Prediction Market Legal War with State Bans and Counter Suits

In the world of sports betting, it is difficult to ignore the recent impact of prediction markets. They are a pretty divisive topic, with contrasting opinions from the American public and gamblers, right up to the lawmakers – both at a state and a federal level. The latter is where prediction markets have faced increasing scrutiny and lawsuits have been thrown back and forth. However, going by the revenue figures, sports betting brands jumping onto the bandwagon, and expansions into other countries and jurisdictions, it would seem prediction markets are here to stay.

Yet they remain highly controversial. The trading volumes on platforms like Kalshi and Polymarket continue to rise, and they are not just tied to sports betting and financial happenings. Recently, controversial geopolitical markets relating to Khameini and the US-Iran negotiations, or before that the Venezuelan ex-President Nicolas Maduro, raised suspicion of insider trading. There are also calls for event contracts, based indirectly, on war, death outcomes, or terrorist-related events, being called unethical and driving lawmakers to target these trading platforms. But let’s backtrack, and start with the lawsuits and pending threats that prediction markets face today.

History of Prediction Markets

Lawsuits, controversial insider betting or trading, and cease and desist or blocked sites all hamper the industry’s very existence. But prediction markets have, arguably, always been contentious. It is just their scale in the US betting industry, and the very quick window in which they suddenly went from being alternative betting sites to mainstream sports betting options.

Right now, you have US regulated operators like Kalshi, and popular crypto-first trading platforms like Polymarket in the US. Way back when, there was PredictIt, a New Zealand based online prediction market that was launched in 2014, and by 2019 the trading volume topped 250 million shares per year. The first of many to come, other prediction markets were launched and followed in PredictIt’s footsteps, but they came to a halt around 2022, when the US federal government authorities deemed them illegal. However, in 2025, the regulations were changed to allow these platforms to operate as regulated financial derivatives, and gradually, they won approval to relaunch in the US.

How Prediction Markets Are Regulated

The most critical detail about how prediction markets are regulated is that they are run by the Commodity Futures Trading Commission, a Federal Government agency. These platforms are listed as financial derivatives, under which the event contracts (prediction markets), are categorized as a financial trading product. Operators like Kalshi must have a license to operate in the US. These are the Designated Contract Market licenses, and you can view all the holders on the CFTC site.

As they are regulated at a federal level, they are technically legal in all 50 states. In the states with legal sports betting (39 with Missouri), there are gambling authorities that can charge operator tax and set up legislation on how gambling products should serve players. But not prediction markets. They do not pay any state gambling taxes, do not answer to the state authorities (in states with legal sports betting), and the state has little to no say on what these platforms can offer.

Think about states with strict rules on player props, college game bets, or limits on deposits/withdrawals. The prediction markets bypass all of these. And in states that have not yet legalized gambling, prediction markets are a legal, albeit not straightforward, means for the public to bet on sports.

Lawsuits Against Kalshi and Polymarket

So, onto the current issues. Kalshi and Polymarket are arguably the biggest prediction markets in the US right now, and as so, they are the ones that receive the most scrutiny. And the most class action lawsuits, cease & desist orders, and statewide site blockages.

Throughout the US, cease and desist orders have been sent to Kalshi, Polymarket, and Crypto.com. The standoff has led to the following states ordering prediction markets to stop serving players in their respective jurisdictions:

• Tennessee
• New Jersey
• Ohio
• Arizona
• Illinois
• New York
• Montana
• Maryland
• Michigan

But some states have launched full on lawsuits against platforms. Kalshi and Polymarket have clashed heads against the:

• Massachusetts Attorney General (Kalshi): September 2025
• Tennessee Sports Wagering Council (Kalshi): January 2026
• Nevada Gaming Control Board (Kalshi and Polymarket): February 2026
• Class Action lawsuit in California (Kalshi): March 2026

The main points of attack are that the platforms deliver unlicensed sports wagers. Though the class action lawsuit was made by traders, claiming that Kalshi refused to pay out winnings on the Iranian leader Ali Kahmeini leaving office – claiming the rules were changed after the outcome.

