Thirty-Eight Attorneys General

On January 29, CFTC Chairman Michael Selig withdrew the proposed ban on sports and political event contracts and signaled that the Commission would intervene in federal courts to assert exclusive jurisdiction. The prediction market industry celebrated. Kalshi's CEO called it a turning point.

Four days earlier, a Suffolk County judge in Boston granted the first state court injunction against a prediction market in American history. Four days later, New York Attorney General Letitia James warned the public about unregulated prediction markets ahead of Super Bowl 60. In between, Nevada's civil complaint against Polymarket — the first state to take Polymarket to court — continued to advance through Carson City.

The industry is watching the CFTC. It should be watching the states. Because the dynamic between federal deregulation and state enforcement is not a two-front war. It is a reflexive system — and the loop is tightening.

The regulatory picture

Assembled from court filings, amicus briefs, and cease-and-desist records through February 2, 2026:

• ▸38 state attorneys general plus the District of Columbia have filed amicus briefs opposing Kalshi's classification of event contracts as federally preempted derivatives. The coalition grew from 36 to 39 between its initial formation and the Maryland filing. It is co-led by Ohio AG Dave Yost and includes Republican attorneys general from Montana and Arizona alongside Democrats from New York and Massachusetts. This is not a partisan fight. It is a federalism fight.
• ▸60+ federally recognized tribes have joined amicus briefs or filed direct litigation, backed by the Indian Gaming Association and the National Congress of American Indians.
• ▸10 states have issued cease-and-desist orders against Kalshi: Nevada, New Jersey, Maryland, New York, Ohio, Arizona, Connecticut, Illinois, Michigan, and Montana. Tennessee targeted all three major platforms — Kalshi, Polymarket, and Crypto.com.
• ▸19 federal lawsuits are pending as of January 30. Eight filed by state regulators and tribes accusing Kalshi of operating an unlicensed gambling platform. Six filed by Kalshi suing state regulators on preemption grounds. Five filed by individual plaintiffs, four of which seek class-action status.
• ▸1 state court injunction granted: Massachusetts, January 20.
• ▸1 civil enforcement action against Polymarket: Nevada, January 16.

The American Gaming Association has joined the state coalition. The tribal gaming organizations have joined. Advocacy groups including Stop Predatory Gambling have joined. No major institutional actor has defected from the opposition. The momentum is one-directional.

A circuit split in formation

The core legal question: do CFTC-regulated event contracts on sporting and political events constitute gambling subject to state gaming laws, or are they commodity derivatives under exclusive federal jurisdiction via the Commodity Exchange Act?

Three courts have answered. The pattern matters more than any individual ruling.

For Kalshi on federal preemption:

• ▸New Jersey (U.S. District Court, April 2025): granted Kalshi a preliminary injunction, found the CEA preempts state gaming law. The state appealed to the Third Circuit.

Against Kalshi:

• ▸Maryland (U.S. District Court, summer 2025): denied Kalshi's injunction, finding the CEA does not preempt state gambling and sports wagering laws. Kalshi appealed to the Fourth Circuit.
• ▸Nevada (U.S. District Court, November 2025): Judge Andrew Gordon dissolved his own seven-month-old preliminary injunction, writing that Kalshi's interpretation would “upset decades of federalism regarding gaming regulation” and “cannot be sustained.” Kalshi appealed to the Ninth Circuit.
• ▸Massachusetts (Suffolk County Superior Court, January 2026): granted the first state injunction, calling Kalshi's reading of federal law “too expansive.”

One federal district court for Kalshi. Three courts against. Three federal appellate cases now pending: the Third Circuit (New Jersey), the Fourth Circuit (Maryland), and the Ninth Circuit (Nevada, with oral arguments scheduled for April 2026).

If Kalshi wins in the Third Circuit but loses in the Fourth and Ninth, the resulting circuit split would almost certainly trigger a Supreme Court petition by late 2026. As Wake Forest economics professor Koleman Strumpf put it: “It's going to be something the Supreme Court, and maybe even Congress, will have to weigh in on.”

A Supreme Court case means years. It means the foundational legal premise on which every prediction market platform operates — that the CEA preempts state gambling law — remains unresolved through at least 2027 or 2028.

The reflexive loop nobody is modeling

Standard regulatory analysis treats the state-versus-federal conflict as an external constraint on the industry: a risk factor in a pitch deck, a line item in a legal budget. This misses what is actually happening. The regulatory war is not outside the system. It is inside the system. It is a feedback loop, and both directions are running simultaneously.

