US government sues Illinois, alleging unlawful efforts to regulate prediction markets

The US government sued Illinois on Thursday to stop what it described as the state’s unlawful efforts to regulate prediction markets.

The booming industry of online prediction markets – which allow users to bet on virtually anything from Oscar winners to the weather to ongoing military conflicts – has been facing greater scrutiny as companies continue to fight state-led efforts to regulate the fast-growing industry – which many argue is “basically gambling but with another name”.

The platforms are less regulated that conventional betting sites because they classify their offerings as “event derivatives”, which means they fall under federal commodities law and are currently overseen by the Commodity Futures Trading Commission (CFTC) rather than by state gaming regulators.

This means they are available in all 50 states to users 18 and older. Licensed sportsbooks can only operate in states where sports betting has been legalized and, unlike casinos or traditional sportsbooks, users in effect bet, or “trade”, against each other rather than against an established “house”, with platforms collecting transaction fees.

Related: Polymarket and other prediction platforms driving oil market, traders say

Under the Trump administration, the CTFC has argued it has exclusive regulatory control over the companies.

According to a complaint filed in Chicago federal court, Illinois’ attempt to shut down so-called designated contract markets regulated by the CFTC intruded on the federal government’s exclusive authority to regulate national swaps markets.

Illinois introduced legislation earlier this year that would put some of the strictest guardrails in the country around prediction markets, including an effective ban on sports-related trades inside the state, a clampdown on advertising and mandating strict age restrictions, as well as sweeping consumer protections.

The lawsuit is the first by the CFTC to block state gaming regulators from policing operators of prediction markets. It cited cease-and-desist letters that the Illinois gaming board (IGB) sent to Kalshi, Polymarket and Crypto.com after the board found reason to believe they violated Illinois gambling laws through their involvement in unlicensed sports wagering.

“It is unlawful to knowingly establish, maintain or operate an internet site that permits a person to play a game of chance or skill for money or other thing of value, or that permits a person to make a wager upon the result of any sport, game, contest, political nomination, appointment or election, via the internet without an IGB-issued license,” the cease-and-desist letters detail.