U.S. regulators have opened a new front in the fight over prediction markets, suing Arizona, Connecticut and Illinois as the legal battle over platforms such as Kalshi and Polymarket grows. The federal government says those states crossed the line when they tried to block or limit event contracts that fall under the Commodity Futures Trading Commission’s authority.

The three states had issued cease and desist orders against prediction market operators, arguing that the products amount to illegal online gambling under state law. Arizona went further and filed criminal charges against Kalshi, saying the company violated state gambling laws and rules that ban betting on elections.

In its lawsuits, the CFTC said Congress gave the agency exclusive authority over designated contract markets and the swaps traded on them. Therefore, the agency argued that a patchwork of state enforcement would weaken federal oversight, increase confusion and disrupt national derivatives markets.

Courts split as states press their own cases

The court fights are already moving in different directions. On April 6, the 3rd U.S. Circuit Court of Appeals ruled that New Jersey could not stop Kalshi from offering sports event contracts in the state, finding that the contracts fall under federal law and CFTC oversight.

However, one judge dissented and said the products looked much more like ordinary sports betting.

Yet that ruling did not settle the issue across the country. Just days earlier, a Nevada judge extended a ban on Kalshi’s operations in that state, ruling that the company’s event contracts qualify as gambling under Nevada law and therefore require a gaming license. That decision kept in place a growing state challenge to the industry even as Kalshi won in New Jersey.

The dispute now reaches beyond states and federal regulators. Tribal gaming groups have also pushed back, saying prediction markets threaten tribal revenue and sidestep rules that casinos and sportsbooks must follow.

AP reported that four tribal nations have sued Kalshi and Robinhood, while tribal leaders warn that the outcome could reshape the balance between gambling regulation and federally supervised financial markets.