Federal Showdown: States vs. Prediction Markets

The Trump administration’s federal regulators are squaring off against state gambling authorities in a high-stakes battle that could determine whether prediction markets operate freely nationwide or face extinction under state control.

Story Snapshot

Nevada sued Kalshi on February 18, 2026, claiming the prediction market platform operates illegal sports betting without a license
The CFTC backed Kalshi the same day, with Chairman Michael Selig warning state challengers “we will see you in court”
Kalshi’s Super Bowl Sunday trading volume exploded 27 times over the previous year, threatening traditional Nevada casinos
Multiple states have filed similar lawsuits while federal courts remain divided on whether commodities regulation trumps state gambling laws

Federal Regulators Challenge State Authority

CFTC Chairman Michael Selig released a forceful video statement on February 18, 2026, declaring the commission would defend prediction markets against state interference. His timing was deliberate, coinciding exactly with Nevada’s lawsuit filing in Carson City District Court. Selig emphasized federal authority over event contracts, stating the CFTC was “taking an important step to ensure that these markets have a place here in America.” The Trump administration’s explicit support signals a confrontation over whether Washington or individual states control this emerging financial sector.

Nevada Claims Unlicensed Gambling Operations

The Nevada Gaming Control Board and state attorney general filed suit alleging Kalshi operates an unlicensed sports betting business in violation of state gaming laws. Nevada authorities emphasized that Kalshi “has continued to dramatically expand its business, rather than attempting to maintain any kind of status quo.” State regulators pointed to evidence that traditional licensed gambling operations experienced business shrinkage while Kalshi’s platform saw explosive growth. Over 90 percent of money flowing through Kalshi now involves sports-related events, a dramatic shift from the platform’s original political prediction focus during the 2024 election.

Kalshi’s Massive Growth Threatens Traditional Casinos

Kalshi’s business expansion provides concrete evidence for Nevada’s concerns about unlicensed competition. The platform recorded 27 times the trading volume on Super Bowl Sunday 2026 compared to the previous year. This exponential growth occurred while Nevada’s regulated sportsbooks faced declining revenue, creating a direct competitive threat to the state’s traditional gambling industry. Kalshi launched sports contracts in early 2025, immediately triggering resistance from state regulators who recognized the threat to their licensing system and tax base.

Multi-State Legal War Intensifies

Nevada’s lawsuit represents just one front in a nationwide legal battle spanning at least nine states. Massachusetts, New Jersey, Tennessee, Ohio, Connecticut, and New York have all pursued enforcement actions against Kalshi, with mixed results in federal courts. Some judges granted preliminary injunctions favoring Kalshi’s federal preemption arguments, while others sided with state gambling authorities. The Massachusetts Superior Court rejected Kalshi’s claims as “overly broad,” ruling that federal commodities regulation can coexist with state gambling authority. Legal observers expect the Supreme Court will eventually resolve this constitutional question.

Regulatory Confusion Creates Uncertain Future

The conflicting court rulings create operational chaos for Kalshi and the broader prediction market industry. Kalshi faces potential service restrictions in multiple states while litigation proceeds through various appeals courts. Traditional sportsbooks like FanDuel and DraftKings responded by launching their own prediction markets to capitalize on lighter federal regulation and lower tax burdens compared to state-licensed sports betting. This competitive response suggests the industry views prediction markets as a permanent fixture regardless of litigation outcomes, though the specific regulatory framework remains undefined.

Constitutional Stakes Extend Beyond Gambling

This legal battle raises fundamental questions about federal power versus state authority that extend far beyond gambling regulation. If Kalshi prevails, federal commodities oversight could preempt state police powers in areas traditionally controlled by states. If states win, they preserve their ability to regulate activities they view as gambling regardless of federal classification. The outcome will establish precedent affecting cryptocurrency markets, derivatives trading, and other financial instruments where federal and state regulatory jurisdictions overlap. Tribal governments have also joined the litigation, arguing Kalshi’s operations violate the Indian Gaming Regulatory Act and tribal-state compacts.