States expand control over prediction market regulations

Federal preemption argument loses ground as states tighten grip on prediction markets

Two months ago, Kalshi walked into federal court with a argument that had genuine force: the Commodity Exchange Act pre-empts state gambling law, and a CFTC-regulated contract cannot simultaneously be an illegal bet under New York statute. The argument had logic. It had precedent in the derivatives space. It did not have six federal judges.

Now it doesn't have the Third Circuit either.

The appeals court ruling — that states retain authority to regulate Kalshi's sports prediction markets — does something the earlier losses did not quite do. It makes the preemption theory a minority position across the circuits, not a contested one. When one court rules against you, you have a circuit split to argue. When the pattern holds across jurisdictions, what you have is a losing theory.

Polymarket's situation is structurally different and in some ways harder. Kalshi is CFTC-regulated and could at least stand on the federal agency relationship. Polymarket operates offshore. New York's suit, filed alongside Governor Hochul, goes after the platform on unlicensed sports betting — which means the state does not need to disprove federal preemption to win. It needs only to show Polymarket took wagers from New York residents without a license. That is a lower bar, and the state knows it.

Polymarket's counter-suit — arguing federal law should block the state's action — lands in a circuit where that theory has already lost. The legal officer who flagged preemption risk before the lawsuit was filed was correct about the exposure, not necessarily correct that preemption was the answer.

Here is where I think the coverage is missing something. The consensus read is that this is a regulatory crackdown that the platforms will eventually negotiate their way out of, probably through licensing frameworks or a federal solution. I don't think that's where this lands — at least not on the timeline the market seems to expect.

The preemption argument was the fast path. It would have resolved the question federally, cleanly, and in a way that bound all fifty states. Without it, each state becomes its own litigation. New York has triple remedy on the table. New Jersey has petitioned the Supreme Court. Massachusetts is running a separate inquiry. The platforms are not fighting one regulator — they are fighting a replication problem, and every state that wins adds to the template.

I have seen this dynamic before, in a different sector, with a different product that was also caught between federal permissibility and state prohibition. The federal solution that everyone assumed was coming took four years longer than anyone priced. The companies that survived were the ones that treated state-by-state compliance as a permanent operating condition, not a temporary cost while the courts sorted it out.

Kalshi's en banc petition is the last structural move available before the Supreme Court becomes the only venue that matters. Whether the Court takes that case — and whether it takes it on a schedule that helps the platforms before the state litigation forecloses market access — is the number no one has cleanly priced.