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Minnesota is poised to become the first state to specifically outlaw certain prediction market activity under threat of felony prosecution, setting up what could become one of the industry’s most significant legal battles.
A new state law scheduled to take effect Aug. 1 would prohibit certain prediction market activity and make it a felony to operate, promote or advertise those services in Minnesota. Kalshi, Polymarket and the Commodity Futures Trading Commission (CFTC) are asking a federal judge to block enforcement, arguing the law attempts to regulate federally approved financial products that fall exclusively under federal commodities law.
The case adds another chapter to the growing dispute over whether prediction markets should be regulated as financial derivatives or treated as gambling under state law.
First state to threaten with felony charges
While nearly 20 states have challenged prediction market operators through lawsuits, cease-and-desist orders or other enforcement actions, Minnesota has taken a different approach by passing legislation aimed directly at the industry.
The law would criminalize not only operating certain prediction markets but also hosting, promoting and advertising them, exposing companies to felony penalties.
Kalshi said in court filings that it has more than 90,000 users in Minnesota with millions of dollars in active contracts. The company argues the law would force it to either stop serving customers in the state or risk criminal prosecution.
Polymarket has made similar arguments, contending Minnesota is attempting to regulate federally approved event contracts by classifying them as gambling.
Judge questions difference between trading and betting
During Thursday’s federal court hearing, U.S. District Judge Katherine Menendez questioned attorneys on where the line should be drawn between a financial contract and a traditional wager.
The discussion covered sports, politics and entertainment markets, with Menendez raising a hypothetical prediction on whether Taylor Swift would wear heels at her wedding to test whether those contracts are meaningfully different from gambling.
Kalshi’s attorneys argued the structure of the transaction matters, comparing event contracts to other financial products used to manage risk around uncertain future events. Unlike sportsbooks, prediction market exchanges allow users to trade contracts against one another while the platform earns revenue through transaction fees rather than acting as the house.
The judge did not immediately issue a ruling.
Federal regulators back prediction markets
The CFTC has become increasingly active in defending federal authority over prediction markets.
The agency argues that event contracts traded on federally regulated exchanges are derivatives governed exclusively by the Commodity Exchange Act, leaving no role for states to regulate them as gambling.
During the hearing, CFTC attorney Henry John Dickman argued there is “no room for state involvement” in regulating federally approved contracts.
The agency has also intervened in legal disputes involving prediction market operators in states including Arizona, Connecticut, Illinois and Kentucky, maintaining that a patchwork of state laws would undermine the national regulatory framework established by Congress.
Minnesota says event contracts are gambling
According to a news report by The Minnesota Star Tribune, Minnesota Attorney General Keith Ellison‘s office argues states have long held authority to regulate gambling as part of their responsibility to protect consumers and public health.
State attorneys contend Congress never intended federal commodities laws to create a nationwide pathway for sports betting through prediction markets.
The debate comes as prediction markets continue to expand rapidly. According to Pew Research Center data cited in court filings, sports account for roughly 80% of markets offered on Kalshi and nearly 40% on Polymarket.
The industry’s growth has also raised broader concerns about gambling addiction, underage participation, financial harm and insider trading. Federal prosecutors have already pursued an insider trading case involving a U.S. Army soldier accused of using confidential information to place trades on Polymarket.
Why this case matters nationwide
The outcome could shape how prediction markets operate across the United States.
A victory for Kalshi, Polymarket and the CFTC would reinforce the argument that federally regulated event contracts can operate under a single national framework. If Minnesota prevails, states could gain broader authority to restrict or prohibit prediction markets within their borders, potentially forcing operators to navigate regulations similar to those governing online sportsbooks and casinos.
With no immediate ruling from the court, Minnesota’s first-in-the-nation law has become one of the most closely watched tests yet in the ongoing battle over who will regulate the future of prediction markets.
