Kentucky Fires Back at Prediction Markets in Prediction Markets War

Prediction markets are platforms where users trade contracts on the outcome of real-world events – from elections to sporting results – with prices reflecting the probability of each outcome. The lawsuits, filed on 17 Jun by Attorney General Russell Coleman in Franklin Circuit Court, accuse the companies of offering unlicensed sports wagering to Kentucky residents while sidestepping the consumer-protection, licensing and tax requirements imposed on regulated sportsbooks.

The move adds another front to a widening national dispute that has pitted state regulators against the US Commodity Futures Trading Commission (CFTC) – the federal body overseeing derivatives and futures markets – which has now sued at least eight states, including Minnesota, Rhode Island and New Mexico, to block state-level gambling enforcement against federally registered prediction market platforms. The agency maintains that certain event contracts fall under its exclusive jurisdiction.

Kentucky challenges federal narrative

At the centre of Kentucky's case is the argument that contracts offered by Kalshi and Polymarket are functionally indistinguishable from traditional sports bets. The state alleges users can trade on game outcomes, point spreads, parlays and player performance in much the same way they would through a licensed sportsbook. Kalshi's sports-related contracts accounted for roughly 70% of its trading volume during a sample period in 2025, and nearly 89% of the platform's close to $23bn in annual contract volume came from sports wagering, according to the lawsuit.

The legal disputes also bring Coinbase, Robinhood – the US retail investment app – and Webull, a commission-free trading platform, directly into the dispute. Kentucky claims the three exchanges partnered with Kalshi to facilitate access to sports-event contracts and share in the transaction fees generated through those markets.

The state's position stands in sharp contrast to recent federal developments. In April, a US appeals court ruled that New Jersey could not enforce its gambling laws against sports-event contracts traded on CFTC-regulated venues such as Kalshi, finding that federal commodities law preempted state restrictions.

Tax that started the fight

The AG's lawsuit did not emerge in a vacuum. In April, the Kentucky General Assembly enacted a first-in-the-nation 14.25% excise tax on prediction market operators' transaction fees, set to take effect on 1 Jan 2027. The rate drew immediate criticism: the Coalition for Fair Markets, formed by Kalshi, Polymarket and Crypto.com (CRO) – a Singapore-based cryptocurrency exchange and financial services platform – pointed out that it exceeds the 9.75% tax applied to horse racing bets in Kentucky, arguing the disparity makes the levy unconstitutional and discriminatory.

On 12 Jun – less than a week before Coleman filed his lawsuit – the coalition launched a countersuit, calling the tax discriminatory, unconstitutional and preempted by federal law.

The AG lawsuits also allege that neither Kalshi nor Polymarket provides users with resources to identify or seek help for gambling addiction, as required under Kentucky law.

Regulatory fight intensifies

Kentucky's filing arrives as the CFTC is attempting to formalize its approach to prediction markets through a proposed regulatory framework that would clarify how sports-related contracts should be viewed under federal law. That process remains ongoing, leaving unresolved one of the industry's most contentious questions.

The defendants have pushed back firmly. In emailed responses to a Lexington Times report on the situation, Polymarket spokesperson Connor Brandi said Coleman's action "runs counter to the federal framework for regulating prediction markets," while Kalshi spokesperson Jacki McGavick said prediction markets are regulated by the federal government, not individual states. Both companies have consistently argued that CFTC registration grants them federal preemption from state gambling laws – a position endorsed by the April appeals court ruling in New Jersey but firmly rejected by Kentucky and a growing coalition of states.

Kalshi spokesperson Jacki McGavick told Sandmark: "Kalshi is a federally regulated exchange – the CFTC is our regulator, not the states. Courts have already recognized this, and we're confident they will here too."

Polymarket, Coinbase, Robinhood and Webull did not immediately respond to Sandmark's requests for comment.