States Coordinate Crackdown on Prediction Markets

Prediction markets face narrowing legal ground as states coordinate enforcement

William Tong did not send nine cease-and-desist letters by accident. The Connecticut Attorney General and the state's Department of Consumer Protection named Underdog, Polymarket, Coinbase, Robinhood, and five others in a single enforcement action, which is not the behavior of an official improvising. It is the behavior of someone who has counted votes and decided the moment is now.

Underdog's response — a 39-page federal complaint asking the District of Connecticut to block state jurisdiction entirely — is the move you make when you believe federal preemption is a winning argument. The company operates a federally designated contract market, which means CFTC oversight is real and documented. The preemption claim is not frivolous. I have watched similar arguments survive initial challenge and then collapse when a court decided that "federally regulated" and "federally exclusive" are different things. They are.

Connecticut's specific objections are worth reading carefully, because they are not random. The state's concern is not that prediction markets exist — it is that they allow users under 21, users on self-exclusion lists, and bets on in-state college teams. These are conditions that Connecticut's gaming framework was built around enforcing. A federal DCM designation does not, on its face, eliminate a state's interest in protecting those populations. That gap is where Tong is standing.

Kalshi's Montana settlement tells a different and quieter story. The company dropped its lawsuit; Montana agreed not to enforce while the Ninth Circuit considers an en banc petition. That arrangement gives both sides a pause without either admitting the other was right. I have seen this structure before in regulatory disputes where one party has won a court decision but is unsure whether it will hold on appeal. Montana is not retreating — it is waiting with a 30-day notice requirement built in, which means enforcement can resume on a defined timeline. That is leverage, not concession.

The Ninth Circuit's existing ruling — that event contracts constitute illegal sports betting on tribal lands — is the weight pressing down on every platform still operating in states with tribal gaming compacts. Kalshi's en banc petition is asking the full circuit to reconsider a decision that the panel wrote with some confidence. The headline the court used internally, that Kalshi "may reshuffle the cards but cannot change the hand," is the kind of language that signals a panel that felt it had found the right answer. En banc reversals happen, but they require a coalition, and that coalition has to form against a ruling that was not close.

What I think the reporting has not yet connected is the coordination problem building for the platforms. Connecticut, Montana, and Massachusetts are each pursuing different legal theories against overlapping sets of companies. Underdog is fighting Connecticut in federal court while simultaneously watching the Massachusetts injunction against Kalshi make the federal preemption argument harder for everyone. Each adverse state ruling tightens the terrain. The companies are not losing a single battle — they are losing the ability to run the same argument in multiple jurisdictions simultaneously, because the losses are accumulating on the record that the next judge will read.

The CFTC's silence is the fixed point around which everything else rotates. Without a clear federal rule, platforms have CFTC registration but no CFTC shield. That combination — federal status without federal protection — is the most expensive legal position a company can occupy, and several of them are occupying it right now.