State Lawmakers Challenge Federal Overreach as Online Prediction Markets Bypass Local Gambling Regulations

States Push Back Against Federal Agency Over Prediction Markets

CHICAGO NewsWK — State lawmakers and legal officials across the country are confronting the rapid growth of online prediction platforms like Kalshi and Polymarket, warning that federal regulatory overreach is eroding state sovereignty and undermining local oversight of gambling.

According to a report first published by Stateline, tension between state leaders and financial technology executives erupted during the annual summit of the National Conference of State Legislatures in Chicago. State officials expressed growing frustration that these online platforms allow users to trade contracts on sporting events and political outcomes, bypassing state licensing, age restrictions, and local tax requirements.

Federal Preemption Sparks Jurisdictional Battles

Platform executives argue their services operate as commodity derivatives exchanges regulated at the federal level by the Commodity Futures Trading Commission (CFTC). However, state leaders contend these contracts function as backdoor sportsbooks that evade long-standing state jurisdiction.

The regulatory conflict has triggered extensive litigation. A bipartisan coalition of 44 state attorneys general recently sent a letter to the CFTC, asserting that federal law does not grant the agency authority to regulate sports-related event contracts. The states argue that gambling regulation has historically fallen under state police powers and local governance.

Speaking at the conference, former U.S. Representative Mick Mulvaney, now leading the Gambling is Not Investing Coalition, pointed out the constitutional stakes of the legal fight. As reported by Stateline, Mulvaney noted, “there’ve been two areas where the states have almost always been entirely sovereign: That’s on booze and gambling.” Mulvaney added that the ongoing jurisdictional disputes between federal regulators and state officials appear destined for the U.S. Supreme Court.

Youth Safety, Integrity, and Tribal Sovereignty

Local officials also highlighted significant concerns regarding consumer protections, underage participation, and market integrity. Iowa State Sen. Dan Dawson cautioned that without state-level enforcement, local communities bear the social costs of unregulated online betting.

Highlighting the local consequences faced by state governments, Dawson noted during the panel, “States are the ones that pick up the pieces,” as reported by Stateline. Dawson cited instances of high school students attempting to place wagers on international sports events via prediction platforms, despite state laws requiring users to be at least 21 years old.

Ethical breaches have also raised red flags regarding insider trading. Governors and administrative agencies in at least eight states have recently instituted rules prohibiting government employees from utilizing nonpublic information to trade on prediction markets. Tribal gaming leaders have similarly voiced concern, arguing that federally protected prediction markets encroach on tribal sovereignty and negotiated compacts that support local tribal economies.