Prediction markets have had a mixed 2026. What should we expect in 2027?
Getty Images
On July 31, New York Attorney General Letitia James, announcing alongside Governor Kathy Hochul, sued Kalshi in state court in Manhattan, calling the federally licensed exchange an illegal, unlicensed gambling operation. The remedies stack up to a number designed for headlines: restitution, disgorgement, treble gains, and $100,000 per unlawful offering, which Reason tallied to at least $36 billion. “No matter what they call themselves, prediction markets like Kalshi are gambling platforms, plain and simple,” James said.
Four days earlier, on July 27, federal judge Katherine Menendez enjoined Minnesota from enforcing the first state law that would have made operating a prediction market a felony, days before it took effect. The plaintiffs were Kalshi, Polymarket’s US exchange, and, remarkably, the United States and the CFTC themselves, arguing the Commodity Exchange Act gives federal regulators exclusive jurisdiction over trades on designated contract markets. Kalshi reported more than 90,000 verified users in Minnesota with millions in open positions.
Same product, same week, opposite outcomes. American gambling policy is being rewritten by venue, one courtroom at a time, and the two biggest questions in US payments-adjacent regulation this year, who regulates event contracts and who collects the tax on sports risk, will be answered by whichever appellate court gets there first.
The New York complaint is built to wound, and its details travel beyond the penalty math. The state alleges Kalshi let 18-to-20-year-olds trade sports outcomes in a state that sets mobile wagering at 21, and Hochul’s framing aimed at the consumer-protection center: Kalshi “has chosen to ignore New York’s gaming laws, which exist to protect consumers.” Gaming lawyer Daniel Wallach suggested the reported $36 billion may actually be understated. Kalshi’s counsel will note the number exceeds the entire US gaming industry’s annual revenue, which is presumably the point. Complaints like this are not drafted to be collected. They are drafted to force a federal question.
The scoreboard is genuinely split
The litigation map defies summary judgment in every sense. Kalshi won preliminary injunctions against Nevada and New Jersey in April 2025, with the New Jersey win affirmed by the Third Circuit this April, two to one, the first federal appellate ruling that sports event contracts fit the CEA’s definition of swaps under exclusive CFTC jurisdiction. It lost in Maryland, where a judge invoked the strong presumption against preemption in fields states traditionally occupy. Massachusetts won an injunction for the state in January. Ohio denied Kalshi in March. In Nevada, the same judge who granted Kalshi’s injunction reversed course in November, ruling sports contracts are not swaps at all.
New York’s suit follows the same choreography. On July 8, a federal judge in Manhattan denied Kalshi’s bid to block New York’s regulators, holding the state’s gambling laws are not preempted as applied to sports contracts. James walked through the door that ruling opened three weeks later. By January, NPR counted 19 federal lawsuits over prediction markets; since then, four New Mexico tribes have added tribal-sovereignty claims, and the CFTC itself has become a serial plaintiff. Wake Forest economist Koleman Strumpf’s read: “It’s going to be something the Supreme Court, and maybe even Congress, will have to weigh in on.”
Washington is a combatant, not a referee
The CFTC under chairman Mike Selig has chosen a side and armed it. The agency withdrew the 2024 proposal that would have banned sports and political event contracts, lets exchanges self-certify sports markets, and is suing nine states, from Arizona to Wisconsin, that try to enforce gambling law against its registrants. On July 30, the day before James filed, the commission sought an emergency federal order to block New York’s enforcement, with Selig warning about “the potential for a single state to bring entire federally regulated markets to the brink of destruction.”
The counterattack is equally organized. On July 28, 44 state attorneys general told the CFTC its proposed event-contract rule exceeds its statutory powers and sits in tension with the Constitution. Even the agency’s own staff signaled discomfort with how fast the market moved: a July 24 advisory scolded exchanges for bundling countless contract variations into single template self-certifications that prevent real review. An agency of a few hundred market regulators is being asked to run the consumer-protection apparatus of a national gambling industry, and the American Gaming Association’s Chris Cylke has asked the obvious question about whether it can.
