Predict 2026 panel maps four-front legal war over prediction markets

Rob Schwartz called it a litigation mess on Tuesday, and the description held up under examination. Speaking at the Predict 2026 conference in New York, the Morgan Lewis partner and former CFTC general counsel laid out what the regulatory battle over prediction markets actually looks like when you get close enough to count the moving parts.

CFTC General Counsel Tyler Badgley had a taxonomy ready. Four buckets, he said. Exchanges suing states to block enforcement. States bringing enforcement actions, including criminal indictments, against CFTC-regulated entities. The CFTC itself seeking injunctions against state gambling authorities. And then everything else — class actions, tribal gaming claims, the accumulated litigation weight of a market that went from near-zero to a volume story in roughly eighteen months.

The Arizona case runs through all of this. A 20-count criminal indictment against Kalshi, filed by the state attorney general in March, was paused in April when a federal judge issued a temporary restraining order. It sits there now, suspended, while the courts work out whether sports event contracts are federally regulated derivatives or state-regulated gambling. The answer to that question is the answer to the Arizona case. It is also the answer to Illinois, Ohio, Tennessee, and the cases not yet filed.

Schwartz went back to 1688 — to Joseph Penso de la Vega's account of the Amsterdam Beurs, where merchants he called skillful gamblers hedged risk with instruments that sounded, to outside observers, indistinguishable from betting. The parallel was not decorative. The argument about whether a contract is useful economic activity or a game of chance is not new. What is new is that the United States has two separate regulatory frameworks — federal commodities law and state gambling statute — that were written at different times, by different people, for different purposes, and that now both have plausible claims over the same instrument.

Judge Martha Pacold's Illinois ruling, issued last week, gave the clearest judicial statement yet of where the federal argument lands. Her line — that Kalshi's contracts are likely swaps that happen to be entertaining — was not a remark about gambling. It was a statement about the Commodity Exchange Act's preemption reach. She blocked Illinois from enforcing its age restrictions, its geographic restrictions, and its controls on what contracts could be traded. She left the tax question open.

The tax question is where the consensus read goes wrong, and it is worth saying so plainly. Most coverage of the Illinois ruling treats the tax as a secondary issue, a residual uncertainty to be resolved later. The framing misreads the incentive structure. A state that cannot regulate what is sold, where it is sold, or to whom it is sold, but can still extract revenue from transactions, has no reason to stop. The preemption argument strips states of their enforcement tools without stripping them of their financial interest in the market's existence. That combination does not produce deregulation. It produces a new kind of contested coexistence, where state tax authorities and federal market regulators both have valid claims simultaneously.

Badgley's four-bucket framework will not shrink before Congress or the Supreme Court provides a definitive answer on the statutory question. The Illinois injunction is a preliminary ruling on likely merits. The Wisconsin judge reached the opposite conclusion on the same preemption argument. Both cases remain open.