Who Regulates Prediction Markets? The Answer Changes at the State Line

Nobody in this fight has argued that Kalshi's licence is fake. On 31 July 2026, New York's Attorney General and its Governor sued the company in state court in Manhattan. They called its event contracts an illegal gambling operation, asked for a restraining order, and attached a damages formula running to roughly $36 billion. The federal designation that lets Kalshi list those contracts was not challenged anywhere in that filing. That same afternoon, a New York resident could still open a position on the Yankees.

So the question of who regulates prediction markets did not have one answer that day. It had two, running at the same time, in two courthouses about four miles apart.

This is a Kodex walkthrough with Ava, who reads structure the way other people read weather. It covers the part of a licence nobody prices: its geography. She does not start with the lawsuit. She starts with the piece of paper everyone assumes is settled, because the whole confusion lives inside it.

What a prediction market licence actually covers

Kalshi holds a designated contract market registration from the Commodity Futures Trading Commission. That designation is a venue licence. It says this company may run a market, list contracts, take orders, and clear them under federal rules. It says nothing about baseball.

"Read it as a permission to operate," Ava says. "Not as a permission slip for every contract you find on the shelf."

Two federal provisions sit under that registration. They push in opposite directions the moment a state gets involved. The first is exclusive jurisdiction. 7 U.S.C. § 2(a)(1)(A) puts these transactions under the Commission's authority, and that is the sentence Kalshi leans on every time a state sends a cease-and-desist. The second is quieter and does more damage. Under 17 C.F.R. § 38.151(b), a designated contract market has to offer impartial access to its markets and services. The access criteria must be impartial, transparent, and applied in a non-discriminatory way.

Hold those two together and you can see the collision before any lawyer arrives. A federal rule tells the venue to let everyone in on the same terms. A state tells the venue to keep its residents out of one aisle. The venue cannot obey both without redefining what impartial means.

Ava puts a finger on the screen at the second one. "That is not a dispute about who is right. It is a design that cannot resolve itself. One of those two obligations has to lose."

In practice the venue has been resolving it in the only direction that keeps the doors open. It restricts by state, category by category, as orders land. Impartial access survives as a principle everywhere it has not yet been contradicted, and the map fills in behind the litigation. Which means the shape of what you can trade is now set by court calendars in states you may not live in.

There is also a carve-out that gets misquoted constantly. It is worth getting right, because the entire argument turns on it. The Commodity Exchange Act contains a special rule for event contracts at § 5c(c)(5)(C). It lets the Commission rule that certain agreements are contrary to the public interest. The enumerated list is short and pointed: activity unlawful under federal or state law, terrorism, assassination, war, and gaming.

That last word is doing an enormous amount of work in every filing on both sides. Regulation 40.11 is the Commission's own rule implementing that statute. The statute and the regulation are two different instruments. In a fight about which rulebook governs, treating them as one is how people end up arguing past each other.

Who regulates prediction markets when two courts read the same sentence differently?

Preemption is the mechanism, and it is simpler than it sounds. Federal law can displace state law three ways. It can say so outright, which is express preemption. It can occupy a whole field so completely that no room is left for a state, which is field preemption. Or it can collide with a state rule so directly that obeying both is impossible, which is conflict preemption. Every filing in this fight is an argument about which of those three, if any, applies to a contract on a football game.

On 6 April 2026, the Third Circuit answered it one way. In KalshiEX LLC v. Flaherty, a divided panel affirmed an injunction stopping New Jersey from enforcing its gambling laws against Kalshi. The Commodity Exchange Act, the majority found, likely displaces state law here on both field and conflict grounds. Judge Jane Roth dissented, and her dissent is the sharpest short version of the other side. The contracts, she wrote, are virtually indistinguishable from what sits on an online sportsbook. The presumption against preemption should carry special force where gambling is concerned.

Three months later, a federal district judge in Manhattan read it the other way. On 7 July, Judge Analisa Torres denied Kalshi a preliminary injunction against New York in KalshiEX LLC v. Williams. The Act does not preempt New York's gambling law, she held.

Same statute. Opposite instruction. Neither judge misread anything.

Nor is it a tidy two-sided split. Kalshi has lost preliminary-injunction motions in Ohio, Nevada, Maryland, and Massachusetts. It has won them in New Jersey and Tennessee, where the court reached the opposite conclusion from Ohio's on nearly identical facts. Six district courts, six readings of the same federal statute, and appeals now running in more than one circuit at once.

Those cases are separate matters against separate states, and a ruling in one does not bind the courts hearing the others. That is ordinary. What makes it expensive is that the product is a nationwide order book. One venue, running one set of prices, now sits inside a country where its contracts are protected in Philadelphia and exposed in Manhattan. That is not something the company can fix by filing better paperwork. Norton Rose Fulbright's survey of the preemption fight walks the doctrine at length and lands on the same structural point. This ends at an appellate court or it does not end.

"You already know this shape," Ava says, pulling the frame back a step. "A rule is only as strong as the body that gets to enforce it, and here two bodies both think they qualify." It is the thread running one level up through the CLARITY Act Senate vote.

