Federal-State Conflict Escalates Over Prediction Markets as Trump Administration Backs Industry

In early March, Donald Trump Jr. addressed a gathering of Republican state attorneys general during a three-day retreat at the Ritz-Carlton in New Orleans.

Despite repeated pledges to separate his family’s business interests from the administration’s work, the president’s eldest son waded into a fierce legal dispute over whether states or federal agencies should regulate prediction markets—a rapidly expanding sector in which the Trumps hold a financial stake.

During a closed-door question-and-answer session with Montana’s attorney general, Trump Jr. asserted that state leaders were being misled by “vested interests”—gambling firms seeking to protect their “monopolies” by targeting prediction markets, according to four people familiar with the remarks. He countered that the markets already operate under robust federal oversight, characterizing them as sophisticated financial tools supervised by federal officials rather than state prosecutors.

While his tone was described as conciliatory, the comments aligned with a broader directive from his father’s administration: stand down.

Across the country, a bipartisan coalition of states has launched lawsuits challenging platforms like Kalshi and Polymarket, setting up a courtroom battle that will decide whether Americans can legally wager on sports, politics, and a vast array of other events through these markets.

Currently, 20 states are embroiled in litigation over whether prediction markets fall under state sports-betting statutes. Last month, 44 states signed a letter denouncing the platforms as a “new form of casino” exploiting young people.

State officials contend the markets are circumventing regulations and avoiding state taxes—estimated at a minimum of $2 billion annually in lost revenue, according to the nonpartisan Tax Foundation.

The litigation has triggered an extraordinary political confrontation, pitting the federal government against the states. President Trump has declared his intention to foster the growth of prediction markets under his leadership, free from state interference. In coordination with Kalshi, his administration has argued in court that the Commodity Futures Trading Commission (CFTC)—the agency overseeing commodities like oil and agricultural products—is the industry’s sole regulator.

In the half-century since its 1974 creation, the CFTC had never sued a state over regulatory jurisdiction. This year, it has sued nine states, all led by Democratic governors. Twice, the agency has directed prediction markets to defy court orders, invoking emergency powers dormant for decades.

That aggressive posture aligns the agency with the Trump family’s financial interests. In January 2024, Kalshi hired Donald Trump Jr. as an adviser, compensating him with more than $300,000 in shares that have since multiplied in value. Last year, he also became an adviser to Polymarket and acquired a stake through his investment firm, 1789 Capital.

A spokesman for Trump Jr. stated he “does not interface with the federal government on behalf of any company he invests in or advises.” A Kalshi spokesperson said he advises the company on marketing.

The legal battle has also drawn a powerful coalition of traditional gambling firms, which view prediction markets as a competitive threat and have lobbied states to act. An industry group representing casino operators is working with former New Jersey Governor Chris Christie, who has publicly denounced prediction markets.

“A lot of money is at stake,” said Rob Schwartz, who served as the CFTC’s general counsel until last year and has tracked the 17-month barrage of lawsuits. “It will certainly go to the Supreme Court. It’s just a matter of when.”

At the core of the litigation lies a debate over the definition of gambling.

For years, Kalshi and other prediction markets have registered with the CFTC, classifying the wagers on their platforms as “event contracts”—financial instruments deriving value from real-world outcomes. Often structured as yes-or-no propositions, these contracts are federally regulated, the companies argue, granting them the right to operate nationwide.

As the largest U.S. prediction market, Kalshi has borne the brunt of the legal pressure; most betting on Polymarket occurs internationally, though it recently launched a limited U.S. app.

In a statement, Kalshi said it provides customer safeguards and offers a genuine opportunity to profit. The company maintains it operates under a “national framework of regulation, not a state-by-state patchwork,” calling state attempts to shut down a federally licensed exchange “overly aggressive.”

State officials reject that position. They argue Kalshi’s product is nearly indistinguishable from sports betting but lacks state-mandated protections. In nearly every state, sports betting is restricted to those 21 and older, yet Kalshi’s app is accessible to users 18 and up.

