Prediction markets allow people to trade contracts on future events, from interest-rate decisions to sports results, and the exchanges that list these contracts are overseen by the Commodity Futures Trading Commission (CFTC). Illinois says that is not enough. It wants any exchange offering sports contracts to get a state license as well, and it treats operating without one as a crime.
In April 2025, Illinois sent a cease-and-desist letter to Kalshi, a CFTC-registered exchange that had started listing sports contracts that January. When Kalshi, its partner Coinbase, and the CFTC challenged that demand in federal court, a judge in Chicago ruled on October 2 that federal law likely overrides it for the sports contracts central to the case. The preliminary ruling bears on a question that extends far beyond Illinois, namely, whether these markets answer to a single federal regulator or face a patchwork of state-level rules.
Judge Martha Pacold of the US District Court for the Northern District of Illinois found that contracts like one on a Chicago Cubs victory in the 2026 World Series are likely “swaps,” and federal law gives the CFTC exclusive authority over swaps traded on the exchanges it oversees. She further concluded that Illinois’s licensing rules likely conflict with the federal framework, not least because complying with them would “force Kalshi to build a market solely for Illinoisans.”
Her reasoning is sound. The Commodity Exchange Act broadly defines a swap to include contracts whose payouts depend on how an event plays out, provided the event is tied to a potential economic consequence. Recognizing how far that language could stretch, Judge Pacold sensibly required the link to be “concrete and articulable.” A championship like the World Series clears that bar, as she noted, because broadcasters, stadiums, and sponsors all see their revenues rise or fall with the number of games played and how well the players perform.
There is also little cause to fear a regulatory vacuum, because the CFTC is well equipped to oversee these markets. The agency is no newcomer to event contracts: its staff first allowed an academic prediction market at the University of Iowa to operate in 1992, and the agency has supervised exchanges listing such contracts since 2004. Throughout, it has overseen them as derivatives, and for good reason. As CFTC Chair Michael Selig has argued in the Wall Street Journal, they let people hedge against real-world risks, from a frost that threatens a farmer’s harvest to an unexpected jump in a neighborhood shop’s energy bills.
Critics say these markets lack the safeguards that come with an Illinois license, such as advertising restrictions and vetting of the companies involved. Selig counters that “these exchanges aren’t the Wild West,” and rightly so, because each must navigate a demanding approval process and then police its own market for manipulation and insider trading under regular CFTC examination. In February, after Kalshi penalized a one-time candidate for governor of California who had traded contracts tied to his own campaign, the CFTC’s enforcement division made clear that it can pursue such misconduct on any registered exchange. The CFTC can also bar certain event contracts it deems contrary to the public interest, and it recently proposed rules spelling out when that line would be crossed.
The deeper case for federal oversight is that a nationwide market needs a single set of rules. When Congress established the CFTC in 1974, one aim was to spare national markets from conflicting state requirements, as the agency explained in a brief defending its authority over prediction markets against Nevada’s regulators. Selig made the same point when the CFTC filed the lawsuit against Illinois that Judge Pacold has now ruled on, warning that such fragmentation “resulted in poorer consumer protection and increased risk of fraud and manipulation.”
Courts remain divided over whether federal law shields these contracts from state regulation, and Judge Pacold’s ruling deepens the split. The US Court of Appeals for the Third Circuit and federal judges in Arizona and Minnesota have blocked state efforts to shut these exchanges out. By contrast, the Ninth and Sixth Circuits have allowed Nevada, Ohio, and Tennessee to enforce their licensing laws against Kalshi, over the CFTC’s objections. The Seventh Circuit, which would hear any appeal by Illinois, is already weighing the CFTC’s appeal of a Wisconsin ruling that went the other way.
The Supreme Court will likely settle the question, and petitions asking it to do so are already pending. Judge Pacold’s ruling will not be the last word on prediction markets, but it points in the right direction.
