Crypto Prediction Markets Face Existential Threat — 3 States Move To Shut Traders Out

Illinois, Arizona and Connecticut are trying to regulate crypto predictions markets, such as Polymarket and Kalshi. The Commodity Futures Trading Commission and the Justice Department are coming to the rescue.

For The First Time, The Scale Moves In Crypto Prediction Markets’ Favor

As contradictory as it may sound, the Trump administration is trying to save crypto prediction markets from the State itself. The coordinated lawsuits the CFTC and the DOJ have filed against the three states argue that only the federal derivatives regulator can police prediction markets.

The @CFTC has clear and longstanding exclusive jurisdiction to regulate prediction markets. But recently, state regulators have tried to impose inconsistent and contrary obligations on CFTC-registered prediction markets. In response, the CFTC and @TheJusticeDept today filed three…

— Mike Selig (@ChairmanSelig) April 2, 2026

The lawsuits go as far as to claim the three states are bypassing the CFTC’s authority by trying to shut down “federally regulated DCMs” (designated contract markets). Regarding Illinois, the federal regulator said the state spent the past year issuing cease‑and‑desist letters to Kalshi, Crypto.com, and Polymarket, which the complaint argues are all under CFTC authority:

Illinois’s attempt to shut down federally regulated DCMs intrudes on the exclusive federal scheme Congress designed to oversee national swaps markets.

Related Reading: Crypto Traders On Edge As Korea Stalls Key Law — Is The “Kimchi Premium” At Risk Next?

Put simply, Washington says prediction markets are federally regulated derivatives. States insist, however, that prediction markets are just unlicensed gambling products harming local consumers.

CFTC Chairman Michael Selig explained that this is not the first time states “have tried to impose consistent and contrary obligations on market participants”. Just this past month, a bipartisan Senate bill targeting sports‑style bets on platforms like Polymarket and Kalshi was introduced by Senators Adam Schiff (D-CA) and John Curtis (R-UT).

Also on March, democratic representative Seth Moulton of Massachusetts (MA-06) formally banned all his staff from participating in prediction markets. That same day, Congressman Adrian Smith (R-NE-03) and Congresswoman Nikki Budzinski (D-IL-13) from Nebraska introduced the PREDICT Act, banning members of Congress from trading on political and policy outcome markets.

These are the first lawsuits by the CFTC to block state gaming regulators ​from policing operators of prediction markets, according to Reuters. The outlet also highlighted the fact that all the defendants are Democrats.

The CFTC’s lawsuits build on its recent push to assert “exclusive jurisdiction” over event contracts, including sports and politics, reversing the Biden‑era move that tried to ban broad categories of prediction markets.

Prediction markets are morphing into an information layer and hedging tool for traders, with liquidity increasingly coming from crypto‑native capital and exchange integrations.

A federal win would likely centralize rule‑making at the CFTC, potentially clearing a single regulatory path for crypto prediction platforms, but also tightening surveillance and enforcement. Conversely, if states prevail, platforms may face a patchwork of gambling rules that fracture liquidity, push some markets offshore, and raise operational risk premia for traders.

Cover image from Perplexity. BTCUSD chart from Tradingview.