CFTC sues 3 states over prediction market regulation

A federal commission on Wednesday announced lawsuits against three states over its ability to exclusively regulate prediction markets.

The Commodity Futures Trading Commission said it was taking Arizona, Connecticut and Illinois to court over what it described as the states' actions "against" contract markets that were registered with the organization.

CFTC has the "exclusive" authority to oversee event contracts through the Commodity Exchange Act, the commission said in a release. But the organization said it found various states trying to outlaw or hamper activities of designated contract markets that are operating in accordance with the law.

Congress has granted the CFTC — rather than individual states — the sole authority to regulate these markets, the body said.

"This is not the first time states have tried to impose inconsistent and contrary obligations on market participants," CFTC Chairman Michael S. Selig said in a statement. "But Congress specifically rejected such a fragmented patchwork of state regulations because it resulted in poorer consumer protection and increased risk of fraud and manipulation."

The CFTC's lawsuits come amid mounting scrutiny of prediction markets on Capitol Hill and elsewhere as platforms like Kalshi and Polymarket skyrocket in popularity.

A group of Congressional Democrats last week introduced legislation banning prediction market bets on topics including elections, war and sports. Rep. Seth Moulton, D-Mass., said he would ban prediction market usage by staff, a policy that's believed to be a first-of-its-kind in Congress.

Sabrina Perel, the NFL's chief compliance officer, asked prediction market operators to block event contracts that are deemed "objectionable" in a letter obtained by CNBC. Perel pointed out that the CFTC believes sports-related contracts should have unique regulation.

The CFTC did not immediately responded to CNBC's request for comment about if it had lawsuits against other states planned.

Disclosure: CNBC and Kalshi have a commercial relationship that includes a CNBC minority investment.