What the states are defending
Money, first. Sports betting is legal in 39 states plus Washington DC, and in 2025 Americans wagered $165.6 billion legally, producing $16.8 billion in operator revenue and $3.66 billion in state taxes. New York alone taxes online sports revenue at 51% and collected over $1.3 billion last year, roughly a third of the national take. A Kalshi trade, by contrast, pays an exchange fee that maxes out around 1.75 cents per dollar of contract, with no gaming tax, no state license, and no age-21 rule, which is why the New York complaint leads with 18-year-olds trading parlays’ cousins.
The AGA claims states and tribes have already lost a billion dollars in gaming taxes to prediction markets. The methodology is contestable; the direction is not, and the trend is steep: the Census Bureau measured $917 million of state and local sports-betting tax revenue in a single quarter of 2025, up almost fourfold from 2021. Tribal governments, whose compacts trade exclusivity for revenue shares, have their own version of the grievance, which is why four New Mexico tribes sued Kalshi in May on sovereignty grounds. An identical sports risk carries a 51% tax through one legal door and an exchange fee through the other. Arbitrage that wide does not persist. It resolves in law, or it resolves in market share.
The market has already placed its bet
Capital is treating the legal risk as noise. Kalshi raised $1 billion at a $22 billion valuation in May, doubling its December mark, on annualized revenue above $1.5 billion, and was reported in June to be discussing a $40 billion round. Super Bowl Sunday alone produced over $1 billion in trades. June’s World Cup group stage pushed combined prediction-market volume to $44.8 billion for the month, $31.5 billion of it on Kalshi, with sports around three-quarters of flow. Polymarket, backed by up to $2 billion from the owner of the New York Stock Exchange, opened its US app to the general public in May.
Kalshi’s response to New York captured the company’s entire legal theory in two sentences: “States can’t just shut down a federally licensed exchange. This would also hurt New Yorkers, who would be driven offshore.” That first sentence is precisely what four federal judges have now disagreed about.
Mainstream distribution keeps deepening while the briefs fly. Robinhood routes its customers to Kalshi’s exchange and booked $156 million of event-contract revenue last quarter, more than its crypto business; Webull connects to the same rails. Every quarter of adoption raises the cost of an adverse ruling, for both sides. Fifty million brokerage customers with open positions are a constituency no court opinion can wish away, which is, of course, part of Kalshi’s litigation strategy: the Minnesota injunction leaned partly on the disruption that shutting 90,000 in-state accounts would cause.
Three exits, all expensive
Path one runs through the courts: Kalshi is appealing the Manhattan ruling to the Second Circuit, and a decision either way creates tension with the Third Circuit’s April holding, the setup Supreme Court review exists for. Path two runs through Congress, where Senators Schiff and Curtis have a bill declaring the quiet part, the Prediction Markets Are Gambling Act, and the AGA is lobbying for exactly that. Path three is CFTC rulemaking that grafts gambling-style guardrails onto contract markets, which the 44 attorneys general have pre-declared unlawful. The agency’s own July advisory reads as an admission that the listing machinery outran review: exchanges have been certifying whole families of contracts in single template filings, and staff wants that stopped. A regulator tapping the brakes on its own registrants while suing the states that would stop them entirely is a regulator improvising doctrine at highway speed.
Until one of those exits is taken, the operative rule of American gambling regulation is geographic accident: a Minnesotan trades federally protected contracts while a New Yorker generates $100,000-per-offering liability for the same click. Note what the two sides no longer dispute. New York’s complaint and Kalshi’s order book agree completely on what is being sold. The remaining argument, worth $36 billion by one count and a couple of state budgets by another, is about who licenses it, who is excluded from it, and who collects the tax. Congress wrote the Commodity Exchange Act in 1974 without imagining it would ever license a sportsbook. Every court now wrestling with preemption is really wrestling with that silence, and silence, at this volume, is a decision someone will eventually have to make out loud.