildfires “because they create perverse incentives” and has never offered markets on war, death, or terrorism.