Direction one: growth generates backlash.

Prediction markets succeed by operating as sports betting alternatives under federal derivatives regulation. That success — $543 million in a single day on Kalshi during conference championships, 91 percent sports volume, Robinhood routing more than half of Kalshi's flow — is precisely what attracts state enforcement. The bigger the number, the harder it is for a state attorney general to ignore that a federally regulated derivatives exchange is functioning as a sportsbook in states where sports betting is illegal. Growth and threat are the same variable.

Direction two: enforcement degrades the product that justifies the classification.

Massachusetts issues an injunction. Legal uncertainty reduces trading from Massachusetts users. Volume drops. Liquidity thins. Spreads widen. Price discovery weakens. The weaker the price discovery, the harder it is to argue these instruments are derivatives performing an economic function rather than bets dressed up as contracts. The state's case strengthens. More states act. More volume drops.

Direction three: federal confidence accelerates both loops.

Selig asserts exclusive jurisdiction. Platforms expand offerings. Investors increase exposure. Volume grows. Growing volume attracts more state regulatory attention. More cease-and-desist orders. More litigation. More uncertainty. The CFTC's support does not stabilize the system. It accelerates the cycle.

This three-directional loop is why 38 attorneys general is an existential number. Not because any individual state can shut down the industry. Because the aggregate weight of state opposition — legal fees, geofencing, compliance costs, headline risk, investor uncertainty — degrades the market conditions that make growth possible. And the growth is what triggers the opposition. The system is eating itself.

The one-commissioner foundation

The CFTC's assertive posture rests on a foundation that should concern anyone with capital in this industry.

The agency is operating with one of its five commissioner seats filled — unprecedented in its 50-year history. Four commissioners departed between January and December 2025. No nominees for the vacant seats have been announced. The enforcement division has been downsized to under 100 people as part of federal government reduction. One person holds the full authority of a Commission that is asserting exclusive jurisdiction over a $40 billion industry.

Selig's January 29 directive was structurally significant. But a directive from a sole commissioner is not a regulation. It is not a statute. It is a policy position that a future Commission, a future administration, or a court can reverse. The Safe Harbor Act, which the Coalition for Prediction Markets is lobbying for, would codify federal preemption into statute. It does not yet exist. The market-implied probability of comparable legislation passing this session is in the low teens.

The industry is building a $20 billion valuation on a regulatory framework that is one election, one appointment, or one Supreme Court ruling from collapsing.

The calendar

• ▸February 4: Draft injunction order due in Massachusetts.
• ▸February 9: CFTC response deadline to the 12-senator letter on insider trading.
• ▸February 12: Connecticut hearing — Judge Victor Bolden decides whether to grant a preliminary injunction against the state's cease-and-desist. This is the next inflection point. Selig's directive asserting federal jurisdiction is four days old. The Massachusetts injunction is three weeks old. The question is whether a federal court will side with the CFTC's jurisdictional claim against a state regulator in this specific procedural posture.
• ▸Late February: Expected rulings in Robinhood v. Massachusetts (the federal Supremacy Clause challenge to the state injunction) and Kalshi vs. New York Gaming Commission in the Southern District.
• ▸April 2026: Ninth Circuit oral arguments in the Nevada case.
• ▸June 2026: New York legislative session close — the deadline for the ORACLE Act, which would impose fines up to $1 million per day on platforms offering sports, political, and catastrophe contracts.

If Connecticut goes against prediction markets, the precedent accelerates the loop. Industry contacts expect five to ten additional states to issue cease-and-desist orders by end of Q1 2026. Each geofenced state reduces the addressable market, reduces volume, and weakens the price-discovery argument that underpins the entire federal preemption claim. The reflexive spiral tightens another turn.

The industry narrative is that Selig's CFTC will resolve the jurisdictional question through rulemaking and litigation. Rulemaking takes 12 to 18 months. Litigation takes longer. A Supreme Court case takes years. The states are not waiting.

The question the market should be pricing — and, based on current valuations, is not — is what happens if the federal preemption argument fails in two of three circuits. Thirty-eight attorneys general have already answered that question. The industry has chosen not to listen.

Dawson Smith writes Reflexivity, a newsletter on prediction markets as reflexive systems. Next week: cross-platform price analysis from Super Bowl 60.

dawson@monetizeopinion.com