In May, Minnesota became the first state in the country to outlaw prediction markets such as Kalshi and Polymarket. Minnesota state Rep. Emma Greenman (D–Minneapolis) told NPR at the time that the state should “decide how best and what regulations” it would subject prediction markets to.
On Monday, a federal court disagreed, issuing a preliminary injunction barring Minnesota from enforcing the ban.
The decision, handed down by U.S. District Judge Katherine Menendez, found that the Commodity Futures Trading Commission (CFTC)—the federal body that regulates prediction markets—and prediction platforms were “likely to succeed” on claims that they “face a threat of irreparable harm.” She also ruled that federal law expressly preempts Minnesota’s ban, and that the “balance of harms and the public interest” necessitated an injunction.
Menendez’s decision comes less than a week after the CFTC, Kalshi, and Polymarket sent a letter asking for a “temporary administrative stay,” warning that the parties would “seek appellate relief” if the court could not decide before the law went into effect on August 1.
In a statement, CFTC Chairman Mike Selig characterized the ruling as a “halt to aggressive state overreach” of federally regulated markets. The ruling could also serve as a bellwether for similar cases the CFTC is fighting.
While Minnesota’s law was the first statewide ban on prediction markets, Arizona, Connecticut, Illinois, New Jersey, Massachusetts, and Wisconsin are also currently pursuing legal avenues to restrict or ban them. The CFTC has countersued each state, arguing that the Commodity Exchange Act gives it “exclusive jurisdiction” to regulate these platforms.
Menendez seems to agree. She found that Congress had used “broad language” to define the kinds of event contracts that the CFTC regulates under the Commodity Exchange Act. Under that authority, Menendez writes, the CFTC can “regulate” any trades on prediction markets that qualify as swaps.
Federal law defines swaps as “any agreement, contract, or transaction” in which payment is contingent on the “occurrence” or “nonoccurrence” of future events with “potential financial, economic or commercial consequences,” meaning most wagers on prediction markets fall under the umbrella of swaps. Ben Sperry, senior scholar of innovation policy and lead counsel at the International Center for Law & Economics, tells Reason that the “vast majority” of contracts lawmakers are concerned with prohibiting “squarely fit” the federal definition of a swap.
However, Menendez noted that Minnesota’s statute may not be “preempted in all respects,” and the CFTC would not have exclusive jurisdiction to regulate “every conceivable event contract” offered by a prediction market.
As an example of the potential limits of the CFTC’s exclusive jurisdiction on swaps, Menendez mused that one would be “hard pressed” to imagine a trade on the winner of the eighth season of Love Island USA as a swap because the outcome lacked “financial, economic, or commercial consequence.”
Other limits to the CFTC’s authority could include future contracts—such as hedging the price of corn, wheat, or oil three months from now—which are excluded from the definition of swaps.
Based on this logic, it would appear that Menendez’s ruling leaves room for states to issue narrower bans on prediction markets for contracts on their platforms that don’t meet the federal definition of swaps. That could mean even more state-specific legislation on prediction markets that is likely to be challenged by the CFTC.
For now, the prediction platforms are taking the win.
Neal Kumar, chief legal officer of Polymarket, tells Reason in an emailed statement that the injunction “makes clear that prediction markets on CFTC-registered exchanges are governed by federal law, not a patchwork of state rules.”
Notably, the courts in recent months have sided with prediction markets in other important cases. In April, the 3rd Circuit Court of Appeals ruled that New Jersey could not subject Kalshi’s event contracts to its sports gambling laws. In May, the U.S. District Court for the District of Arizona granted an injunction preventing Arizona from prosecuting Kalshi for violating its gambling laws, finding the state was preempted from doing so by federal law.
Still, Minnesotans may be in for a protracted fight against prediction markets. In a statement sent to Reason, Minnesota Attorney General Keith Ellison described the platforms as “gambling, plain and simple,” adding that his office will continue to “litigate this case and defend the State’s duly passed law.”
