Polymarket sued Massachusetts over prediction market jurisdiction, arguing the CFTC has exclusive authority. The outcome could determine whether states can fragment crypto derivatives markets.
Polymarket's Federal Lawsuit Could Reshape DeFi Regulation
Polymarket didn't wait to get sued. Three days after a Massachusetts judge blocked Kalshi from offering sports contracts in the state, Polymarket filed a federal lawsuit against the state's attorney general, claiming exclusive CFTC jurisdiction and asking the court to preempt any state enforcement before it happens.
The legal question is narrow but the implications are wide: can states regulate federally licensed derivatives exchanges under gambling laws, or does the Commodity Exchange Act preempt that authority entirely?
Polymarket's argument is straightforward. They operate as a designated contract market under CFTC oversight after acquiring QCX in 2025. Event contracts—whether on sports, elections, or weather—are swaps under federal law, and the CEA gives the CFTC exclusive jurisdiction. States have no regulatory lane here. Massachusetts sees it differently. Their injunction against Kalshi characterized prediction markets as sports betting in disguise, subject to state licensing requirements like any other gambling operation. They point out that users are wagering money on uncertain outcomes, which is definitionally gambling under state law.
What makes this messier is that Polymarket's products do blur lines. Sports contracts behave like betting markets even if the underlying mechanics differ—prices fluctuate based on collective sentiment, payouts depend on real-world event outcomes, and participants are financially motivated by prediction accuracy. But structurally, Polymarket operates more like a futures exchange than a casino. No house sets odds. Traders buy and sell contracts peer-to-peer. The platform charges a flat fee and takes no counterparty risk.
The CFTC itself has weighed in, filing an amicus brief in a related case supporting federal preemption. That's significant—it signals the agency believes prediction markets fall under its mandate and that state interference would fragment a nationally integrated market. If every state imposes its own licensing regime, liquidity collapses and the infrastructure becomes unworkable.
Polymarket framed the lawsuit as protecting "users nationwide," but it's really about protecting the business model. They've already been banned in Nevada temporarily, and at least eight other states are reportedly exploring enforcement. Without federal clarity, Polymarket either geofences constantly or risks criminal liability in multiple jurisdictions. The case could take months or years to resolve, but the legal theory being tested is foundational for DeFi derivatives more broadly. If states can assert gambling jurisdiction over federally regulated contracts, that same logic could extend to other on-chain financial products.