The U.S. Commodity Futures Trading Commission (CFTC) announced on May 28 that it was suing the state of Rhode Island. This followed a week indictment by Rhode Island prosecutors against prediction market platforms Kalshi and Polymarket, alleging that the companies' sports-related event contracts violated state sports betting laws. The CFTC maintains that such event contracts fall under federal regulation of swaps and derivatives markets.

Controversy escalates within a week

The CFTC stated that it has applied to intervene in existing lawsuits in Rhode Island against the two platforms, and will also file a separate lawsuit against the state. This move indicates that federal regulators are directly involved in legal conflicts between state governments and prediction market platforms.

Rhode Island Attorney General Peter Neronha filed a lawsuit last week alleging that the sports contracts between Kalshi and Polymarket effectively circumvented the state's sports betting rules, with the costs ultimately borne by state residents. In response, the CFTC argued that the state government has no right to restrict event contract transactions already covered by federal regulations under the guise of betting law.

Regulatory jurisdiction becomes the focus

At the heart of this controversy lies the question of whether prediction markets should be considered gambling operations or federally regulated derivatives products. CFTC Chairman Michael Selig stated that registered trading platforms are facing a series of lawsuits seeking to restrict U.S. users' participation in event trading and to undermine the CFTC's single regulatory authority over prediction markets.

According to CNBC, Rhode Island has become the seventh state to be sued by the CFTC in connection with related lawsuits. Currently, 18 states across the U.S. are embroiled in legal disputes related to prediction markets, with Minnesota pushing for a complete ban on such markets.

Lawsuits in multiple states continue to expand

The report noted that the state governments involved in the lawsuits are not concentrated in a single party, but the states currently being sued by the CFTC all have Democratic attorneys general. Rhode Island Attorney General Neronha also responded that federal intervention will not change the state's position, and the state government still believes its case is well-founded.

The prediction market has expanded rapidly in the United States in recent years, with event contract trading surrounding elections, economic data, and sporting events continuing to heat up. This has further exposed the boundary issues between state gambling regulations and federal derivatives regulations. The outcome of this lawsuit may affect the future operating space of platforms such as Kalshi and Polymarket in various U.S. states.