CFTC vs. States: Who Really Controls Prediction Markets?

⚖️ The Federal Filing That Lit a Fuse

On February 17, 2026, the Commodity Futures Trading Commission (CFTC) made a decisive move in the ongoing battle over prediction markets. The agency filed an amicus brief with the U.S. Court of Appeals for the Ninth Circuit, formally asserting that it holds exclusive jurisdiction over prediction markets under the Commodity Exchange Act (CEA). The case, North American Derivatives Exchange, Inc. et al v. The State of Nevada, involves Crypto.com and Nevada's Gaming Control Board. CFTC Chair Michael Selig pulled no punches, accusing states of engaging in a "power grab" and declaring the agency "will no longer sit idly by while overzealous state governments undermine the agency's exclusive jurisdiction over these markets." The brief argues that prediction markets are federally regulated commodity derivatives, and that states attempting to treat them as gambling operations risk fragmenting a nationally coordinated regulatory framework Congress deliberately created.

📊 A Market Too Big to Ignore

The stakes behind this legal battle are enormous. Prediction markets have grown from a niche corner of finance into a multi-billion-dollar industry almost overnight. Combined monthly trading volume across major platforms climbed from under $100 million in early 2024 to over $13 billion by the end of 2025. Kalshi and Polymarket, the two dominant players, generated a combined $38.6 billion in trading volume last year alone. Kalshi, valued at $11 billion after a $1 billion Series E round led by Paradigm, has seen sports contracts account for 85% of its notional volume. Polymarket processed 95 million total trades through 2025, a 421-fold increase in monthly activity. Citizen Financial Group projects the sector's revenues will balloon to over $10 billion by 2030 from roughly $2 billion today. For traders and investors, this market is no longer an experiment; it is a fast-maturing asset class attracting serious institutional capital.

🏛️ What the CFTC Is Actually Arguing

The CFTC's amicus brief lays out a clear legal theory: Congress established exclusive federal jurisdiction over commodity derivatives markets, and prediction markets fall squarely within that mandate. The agency argues that allowing states to treat event contracts as illegal gambling would "re-characterize swaps trading on Designated Contract Markets (DCMs) as illegal gambling," which it calls "inconsistent with the text, structure, and history of the CEA." In the agency's view, the preemption is not a technicality; it is a structural feature Congress intentionally built into the law to prevent exactly the kind of state-by-state enforcement patchwork now emerging. CFTC Chair Selig had previously signaled support for event contracts at a recent crypto symposium, though he notably described the regulatory status of sports event contracts as a "complex legal issue likely to be resolved by courts" when he was nominated last November. The amicus brief suggests the agency is now willing to actively litigate, not just wait for courts to sort it out.

🗺️ The Battleground Spreading Across States

Despite the CFTC's firm stance, state enforcement actions have multiplied. Nevada's Gaming Control Board was the first to move against Kalshi, followed by New Jersey, Tennessee, Ohio, Connecticut, New York, and Massachusetts. In January 2026, a Massachusetts court ruled that Kalshi's sports event contracts are subject to state gaming laws and issued a preliminary injunction. The court rejected Kalshi's federal preemption argument as "overly broad," concluding that federal commodities regulation can coexist with state gambling authority. Results have been mixed across jurisdictions: some courts have sided with Kalshi's preemption theory, others have not. The Third Circuit is now reviewing New Jersey's appeal. Wall Street analyst Jaret Seiberg at TD Cowen believes states still hold the edge in the short term, even with the CFTC's intervention, because the legal pathway to a definitive resolution runs through the appellate courts and likely ends at the Supreme Court.

🧩 The Politics Making This Harder

The CFTC's position is clear, but translating it into durable legal protection for prediction markets is complicated by political cross-currents. Seiberg at TD Cowen put it plainly: "The politics of this are messy." Many Republican lawmakers who otherwise champion states' rights also oppose expanded sports gambling, which means they are unlikely to support federal legislation that would override state prohibitions on prediction markets. The Republican-controlled Congress, Seiberg cautioned, should not be assumed to be a reliable backstop for the industry. Meanwhile, Seiberg projects the Ninth Circuit appeal could drag into 2027 if there is a request for en banc review, with Supreme Court arguments unlikely before fall 2027 and a final decision potentially not arriving until early 2028. For platforms like Kalshi and Polymarket, that is a long runway of legal uncertainty even as trading volumes continue to climb.

🎯 What This Means for Traders and the Road Ahead

For traders and investors in prediction markets, the near-term picture is one of continued legal friction but sustained market growth. The CFTC's amicus brief does not immediately resolve the state enforcement actions; it adds a powerful federal voice to an ongoing legal argument. New entrants like Novig, which raised $75 million in a Pantera Capital-led Series B round on February 18, 2026 at a $500 million valuation, are pressing forward regardless of the regulatory uncertainty. Coinbase, Robinhood, and Crypto.com have all entered the space, signaling that major financial platforms view the sector's long-term trajectory as favorable. The CFTC is betting that its exclusive jurisdiction argument ultimately prevails, and Selig has indicated he plans to draft clear new rules for event contracts. Whether courts agree before state-by-state enforcement creates lasting damage to market liquidity and user access remains the central question for anyone with capital in this space.

Sources

https://www.theblock.co/post/390427/cftc-states-prediction-markets-td-cowen https://www.cftc.gov/PressRoom/PressReleases/9183-26 https://www.cnbc.com/2026/02/17/cftc-defends-prediction-market-enforcement-states-challenge.html https://www.commerciallitigationupdate.com/prediction-markets-v-state-gaming-laws-the-kalshi-litigation-gamble https://www.gamblinginsider.com/in-depth/110180/prediction-market-statistics https://fortune.com/2026/02/18/sports-prediction-markets-novig-kalshi-polymarket-cftc-pantera-multicoin/ https://internationalbanker.com/finance/accounting-for-the-explosive-growth-in-prediction-markets/

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