Site Blocks and Bans

Some state authorities have taken matters into their own hands, and gone as far as to block the sites in question. The legislation has been overruled by the state courts, and after failing to get prediction markets bracketed as illegal sports betting sites, they have gone on to block the domains.

• Massachusetts: Blocked Kalshi in 2026
• Nevada: Blocked Klashi and Polymarket in 2026
• Tennessee: Blocked Kalshi, Polymarket and Crypto.com in 2026, but this has been overridden

And Utah is currently working on banning Kalshi and Polymarket, expanding on its anti-gambling laws and extending these to try to corner the prediction market operators.

Prediction Market Counter-Suing

Kalshi and Polymarket have not taken these class action lawsuits lying down. Kalshi sued the states of Utah, Tennessee, Connecticut, Nevada, New Jersey and Massachusetts to argue its case and fight the restrictions or outright bans. Polymarket also opened a lawsuit against Massachusetts, challenging the state regulatory stance. Arguably, the biggest opposers are Nevada, New York, New Jersey and Massachusetts, who represent the bigger sports betting markets for the prediction markets.

In most of the cases, the problem is not with the prediction market real world contracts, but specifically with their sports offering. It is a pretty confusing environment for the public, most of whom believe event contracts are a type of sports betting. Because of the nature of the markets, their peer to peer trading mechanics, and the trading/selling element could be defined as sports betting. But it can also be defined as trading, or exchanging stocks on the outcome of sports events, which are real world events.

Sportsbook Expansions

Sportsbooks were among the first in line to criticize prediction markets. This was a direct threat to their market, stealing away their customers and opening revenue streams in states where sports betting brands had no legal footing. But that soon changed, as FanDuel broke ranks and partnered with CME Group, with the intention of launching a prediction market of its own later in 2025. This was followed by Fanatics launching its own prediction market. Next came DraftKings, launching its DraftKings Predictions exchange, before FanDuel introduced FanDuel Predictions.

While these platforms offer financial, business, political, and stock markets, the offering mainly revolves around peer to peer sports trading, with all the features you would get at Kalshi or Polymarket. The idea for the betting firms is that they can use the federally regulated platforms to get into states where sports betting is not yet legal. Or those that have legal sports betting, but strict monopolies/tribal contracts that make it virtually impossible for the operators to gain access.

The fact that DraftKings, FanDuel and Fanatics have all invested in prediction market apps of their own shows that these operators – all of which are massive in the US – are now backing prediction markets. Other operators in the US have not changed their stance on prediction markets, and given all the controversy surrounding them, you can’t help but feel it is a gamble on behalf of DraftKings and co. But if there were regulatory changes or amendments to prediction markets, it wouldn’t be a surprise to see these platforms benefit either.

They already have competitive sportsbooks, and the prediction markets are only there to attract traffic from states where betting is not legal. If prediction markets were taxed at the state level, forced to remove sports products, or even have to partner with local sportsbooks to offer these products – it wouldn’t be a losing scenario for DraftKings, FanDuel and Fanatics.

Looking Forward

While the saga does not feel like fresh news, the blocking of Kalshi and Polymarket in Massachusetts, Nevada and the others are recent happenings. These are not just orders or allegations in courts, but they have direct impacts on customers, who cannot access prediction markets in the selected states. This is one of the most direct, and threatening actions taken by a state against a licensed prediction market operator, but it is not over yet. And the outcome will no doubt be eagerly watched by operators and lawmakers alike.

It is a battle between the state and the feds, something that could see many different possible scenarios unfold. We could have the Federal Courts siding with prediction markets and overriding the states’ authority – not just in these cases – but all potential future cases against the platforms. Another scenario is that prediction markets are allowed to run, but they have to pull their sports products. Or, the sports products have to be licensed within the state – or partnered with associated sportsbooks.

Prediction markets are slowly spreading to Europe, Brazil, and other jurisdictions as well. Looking at how they integrate these markets, and whether there are legal entanglements or arrangements done abroad can also help either argue for the cause, or against these platforms. One thing is certain: as the battles continue, gradually the landscape of these prediction markets is bound to change.