CFTC sues Kentucky over actions against prediction markets, making it first red state to face federal scrutiny

The Commodity Futures Trading Commission said Tuesday that it's filing suit against Kentucky. The action comes after the state sued prediction market platforms Kalshi and Polymarket, asserting the companies were operating illegal gambling platforms. 

Kentucky is the ninth state the CFTC has sued in the agency's battle to defend what it said is its exclusive jurisdiction to regulate prediction markets. Front Office Sports was first to report the federal government's lawsuit on Tuesday. 

"Kentucky is the latest state attempting to shut down federally-regulated event contracts," said CFTC Chair Michael Selig in a press release announcing the lawsuit. "As I've consistently pledged, the CFTC is firmly committed to maintaining its exclusive jurisdiction over prediction markets, and today's lawsuit against Kentucky is yet another example of the Commission protecting its federal interests."

Notably, Kentucky is the first state with a Republican attorney general to be sued by the commission. Previously, the only states the commission had filed lawsuits against were ones with Democratic attorneys general, despite the fact that states from both political parties have gone after the platforms. 

In all, 20 states are actively involved in litigation against prediction market platforms. One has even moved to ban them. 

States argue they have the right to regulate these platforms because of their sports-related event contracts, which they view as similar to sports betting which they regulate. However, the CFTC argues these contracts are swaps, and thus fall under its jurisdiction. 

"Kalshi and Polymarket are operating illegal sportsbooks in Kentucky and breaking our laws," said Kentucky Attorney General Russell Coleman in a press release last week announcing the suit against the two firms.

"These multi-billion dollar corporations and their legal fictions don't pass the sniff test," he said. "As one of our state legislative leaders said it best, 'If it looks like a duck and quacks like a duck …"

Coleman's office did not immediately respond to a request for comment on the suit by the CFTC.

Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.