The month Kalshi ran out of federal cover

The order of events in July explains the timing of everything else, and it is the part a static legal map cannot show you. Four dates, in sequence.

Kalshi lost the preliminary injunction on 7 July. On 27 July, Torres denied it a second time, refusing an injunction pending appeal. Her three-page order noted that Kalshi offered no new authority that would let the court find a strong showing of success on the merits. Two days later, the federal appeals court in Manhattan declined to step in while the appeal runs. On 31 July, New York filed.

New York did not sue while Kalshi still had a federal shield in place. It waited until the shields were gone, then moved within days.

What the filing asks for is the part worth reading. Attorney General Letitia James and Governor Kathy Hochul brought it together in New York's Supreme Court, which is the state's trial court rather than its highest one. That name trips people constantly. They sought a temporary restraining order, restitution, triple the company's gains, and $100,000 for each unauthorized offer of sports wagering. They also asked for a full accounting of customer bets and losses. The complaint alleges the platform let people under 21 wager.

Within a day of that filing, the Commission moved in federal court in Manhattan for emergency relief. It asked the court to stop New York from enforcing against the venue at all, calling the state's action overreach that would harm the markets it regulates. Two governments, two courthouses, one week, opposite instructions to the same company.

And through all of it, the account kept working.

Michigan reached further, and got stopped

What does a state action actually take from you? The honest answer is that it depends entirely on how far the order goes, and there is now a clean set of examples at three different depths.

Michigan went deepest, and it went there through the venue rather than around it. A state court order in early July stopped new sports positions. Users found out the way these things arrive now, as a notice in the app: they were not currently allowed to open positions in sports. Crypto, weather, and world news kept trading beside it. Days later the exchange self-certified an emergency rule to force-liquidate identified Michigan users' open positions. The Commission stayed that rule and ordered the trades honored.

Sit with the order of operations there. The thing that came closest to reaching into open positions was not the state and not the regulator. It was the venue, acting on its own rulebook, under pressure from a state. It took a federal intervention to stop it. That mechanism is the subject of who holds your margin, and it is why venue discretion belongs on your risk list next to counterparty risk.

Ava has one correction to offer here, and she makes it every time this comes up. "The licence was never the exposed surface. Your access was."

Both sides added states instead of backing down

Four months of escalation have produced no retreat in either direction. That is the strongest available evidence that this does not settle privately.

On 2 April 2026, the Commission and the Department of Justice sued Arizona, Connecticut, and Illinois. Each state's governor and attorney general were named. Chairman Michael Selig said the agency would defend market participants against overzealous state regulators.

The states answered at scale. On 27 July, as the comment period closed on the Commission's first proposed rule for these markets, 44 state attorneys general signed a joint letter led by Ohio's Andy Wilson. It urges the agency to withdraw the rule and rewrite it. Their argument is that it reaches past the agency's statutory authority into an area states have always governed. Five states did not sign, among them Texas, Florida, and Georgia. The coalition is broad without being unanimous, and CNBC's account of the letter carries the full split.

A venue does not price this the way it prices a market risk. Neither can you, because the resolution date is a court calendar.

What can you check before you fund an account?

None of this makes a prediction market unusable. It makes one specific thing checkable, and it is not the thing the marketing pages answer.

A state action reaches a category of contract rather than a platform, and that moves the question one notch down from the one most people ask. It is not whether a venue is legal where you live. It is which shelves of it you can open from your address. Sports has been the pressure point in every action so far, and weather, economics, and world news have been left alone in each one.

Which shelf you can reach is only half of it. A venue's own terms cover what it may do to a position it can no longer let you hold. Blocking new positions and closing existing ones are different powers, and Michigan is proof that the second is not hypothetical. A venue reserving the right to unwind you under a state order has told you something specific about your exposure. That sentence is in the document before you deposit.

What none of these actions has touched is worth as much attention as what they did. Across Michigan, New York, and the three states sued in April, no order has reached a balance or stopped a withdrawal. The fight has been about what you may open, not about what you already hold or whether you can leave with it. That is a narrower exposure than the headline numbers suggest, and it is a different one than the risk people brace for.

That other risk runs on its own clock. Whether a contract pays you correctly is a question about wording, and that lives in prediction market resolution risk. Whether you can open the position at all is a question about geography. They fail independently, and only one of them is written in the contract.

Ava closes the laptop halfway, the way she does when the useful part is over. "You have been taught to check whether a venue is regulated. Start checking where."

A halt, a state order, and a market closure all arrive the same way. Something that used to work does not, which is why a circuit breaker is a venue rule rather than an asset rule. The contract did not change. The permission did.

Try the habit where it costs nothing. Open the Kodex simulator, hold a tokenized stock and a metal at the same time, and watch each one answer to a different rule about when it may trade at all. Same $5,000, same screen, two rulebooks underneath. Asking which rulebook reaches which position is free here and expensive everywhere else.

Start free →