Kalshi and Polymarket Face Their Biggest Legal Test Yet

New York and other US states are suing Kalshi and Polymarket, the CFTC is fighting back, and prediction market bans are spreading abroad.

Prediction markets are new territory, so many questions remain about regulation and how they are defined. They work differently from online casinos, as these platforms enable users to trade on real-world events against each other, not the house. These markets have been growing in popularity, which makes it more important than ever to classify where they stand.

Some of the biggest platforms, such as Kalshi and Polymarket, are facing lawsuits from New York, several other US states and consumer protection groups. At stake is whether these platforms should be regulated as financial derivatives under federal law or treated as illegal online gambling under US state laws.

Who is suing Kalshi and Polymarket?

New York Attorney General Letitia James sued Kalshi on 31 July 2026. She alleges the platform runs an unlicensed gambling business. James is seeking damages worth more than $36 billion. On 24 September, she sued Polymarket too, which filed a countersuit the same day.

Nevada's Gaming Control Board is also pursuing fines of $120,000 per day against Kalshi, claiming it fails to comply with geofencing orders.

Consumer protection lawsuits have been filed against both Kalshi and Polymarket. The suits accuse them of deceptive practices and disguising gambling as financial speculation.

The CFTC takes on the states

A major debate remains over whether prediction markets fall under federal or state jurisdiction. The Commodity Futures Trading Commission (CFTC) argues that event contracts are federally regulated derivatives and not gambling products.

Unlike casino games, event contracts have no house edge. Prices move with what other users are willing to pay.

On 11 August 2026, the CFTC invoked emergency authority to keep Kalshi operating, but New York's lawsuit is still live. The dispute has become an all-out battle, with nine states currently in litigation with the federal government over who gets to regulate these platforms.

More countries blocked Polymarket this year

Looking beyond the US, the countries that have blocked Polymarket so far this year include:

Spain
France
Portugal
Denmark
Brazil
Bulgaria
South Korea

The main push behind these bans is that Polymarket lacks gambling licences and player protection safeguards.

Europe faces the same question as the US: are prediction markets innovative financial tools or gambling platforms in disguise?

Polymarket's security has come under fire too, after hackers took about $3.1 million from users' wallets in June. The platform says it's refunding them in full.

Prediction market trading hit $53 billion in July

Combined monthly trading volume on Kalshi and Polymarket reached about $24 billion in April 2026. Pew Research Center reports it hit $53 billion in July.

World Cup prediction market trading hit $4.3 billion on Polymarket's winner market alone. This shows how much cash these markets are bringing in. But are they pouring back into local communities?

New York says no: unlicensed platforms skip the taxes that licensed operators pay. That money funds schools and problem gambling treatment.

A Roosevelt Institute study estimates that Kalshi users lost $583.5 million in under five years, between the platform's 2021 launch and May 2026. Kalshi disputes the figure, saying the study counts professional market makers as ordinary users.

According to critics, prediction markets are indistinguishable from sportsbooks and expose users to gambling harms. Several of the lawsuits also allege that these platforms use misleading endorsements and fail to disclose risks.

No matter what the courts decide, the risk is real. The same play safe habits apply as on any real-money platform, so set limits and know when to stop.

Kalshi even faces a lawsuit from FlightAware over unauthorised use of its flight-tracking data to settle contracts.

Will prediction markets be regulated like gambling?

The outcome of the current lawsuits will be a clear determining factor on whether prediction markets are to be treated as nationally regulated financial instruments or state-controlled gambling products.

If the states win, we can expect these platforms to start applying for and obtaining gambling licences in every jurisdiction.

A licence in every state would upend the single national market their business model relies on.

However, if the CFTC wins, prediction markets could gain legitimacy as mainstream financial tools. Even then, concerns about user losses and underage access would remain.

Either way, prediction markets are already popular with Gen Z and are no longer a niche experiment. They have become multi-billion-dollar platforms, and the courts will decide how US laws apply to them. So, whether you use these platforms, sportsbooks, online or crypto casinos, check what's allowed where you live.

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By Pete

Verified Casino Expert

Expertise: Content Editing, Copywriting, SEO Content Writing, UK, USA & Canada Gambling Markets

Hi there, I'm Pete! The one who thinks a page isn't finished until you can read it once and get it. Years of casino copywriting taught me all the tricks for dressing a page up. Now I mostly use them to strip it back.

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Last updated: September 25, 2026

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Kalshi and Polymarket face their biggest legal test yet

Who is suing Kalshi and Polymarket?

The CFTC takes on the states

More countries blocked Polymarket this year

Prediction market trading hit $53 billion in July