FRANKFORT – The lawsuit arrived at the federal courthouse six days after Kentucky had filed its own.
Attorney General Russell Coleman’s office had moved first, filing three separate cases in Franklin Circuit Court on June 17 and 18, targeting prediction market platforms Kalshi and Polymarket and sweepstakes casino operator VGW Holdings for what Coleman called illegal sportsbooks operating without state licenses. “Kalshi and Polymarket are operating illegal sportsbooks in Kentucky and breaking our laws,” Coleman said. The companies argued that holding federal designations made them untouchable under state gambling statutes.
Then the Commodity Futures Trading Commission answered. On June 23, according to the CFTC’s federal complaint, the agency sued the Commonwealth of Kentucky, Governor Andy Beshear, Attorney General Coleman, Department of Revenue Commissioner Thomas Miller, and the Kentucky Racing and Gaming Corporation. The CFTC asked a federal court to block Kentucky’s lawsuits from proceeding and to bar a new excise tax before it takes effect. Kentucky, the agency argued, has no jurisdiction over contracts that Congress assigned to federal regulators under the Commodity Exchange Act.
With that filing, Kentucky became the ninth state to be sued by the CFTC in an accelerating battle over prediction markets, and the first with a Republican attorney general at the center of it.
Prediction markets are platforms where users deposit money and purchase contracts tied to the outcomes of real-world events: a presidential election, a World Cup group stage winner, a company’s quarterly earnings. Kalshi and Polymarket hold CFTC designations as regulated contract markets, meaning the agency treats their products as financial derivatives. States see something different. When a Kentuckian logs onto Kalshi and places money on Germany to advance in the tournament, Coleman’s office argues, that person is placing a sports bet, and sports betting in Kentucky requires a state license.
The legal gap between those two readings, derivatives or wager, is where this litigation lives. The CFTC’s complaint grounds its authority in the Commodity Exchange Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which handed the agency expanded jurisdiction over swaps and event contracts. Because Congress gave the CFTC exclusive authority in this space, the agency contends, state laws that conflict with or obstruct federally designated contract markets are preempted under the Constitution’s Supremacy Clause.
Kentucky’s response to that argument was the excise tax. House Bill 757, passed by the state legislature on April 14, imposes a 14.25% levy on prediction market transaction fees, set at the same rate applied to licensed online sportsbooks operating in the state. The tax is set to take effect January 1, 2027. The CFTC’s complaint argues it is the first such state tax on prediction markets in the country and invokes the Supreme Court’s 1819 ruling in McCulloch v. Maryland to frame the danger: “the power to tax involves the power to destroy.”
The parallels to McCulloch are deliberate. Federal regulators argue that Kentucky has constructed a two-pronged legal trap: sue the platforms directly in state court, then use the tax to make continued operation economically untenable for any company that fights and wins.
Kentucky’s Kalshi lawsuit is particularly expansive. In addition to the prediction market itself, it names Coinbase, Robinhood, and Webull as affiliated defendants, alleging those platforms distributed Kalshi’s services to Kentucky users, shared in transaction fees, and are therefore party to what the state considers unlicensed gambling. The Polymarket lawsuit is a separate filing. A third action targets VGW Holdings, the Australian company behind sweepstakes casino brands including Chumba Casino, LuckyLand Slots, and Global Poker.
The CFTC has now initiated legal action against nine states since prediction markets began expanding aggressively in the United States: Arizona, Connecticut, Illinois, New York, New Mexico, Minnesota, Rhode Island, and Wisconsin preceded Kentucky. What distinguishes the Kentucky case is partisan. The preceding eight states all involved Democratic attorneys general or governors driving the enforcement actions the CFTC challenged. Kentucky’s Russell Coleman is a Republican, and Andy Beshear, the governor named in the federal complaint, is a Democrat, an unusual alignment in a fight that has until now followed party lines.
The federal courts have tilted toward the CFTC’s position in early proceedings. On April 6, the Third Circuit Court of Appeals affirmed a preliminary injunction barring New Jersey from enforcing its gambling statutes against Kalshi’s sports-related event contracts, finding the federal preemption question substantial enough to pause state enforcement while the merits developed. That ruling did not resolve the central statutory question: whether Congress, in passing Dodd-Frank, intended to shield sports-event betting from state gambling regulation. Critics of the CFTC’s current posture argue the agency is stretching a post-financial-crisis statute to protect a product Congress never anticipated. Proponents counter that prediction markets generate genuine informational value beyond a simple wager and that fragmented state enforcement would destroy national market liquidity.
The pattern extends beyond Kentucky. Pennsylvania’s Supreme Court last week struck down 70,000 skill game machines as unconstitutional, setting off its own budget and enforcement crisis at the same moment the CFTC’s prediction market campaign crossed party lines.
Legal scholars tracking the federal dockets say a circuit split, should it develop across the nine pending state cases, could carry this dispute to the Supreme Court as early as next year. Whether any federal district court in Kentucky will block the 14.25% excise tax before its January 2027 effective date remains unanswered. As does the more fundamental question this litigation has not yet settled: what exactly Congress meant when it handed the CFTC exclusive authority over event contracts, and whether a platform that lets a user bet money on a sports outcome is a derivative or a wager.
