The Department of Justice and the Commodity Futures Trading Commission filed federal lawsuits against Illinois, Arizona, and Connecticut on April 2, simultaneously targeting governors, attorneys general, and gaming boards in all three states. The agencies argue that prediction market platforms like Kalshi, Polymarket, and Crypto.com operate as federally regulated derivatives exchanges, not state-licensed gambling operations, and that state enforcement actions against them violate the Commodity Exchange Act's preemption clause.
It is the first time a federal agency has directly sued state regulators over prediction markets.
Three States, Three Enforcement Approaches
Each state took a different path toward shutting prediction markets down.
Illinois, alongside several other states, sent cease-and-desist letters to prediction market providers in late 2025, asserting they were offering unlicensed gambling products. The Illinois Gaming Board specifically targeted Kalshi, Polymarket, and Crypto.com.
Arizona went further. State prosecutors filed criminal charges against Kalshi last month for allegedly violating state gambling laws and a separate statute banning election betting.
Connecticut's Department of Consumer Protection issued cease-and-desist orders on December 2, 2025, to KalshiEx, Crypto.com, and Robinhood Derivatives, alleging they were operating as unlicensed online gambling platforms.
The CFTC's lawsuits name the governors and attorneys general of all three states as defendants: Governor J.B. Pritzker and AG Kwame Raoul in Illinois, Governor Katie Hobbs and AG Kris Mayes in Arizona, Governor Ned Lamont and AG William Tong in Connecticut.
The Federal Preemption Argument
The CFTC's legal theory is straightforward. Event contracts, the agency argues, are "derivative instruments that enable parties to trade on their predictions about whether a future event will occur." Under the Commodity Exchange Act, the CFTC holds exclusive jurisdiction over swaps and derivatives. State gambling regulators have no authority over them.
CFTC Chairman Michael Selig framed the lawsuits as a defense of market participants: "This is not the first time states have tried to impose inconsistent and contrary obligations on market participants, but Congress specifically rejected such a fragmented patchwork of state regulations because it resulted in poorer consumer protection and increased risk of fraud and manipulation."
The practical problem, the CFTC argues, is that state cease-and-desist orders make it impossible for exchanges to comply with their federal obligation to provide impartial nationwide access.
A DOJ Attorney With History
Yaakov Roth, the principal deputy assistant attorney general leading the federal cases, previously represented Kalshi during its 2024 legalization fight. That connection will draw scrutiny. Illinois Governor Pritzker's office already pushed back, with a spokesperson stating: "The Trump Administration is carrying water for companies driving well-documented and lucrative insider trading schemes."
Donald Trump Jr. currently advises both Polymarket and Kalshi. Trump Media has its own prediction market ambitions. Critics will argue the lawsuits serve personal financial interests rather than regulatory clarity.
What a Federal Victory Would Mean
Gaming lawyer Daniel Wallach noted the CFTC strategically selected states without prior unfavorable court rulings, avoiding "surefire losses in NV, OH, MD & MA" where state courts have already sided with gambling regulators.
If the CFTC prevails, the implications are significant. Prediction markets would gain federal cover to operate across all 50 states without individual state gambling licenses. Analysts estimate the sector could generate $10 billion in gross revenue with profit margins between 60 and 80 percent, far exceeding traditional sportsbook margins.
Over a dozen states currently have active litigation against prediction market platforms. Congress has introduced roughly 14 bills proposing various restrictions. A federal court ruling establishing CFTC preemption would override most of these efforts in one stroke.
The Ninth Circuit will hear oral arguments on April 16 in consolidated Nevada cases involving Kalshi, Robinhood, and Crypto.com. That hearing, combined with these new lawsuits, makes April the most consequential month for prediction market regulation since Kalshi first won CFTC approval for election contracts in 2024.
The Crypto Connection
Polymarket, the largest crypto-native prediction market, runs on Polygon and settles in USDC. Its volumes surged past $1 billion during the 2024 election cycle. A federal victory here would remove the single biggest legal overhang for on-chain prediction protocols.
Crypto.com, named in enforcement actions in all three states, operates both a CFTC-registered prediction market and one of the largest crypto card programs in the industry. The company's prediction market expansion is a direct bet on federal preemption holding up in court.
For crypto users more broadly, the case tests whether federal regulators will protect blockchain-based financial products from state-level classification as gambling. The answer will shape how DeFi protocols offering event contracts, options, and binary outcomes operate in the United States.
Overview
The DOJ and CFTC sued Illinois, Arizona, and Connecticut to block state enforcement actions against prediction market platforms including Kalshi, Polymarket, and Crypto.com. The federal government argues these platforms are derivatives exchanges under exclusive CFTC jurisdiction, not gambling operations subject to state regulation. The lead DOJ attorney previously represented Kalshi. A Ninth Circuit hearing on April 16 and these new lawsuits together will determine whether prediction markets gain federal protection to operate nationwide.