“You can go onto a site and place money on the outcome of some sports activity,” said Nick Brown, the Democratic attorney general of Washington, who secured a preliminary court victory over Kalshi this month. “That’s the same thing as gambling.”

‘A Wink and a Nod’

On the morning of this year’s Super Bowl, Derek Brown, Utah’s attorney general, saw a Kalshi advertisement served to his college-age son inviting him to “legally trade on football outcomes.”

Brown was appalled. In his view, Kalshi was using semantic sleight of hand to circumvent Utah’s constitutional ban on gambling. “It’s a wink and a nod,” he said.

Over the following two weeks, Brown and Utah’s governor, both Republicans, publicly condemned prediction markets as “almost dystopian.” At one point, Brown received a text from a Kalshi lobbyist requesting a meeting; he ignored it.

In late February, Kalshi sued Utah in federal court, citing the state’s “intent to prohibit Kalshi from operating.” It marked one front in a nationwide legal war involving Kalshi and several competitors, including Polymarket and the trading platform Crypto.com.

After the U.S. Supreme Court struck down a federal ban on sports betting in 2018, most states legalized the industry, generating more than $3.2 billion in tax revenue from licensed operators in the last fiscal year, according to the Tax Foundation.

Prediction markets charted a different course. In 2024, Kalshi won a court ruling permitting it to offer bets on elections, paving the way for CFTC-licensed operation. This year, Kalshi and Polymarket became cultural phenomena, attracting tens of billions of dollars in monthly wagering volume. New entrants have brought the number of registered prediction markets to 13.

While public attention has focused on exotic offerings—such as bets on drug trials or missile strikes—roughly 75 percent of activity on Kalshi this year has centered on sports, according to data provider The Block. (Kalshi has reportedly discussed a partnership with The Athletic, the sports media site owned by The New York Times Company.)

Tarek Mansour, Kalshi’s chief executive, argues his company differs fundamentally from traditional gambling. Kalshi does not act as the “house” taking the opposite side of bets; rather, it matches buyers on each side and earns revenue through fees, irrespective of outcomes.

“We’re similar to exactly how the New York Stock Exchange or Nasdaq is regulated,” Mansour said in a January interview.

Some of Kalshi’s own marketing has undermined that framing. One social media ad, cited in state litigation, urged customers to “bet on the NFL.” (Kalshi said it no longer uses that advertisement.)

Unsurprisingly, the rise of Kalshi and Polymarket has infuriated gambling companies that pay state taxes and operate under state licenses. Some, like DraftKings and FanDuel, quickly launched their own prediction markets. Others fought back, led by the American Gaming Association, which represents casino operators.

Kalshi is a “backdoor sports betting operation” defying state law, said Rob Lockwood, the association’s spokesman.

In December, Tres York, an association executive, dined with Kentucky Attorney General Russell Coleman at Joe’s Seafood in Washington, according to emails obtained by The Times. Afterward, York pitched Coleman’s office on the need to combat prediction markets, noting a coalition of state officials was assembling a legal brief.

“I’d be happy to connect you with the Deputy AG in Nevada who is leading the recruiting efforts to defend states’ rights,” York emailed one of Coleman’s deputies.

Kentucky did not join the brief, but Coleman eventually sued Kalshi and Polymarket in state court. “These multibillion-dollar corporations and their legal fictions don’t pass the sniff test,” he said in a statement.

A Federal Agency Intervenes

Soon, another litigant entered the fray.

In December 2025, President Trump’s pick to lead the CFTC, Michael S. Selig, was sworn in. A technology enthusiast, Selig, 36, had worked with prediction markets and cryptocurrency firms as a corporate lawyer.

At the CFTC’s helm, Selig has filed lawsuits against Kentucky, Illinois, and seven other states battling the prediction markets. “It’s existential for the agency,” he said in an interview. “If the states are taking pieces out of our statute, that’s a problem for us.”

The agency has treated the issue as an emergency in certain states, warranting extraordinary use of its powers.

