New York has taken prediction-market giant Polymarket to court, and Polymarket has hit straight back. The legal fight, which heated up this week, goes to the heart of one of the biggest unresolved questions in US finance: are prediction markets financial products regulated in Washington, or gambling that states can police?
New York's case: "unlicensed gambling"
On Thursday, September 24, New York Attorney General Letitia James and Governor Kathy Hochul filed a lawsuit against QCX LLC, the US entity behind Polymarket. The state alleges that Polymarket is running an unlicensed gambling business in New York.
According to the lawsuit, the platform offers contracts on sports and election outcomes, betting-style positions on who will win, without holding a New York gambling licence. The state also accuses Polymarket of allowing users under 21 to take part, in violation of state law.
New York wants a court to block Polymarket from operating in the state without a gambling licence. It is also seeking restitution, forfeiture of what it calls illegal gains, and financial penalties.
Polymarket's response: "squarely foreclosed by federal law"
Polymarket didn't wait to respond. Its US arm has filed its own lawsuit against the state, asking a court to stop New York from bringing enforcement action against it.
The company's argument is that it isn't a gambling site at all, but a federally regulated exchange. It describes itself as a lawful, national designated contract market whose event contracts fall under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act. Polymarket is seeking a declaratory judgment that New York's gambling laws are preempted by that federal law.
In its filing, Polymarket called New York's enforcement against prediction markets an "extraordinary assertion of state power squarely foreclosed by federal law." Chief Legal Officer Neal Kumar said the company plans to contest the state's lawsuit.
Not the first fight, and not the last
This isn't New York's first clash with a prediction market. In July, Attorney General James brought legal action against Kalshi, Polymarket's biggest regulated rival, arguing that its sports and event contracts amounted to illegal gambling under state law. In that case, US District Judge Analisa Torres found that Kalshi had not shown New York's gambling laws were preempted by the Commodity Exchange Act as applied to its sports event contracts.
The wider picture is messy. In August, the Ninth US Circuit Court of Appeals concluded that Kalshi was unlikely to show federal commodities law stopped Nevada from requiring a gambling licence for sports-event contracts. That conflicts with an earlier Third Circuit ruling in a case involving New Jersey.
When two federal appeals courts disagree on a question this important, it raises the real possibility that the US Supreme Court will eventually be asked to settle it.
How a prediction market actually works
On a platform like Polymarket, each question, such as "Will this team win on Sunday?", has contracts that pay out $1 if the answer is yes and nothing if it's no. They trade at prices between zero and one dollar. If a "yes" contract costs 65 cents, the market is effectively saying there's about a 65% chance it happens. As news breaks, traders buy and sell, and the price moves.
Supporters point out that this structure is the same as other event contracts traded on regulated exchanges, which is why Polymarket, after acquiring a CFTC-licensed exchange in 2025 to relaunch in the US, argues it belongs under the CFTC. A "designated contract market" is the CFTC's formal status for a regulated futures exchange, the same category as major commodity exchanges.
Why this matters beyond Polymarket
Prediction markets let people buy and sell contracts tied to real-world outcomes: an election result, a sports game, an economic data release. Supporters say they're a powerful forecasting tool, because the prices reflect what people with money at stake actually think will happen. Critics say that when the outcome is a football match, it looks an awful lot like sports betting with a different label.
The difference matters enormously in practice:
That's why New York's case is being watched far beyond the state. States earn significant tax revenue from licensed sports betting, and many see unlicensed prediction markets as a way around their rules. Platforms like Polymarket and Kalshi argue that federal oversight is the whole point of being a regulated exchange.
The crypto angle
Polymarket is one of crypto's best-known success stories. It grew rapidly on the back of blockchain technology and stablecoin payments, and it drew huge attention around major political events. Its future in the US now depends partly on how courts answer this jurisdiction question.
For the wider crypto industry, the case is another example of a familiar pattern: new technology moving faster than the rules, and regulators at different levels competing to decide who's in charge.
What happens next
Both lawsuits will now work their way through the courts. Key questions include whether a court grants New York's request to block Polymarket in the state, how judges weigh the Commodity Exchange Act preemption argument after the conflicting appeals rulings, and whether the issue moves towards the Supreme Court.
For now, one thing is clear: the question of who regulates prediction markets is no longer theoretical. It's being fought in court, state by state, and the outcome could reshape the industry across the United States.
This article is for information only and is not legal or financial advice. The allegations described have not been proven in court.
Sources: Reuters, CNBC, CoinDesk and court filings as reported by VitalLaw and Law Commentary.
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