The legal battle over prediction markets in the United States has entered a new phase after the state of Kentucky filed lawsuits against Kalshi, Polymarket, and several of their major partners, arguing that their sports event contracts amount to illegal sports betting under state law.

The lawsuits add Kentucky to a growing list of states challenging prediction markets, intensifying a nationwide debate over whether these platforms should be regulated as financial exchanges or gambling operators.

Kentucky Says Prediction Markets Are Illegal Sportsbooks

Kentucky Attorney General Russell Coleman announced that the state has filed lawsuits against:

• Kalshi
• Polymarket
• Coinbase
• Robinhood
• Webull

The state alleges that the companies are operating “unlicensed and illegal sports betting and gambling platforms” by allowing users to trade contracts tied to sporting events without obtaining the licenses required under Kentucky law.

“Kalshi and Polymarket are operating illegal sportsbooks in Kentucky and breaking our laws,” Coleman said.

“These multi-billion-dollar corporations and their legal arguments don’t change the reality of what they are offering.”

According to the lawsuits, the platforms are conducting business in Kentucky without gaming licenses and their sports event contracts “fall squarely within the definition of sports wagering.”

A Multi-Billion Dollar Industry Under Pressure

The case carries significant implications because prediction markets have grown rapidly over the past year.

Data from industry trackers shows that Kalshi and Polymarket collectively generated approximately $25 billion in trading volume during May alone, making them among the largest event-based trading platforms in the world.

The industry’s rapid expansion has attracted growing attention from both state regulators and federal authorities.

If more states succeed in blocking these platforms, prediction markets could lose access to some of the country’s largest user bases.

States vs Federal Regulators

At the center of the dispute is a fundamental legal question:

Are sports event contracts financial derivatives or sports bets?

Prediction market operators argue that their contracts are financial products—specifically “swaps”—which fall under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC).

State regulators disagree.

They argue that contracts based on the outcome of sporting events function exactly like sports wagers and therefore require state gaming licenses.

The CFTC has largely sided with prediction markets.

In fact, the federal regulator has already launched legal actions against multiple states that attempted to block these exchanges, arguing that states are interfering with federally regulated markets.

More Than 17 States Are Now Involved

Kentucky is far from alone.

At least 17 states have now taken action against prediction market operators, including:

• New York
• New Jersey
• Ohio
• Nevada
• Connecticut
• Maryland
• Illinois
• Arizona
• Wisconsin
• Massachusetts
• Michigan
• New Mexico
• Tennessee
• Utah
• Iowa
• Montana
• Kentucky

Some states have issued cease-and-desist orders, while others have filed lawsuits directly.

In response, prediction markets have launched their own legal challenges, arguing that state restrictions violate federal commodities law.

Mixed Court Decisions Increase Uncertainty

Courts have delivered conflicting rulings so far.

Earlier this week, a federal judge in Michigan ruled against Polymarket, finding that its sports event contracts do not qualify as swaps under CFTC authority.

However, prediction markets have also secured important victories.

In April, the Third Circuit Court of Appeals ruled that New Jersey regulators could not block Kalshi from offering sports event contracts, reinforcing the argument that federal law may preempt state gaming rules.

The conflicting rulings suggest the issue could eventually reach higher courts and potentially reshape the legal boundaries of prediction markets nationwide.

Kentucky Also Challenges Prediction Market Taxes

The legal battle extends beyond licensing.

Kalshi and Polymarket are already involved in a separate dispute with Kentucky after challenging the state’s 14.25% tax on prediction market transaction fees.

The companies argue that the tax unfairly targets federally regulated exchanges and conflicts with federal law.

Kentucky, however, maintains that the platforms are operating gambling businesses and should be treated accordingly.

Political Connections Add Another Layer

The debate has also become increasingly political.

US President Donald Trump has publicly defended the CFTC’s authority over prediction markets, stating earlier this year:

“It is critically important that the CFTC’s exclusive authority over Prediction Markets is maintained.”

The issue has drawn additional attention because Donald Trump Jr. serves on Polymarket’s advisory board and is also an adviser to Kalshi.

A Defining Moment for Prediction Markets

The outcome of these legal battles could shape the future of event-based trading in the United States.

If prediction markets prevail, they may establish themselves as a new category of federally regulated financial products.

If states succeed, platforms may be forced to obtain gaming licenses on a state-by-state basis, dramatically changing how these markets operate.

For now, the fight is far from over.

But one thing is increasingly clear:

The battle between Wall Street-style prediction markets and traditional gambling regulations is becoming one of the most important legal contests in the future of crypto and digital finance.