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Minnesota Tried to Make Prediction Markets a Felony. One Federal-Law Question Put It on Hold

By Isaac • July 27, 2026 11:36 pm • Comments

Minnesota was days away from turning much of the prediction-market business into a felony.

A federal judge has now stopped the law before its August 1 effective date, handing Kalshi, Polymarket US and the Commodity Futures Trading Commission an early victory.

Early is the important word.

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Judge Katherine Menendez issued a preliminary injunction, not a final judgment. Minnesota cannot enforce the new statute against CFTC-registered designated contract markets while the cases proceed, but the order leaves open a question that could eventually split the market contract by contract.

Are all event contracts federally regulated swaps, or only the ones tied closely enough to financial, economic or commercial consequences?

For now, the inability to draw that line cleanly helped produce a broad pause.

The 44-page order covers three related lawsuits brought by the United States and CFTC, KalshiEX, and QCX, the company doing business as Polymarket US.

All three plaintiffs argued that Minnesota crossed into territory Congress reserved for the CFTC under the Commodity Exchange Act.

The federal law gives the CFTC “exclusive jurisdiction” over swaps traded on designated contract markets. Kalshi and Polymarket US are registered DCMs, so the core dispute is whether the contracts on their platforms fit the statute’s definition of a swap.

Menendez found the plaintiffs likely to prevail on at least part of that express-preemption argument. She also found a credible threat of irreparable harm and said the balance of harms favored keeping the current market open while the cases continue.

The injunction is deliberately temporary. It bars enforcement against CFTC-registered designated contract markets until a final merits decision, without deciding every contract’s status or permanently invalidating Minnesota’s statute.

Minnesota’s law took direct aim at the business model.

It would have prohibited covered prediction markets involving sports, wars and emergencies, elections and government decisions, legal proceedings, deaths, popular culture, and even whether a person would say a particular word or phrase.

The felony provisions reached beyond the exchange itself. They covered operating a prohibited market, handling money, setting prices, providing certain data or location and payment services, and advertising the transactions when the statute’s other conditions were met.

That breadth raised the stakes well above a conventional civil licensing dispute.

Kalshi told the court it had more than 90,000 verified users in Minnesota as of May 26, with millions of dollars in positions that had not settled. If the law took effect, the platforms faced a choice between shutting those users out and risking criminal prosecution.

The court found that threat, along with unrecoverable economic and reputational harm, serious enough to support emergency relief.

The harder part was deciding how far federal preemption extends.

The Commodity Exchange Act defines a swap broadly enough to include a contract whose payment depends on an event associated with a potential financial, economic or commercial consequence.

Menendez found that many contracts on Kalshi and Polymarket US likely fit that language. Markets tied to GDP, the S&P 500, climate goals, electric-vehicle market share, congressional votes, interest rates and similar events can have consequences that are direct rather than remote.

If those contracts are swaps traded on a designated contract market, the CFTC’s exclusive jurisdiction gives Minnesota a serious preemption problem.

The judge concluded that the plaintiffs were likely to succeed, at least in part, on that argument.

Then came the complication.

The order says some event contracts may sit outside the federal definition.

A market on which couple will win “Love Island USA” may involve popular culture without a meaningful financial, economic or commercial consequence. The same concern applies to a contract predicting what announcers will say during a World Cup broadcast.

Those examples could fall under Minnesota’s statute without qualifying as swaps under federal law. If so, the CFTC’s exclusive jurisdiction would be much harder to invoke.

The court did not settle that boundary. It also noted that the parties had argued the preliminary-injunction fight largely as an all-or-nothing choice and had not provided a practical way to separate thousands of contracts before the state law took effect.

Menendez rejected the two extreme answers.

She did not accept that every contract listed by a regulated exchange automatically becomes a federally protected swap. She also declined to let Minnesota enforce the entire statute when a considerable share of the affected contracts likely falls within the CFTC’s exclusive domain.

The temporary solution was to preserve the status quo.

Until the court reaches a final merits decision, Minnesota is barred from enforcing the prediction-market statute against entities registered as designated contract markets by the CFTC.

The ruling did not decide Kalshi’s and Polymarket’s separate First Amendment claims over advertising and access to information. It did not decide their alternative implied-preemption arguments either.

Those issues remain available later if the express-preemption theory does not resolve the case.

Minnesota Attorney General Keith Ellison’s office argues that prediction markets are gambling and that the state retains its traditional power to protect public health and safety.

The state’s case centers on addiction, manipulation, insider knowledge and the sensitivity of markets tied to elections, war, disasters and deaths. Minnesota also contends that Congress did not quietly erase state gambling authority when it expanded the CFTC’s jurisdiction over swaps.

Its proposed answer was geoblocking: Kalshi and Polymarket could keep offering contracts elsewhere while removing the prohibited products from Minnesota.

The preliminary injunction delays that solution. It does not declare the state’s concerns imaginary, and it does not guarantee that Minnesota’s law will fail in every application.

The national consequences are already larger than one state.

Prediction-market operators and state gambling regulators have been fighting versions of the same jurisdictional battle across the country, with courts reaching different early results. A broad federal victory in Minnesota gives the CFTC and the exchanges another favorable ruling, but it does not create a single nationwide answer.

The most consequential language in the order may be its refusal to treat all event contracts alike.

A market tied to an interest-rate decision can look like a financial derivative. A market on a reality-show winner can look like a wager with a financial wrapper.

Both can trade on the same regulated platform, but the federal statute may not protect them in the same way.

Minnesota’s law is frozen while the court works through that distinction.

If the plaintiffs ultimately win, the state may be unable to regulate a large class of event contracts offered by CFTC-registered exchanges. If Minnesota wins on some categories, the industry could face a contract-by-contract patchwork even when the platform itself is federally regulated.

The felony ban is on hold. The harder fight—where a swap ends and gambling begins—has only reached its first ruling.

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