That was the last time the United States recognized the importance of facilitating the housing of new technologies within the United States. Online gambling? Illegal in the U.S., so countries like Costa Rica jumped into the void, enjoying all of the jobs and tax revenue that comes with having international online gambling companies located in that country. Other countries like Canada have legalized online gaming with geographic verification. The United States, by contrast, killed the one gambling modality that it was showing growth in — online poker.
Cryptocurrency has suffered the same fate. Instead of having large American companies operating crypto exchanges, the owners of exchanges and tokens/coins are frequently so well hidden that, even if they are owned by U.S. persons, the revenue is easily kept offshore and I suspect huge amounts of tax evasion are taking place.
We now have prediction markets. The fact is that prediction markets will exist. The internet and technology development act like a one-way valve on Pandora’s Box. The United States can do its best to close the lid, but the tech will leak out though those valves. The question isn’t whether or not to ban or regulate prediction markets. The question is whether or not the United States will host the companies behind those markets. If the U.S. bans it, a combination of VPNs and unscrupulous foreign operators will certainly rush in to fill the void — and Americans will be sending their bets overseas.
Section 230 is the gold standard for internet regulation: Government isn’t able to help through regulation or banishment. It won’t work. What does work is when the government gets out of the way. Not because regulation is a bad thing, but instead because it is no longer an enforceable option.
The U.S. faces the question repeatedly in the face of internet technology: Should it engage in ineffective regulation or get out of the way? With Section 230, getting out of the way created trillion-dollar companies. I doubt prediction markets will ever reach that size, but the U.S. has a chance to learn from history or ignore it. It’s choosing “ignore it”. And it will pay a price.
Background
Kalshi, a federally regulated prediction market platform, allows users to trade contracts on the outcomes of future events — from economic indicators to election results. The Commodity Futures Trading Commission (CFTC) regulates Kalshi as a designated contract market under the Commodity Exchange Act. Arizona, however, moved to prosecute Kalshi under its state gambling laws, arguing that prediction market contracts are illegal wagers rather than regulated financial instruments.
The CFTC intervened, filing suit against Arizona and seeking a temporary restraining order to block prosecution. The case presented a fundamental question about the boundary between federal financial regulation and state gambling enforcement in the rapidly growing prediction markets industry.
The Court’s Holding
Judge Michael Liburdi granted the CFTC’s request for a temporary restraining order, finding that the federal agency was likely to succeed on the merits of its preemption argument. The court held that when the CFTC has approved a platform as a designated contract market and authorized specific contract types, state gambling laws are preempted under the Supremacy Clause — states cannot criminalize activity that federal law expressly permits and regulates.
The ruling emphasized that the Commodity Exchange Act creates a comprehensive federal regulatory framework for derivatives and event contracts, and that allowing individual states to prosecute federally approved platforms would undermine the uniformity that Congress intended. The TRO prevents Arizona from taking any enforcement action against Kalshi while the case proceeds.
Key Takeaways
- The ruling is the first federal court decision directly addressing whether state gambling laws are preempted by CFTC regulation of prediction markets — setting a significant precedent for the industry.
- Other states considering enforcement actions against prediction market platforms will need to account for this federal preemption analysis.
- The decision validates the CFTC’s authority over event contracts and strengthens the legal foundation for the prediction markets industry.
Why It Matters
Prediction markets have exploded in popularity, with platforms like Kalshi and Polymarket generating billions in trading volume. But the regulatory landscape has been uncertain — the CFTC has taken an increasingly permissive approach to event contracts, while several states view them as illegal gambling. This ruling clarifies that federal approval of a prediction market platform preempts state gambling prosecution, giving the industry a critical legal victory and a framework for operating across state lines.
For the broader fintech industry, the decision reinforces the principle that comprehensive federal regulation creates a floor that states cannot undermine through criminal enforcement. For state regulators, it signals that the path to controlling prediction markets runs through Congress, not state prosecutors’ offices.
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