Selig’s response to a little-noticed state court ruling in Michigan underscored the administration’s willingness to defend the industry. In July, a state judge ordered Kalshi to unwind bets from Michigan residents because the company lacked a proper license.

Invoking rarely used emergency authorities, the agency instructed Kalshi to ignore the court order, even though the company had already begun canceling bets. The Michigan order “would risk shattering public confidence” in prediction markets, the agency said.

The CFTC had last used those powers in 1980, when President Jimmy Carter banned grain sales to the Soviet Union, prompting the agency to suspend grain futures trading to calm commodity markets.

“This is really unprecedented and frankly outrageous,” said Aitan Goelman, the CFTC’s enforcement director under President Barack Obama. “How is being unable to gamble on sports online a market emergency?”

The agency launched a second emergency intervention this month after a federal judge refused to block New York from moving to shut down Kalshi’s operations there. The CFTC instructed Kalshi to continue operating regardless. Within days, the company cited the measure in a parallel case in Connecticut.

The federal judge overseeing that lawsuit was unimpressed. “The CFTC lacks the authority to dictate an order that conflicts with this court’s decision,” he wrote.

Asked why the agency sought to bypass judges, Zach Fulton, a CFTC spokesman, said it needed to “preserve the status quo while the courts are still deciding these issues.”

Like a growing coalition of blue states, Republican-led Ohio, Nevada, Montana, and Tennessee have either sued or issued cease-and-desist orders to force prediction markets into compliance. Yet while the CFTC has sued nine states with Democratic governors, its strongest legal action against Republican-led states has been filing friend-of-the-court briefs—arguments judges are not required to consider.

Fulton said politics played no role in the legal strategy and that the agency targeted the most aggressive states.

“The CFTC didn’t pick these states—they picked themselves,” he said.

Kalshi Fights Back

Last month, Pricey Harrison, a Democrat in North Carolina’s House of Representatives, scrutinized a printout of the latest state budget draft. She spotted a concerning provision on Page 626.

Harrison had recently introduced a bill restricting prediction markets. But the budget contained what appeared to be a boon to the industry: A prediction market licensed by the CFTC, the document stated, “may operate within the state lawfully as a result of its registration with the commission.” The markets would pay a 6 percent tax on revenue, far below the 23 percent rate imposed on sports gambling firms.

“I’m not the most observant person,” Harrison said, “but I was like, ‘Oh, this smells bad.'”

The provision would allow prediction markets to operate in North Carolina without fear of a state lawsuit. A Kalshi lobbyist and former North Carolina legislator, Jim Harrell, helped craft the language in discussions with the State House’s Republican leadership, according to two people familiar with the talks. The company’s input secured a lower tax rate than legislators had initially considered.

Legislators also received input from the White House, another sign of the administration’s involvement in state-level disputes. The Office of Intergovernmental Affairs shared information about “the federal government’s position on state regulation of prediction markets,” said a spokesman for State Representative Destin Hall, the speaker of the North Carolina House. The budget was approved on July 7.

A White House spokesman said President Trump believed it was “essential” for the CFTC to maintain exclusive authority over the markets.

Hall’s spokesman disputed that the tax provision was a giveaway, noting prediction markets had not previously been required to pay taxes. Kalshi said the North Carolina arrangement was fair to the industry, adding that because many users win money on the platforms, the state will also collect taxes on those profits.

So far, the litigation has yielded mixed results. All nine of the CFTC’s lawsuits remain pending in federal court. Judges in states like Nevada and Washington have ruled against Kalshi and ordered it to cease operations. While the firm secured an early victory in the federal appeals court covering New Jersey, other appellate courts are still hearing cases.

Policy victories in places like North Carolina can still prove useful. Two weeks after the budget was signed, a Kalshi lawyer cited the agreement in a filing in one of the appellate cases, describing it as a compromise model applicable to other jurisdictions.

The company is pressing for more. As of this month, Kalshi has lobbyists working in all 50 states, a person familiar with the matter said.

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