CFTC expands prediction markets legal fight with Kentucky lawsuit

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CFTC Kentucky prediction lawsuit

Highlights

The CFTC filed a federal lawsuit against Kentucky, asserting exclusive federal jurisdiction over prediction markets and challenging the state's actions against Kalshi and Polymarket.
Kentucky is the ninth state targeted by the CFTC in a year for attempting to regulate federally overseen prediction markets, escalating a national industry rules debate.
The CFTC's complaint contests a Kentucky bill imposing a 14.25% tax on prediction market transaction fees, claiming it blocks these markets from operating in the state.

Federal complaint targets Kentucky oversight

As reported by The Block, the Commodity Futures Trading Commission sued Kentucky on Tuesday, arguing that it has exclusive jurisdiction over prediction markets and that the state is improperly trying to block federally regulated designated contract markets.

The lawsuit follows action by Kentucky last week against Kalshi, Polymarket and other operators, which the state accuses of running unlicensed and illegal sports betting and gambling platforms. In its complaint filed in the U.S. District Court for the Eastern District of Kentucky, the CFTC says Kentucky's effort to shut down federally regulated markets intrudes on the federal framework created by Congress to oversee national swaps markets.

Kentucky is the ninth state the regulator has sued over the issue. Over the past year, the agency has also brought similar complaints against Wisconsin, Illinois, Arizona, Connecticut, New York, New Mexico, Minnesota and Rhode Island, centering on its view that states are overreaching into an area under federal control.

Industry rules debate widens across U.S. markets

States continue to push back, arguing that prediction platforms violate local gaming and gambling laws, especially when contracts resemble sports-related bets. The dispute is growing as platforms such as Kalshi and Polymarket gain popularity following the 2024 election cycle, with users placing wagers on political outcomes and major sporting events such as the World Cup.

CFTC Chair Michael Selig, who takes office late last year and supports prediction markets, is advancing a broader regulatory framework for the sector. Under his leadership, the agency debuts a wide-ranging rule proposal that would generally permit sports betting on prediction markets while restricting contracts tied to terrorism and assassinations.

In the Kentucky complaint, the CFTC also challenges a state bill requiring prediction markets to pay a 14.25% tax on transaction fees. The regulator argues that the measure effectively makes it impossible for prediction markets to operate in Kentucky.

California’s proposed Billionaire Tax Act, which our publication previously covered, is moving toward a November statewide vote after gathering enough signatures. The measure would impose a one-time 5% levy on residents with net worth above $1 billion, potentially applied retroactively from Jan. 1, 2026, with payments due in 2027 over five years. The proposal has split political and business leaders, with supporters citing funding needs and critics warning it could drive billionaires and capital out of the state.

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