Polymarket has sued New York Attorney General Letitia James and other state officials in federal court, turning New York’s attempt to regulate the prediction-market operator as an illegal gambling business into a direct fight over the limits of state authority.
The company filed its lawsuit in Manhattan federal court on Sept. 24, just hours after James brought a separate case accusing QCX LLC, which does business as Polymarket US, of operating an unlicensed gambling platform in New York.
Polymarket’s response goes beyond disputing the state’s description of its products. The company argues that the Commodity Futures Trading Commission has exclusive authority over federally regulated prediction markets and that New York cannot apply its civil and criminal gambling laws in a way that conflicts with that federal framework.
The competing lawsuits therefore put two very different descriptions of the same business before the courts. New York sees wagers on uncertain events. Polymarket sees federally regulated derivatives.
The state’s case, covered in detail in Dave Finances’ report on New York’s lawsuit against Polymarket, seeks to stop the company from operating in New York without a state gaming license. James is also seeking restitution for customers, forfeiture of alleged illegal gains and financial penalties.
Polymarket Says Federal Regulation Should Override State Gambling Rules
Polymarket’s federal complaint focuses on preemption: the legal principle that federal law can prevent states from regulating an area Congress has placed under federal authority.
The company argues that New York is forcing it into an untenable position. It can either comply with state demands and limit a business it says federal law allows it to operate nationally, or continue serving customers and risk substantial state civil and potentially criminal liability.
At the center of that argument is QCX LLC’s regulatory status.
The CFTC lists QCX LLC, doing business as Polymarket US, as a designated contract market. The designation dates to July 9, 2025, providing Polymarket with the federally regulated exchange infrastructure it later used to return to the U.S. market.
That history is significant because Polymarket previously ran into the CFTC from the opposite direction. In January 2022, the regulator ordered the company to pay a $1.4 million civil penalty for offering event-based binary options outside a registered exchange and required it to wind down markets that did not comply with U.S. derivatives rules.
Polymarket was subsequently absent from the U.S. market for more than three years before returning through regulated infrastructure.
The company’s position now is effectively that after moving inside the federal regulatory framework, individual states should not be able to recreate a second layer of gambling regulation over the same contracts.
That argument is not unique to Polymarket. The CFTC itself has previously pushed back against state interference with federally regulated prediction markets, including in disputes involving Kalshi.
New York Says Sports Contracts Are Gambling Regardless of the Wrapper
New York starts from a different question: what are customers actually doing?
James argues that prediction contracts qualify as gambling when users put money at risk on events they cannot control and receive payouts depending on the result. Her complaint cites sports markets, including contracts tied to baseball outcomes, as examples.
The state also objects to Polymarket allowing customers between 18 and 20 years old to participate even though New York requires mobile sports-betting customers to be at least 21.
According to the attorney general’s office, operating through a CFTC-regulated entity does not eliminate obligations under New York gambling law.
The sports question is particularly important because Polymarket has been building a much larger U.S. sports business. Its expanded partnership with Sportradar now covers official data and related services across more than 20 leagues and competitions, pushing the platform closer to territory historically occupied by regulated sportsbooks.
At the same time, other federally regulated platforms are moving aggressively into sports event trading, increasing the commercial importance of where courts ultimately draw the line between derivatives and gambling.
Federal Courts Are Already Giving Different Answers
The problem for both sides is that the law is not settled.
Federal appeals courts have already reached conflicting conclusions in cases involving Kalshi. The Ninth Circuit rejected a broad attempt to prevent Nevada from applying its gambling laws to Kalshi’s sports contracts, while the Third Circuit had earlier reached a more favorable conclusion for Kalshi in its dispute with New Jersey.
Dave Finances previously examined how the conflicting appellate rulings have increased the possibility that the jurisdictional question may ultimately need resolution at the Supreme Court.
The legal uncertainty has emerged just as prediction markets are becoming materially larger businesses.
Coinbase, for example, has been expanding event contracts through Kalshi, with its prediction-market business reaching more than $100 million in annualized revenue by the second quarter of 2026, according to the company.
Crypto exchanges are also using prediction markets as customer-acquisition products, while specialized platforms are broadening from elections and economic data into sports, entertainment, crypto prices and increasingly granular real-world events.
That growth is attracting more federal oversight as well. The CFTC has recently intensified market-integrity scrutiny around contracts whose outcomes could potentially be manipulated or known in advance by connected participants.
This Case Is Really About Whether Prediction Markets Get One Rulebook or Fifty
The immediate legal question concerns Polymarket and New York. The commercial question is much larger.
A prediction-market operator has a very different business model if CFTC registration gives it access to one national market than if it also needs gaming approval in every state that considers some of its contracts gambling.
State-by-state regulation would not necessarily kill prediction markets, but it would remove one of their biggest structural advantages over conventional sportsbooks.
Sports-betting companies already deal with separate licenses, tax rates, age limits, responsible-gambling requirements and product restrictions across individual states. Prediction exchanges have built their U.S. expansion around the idea that federally regulated event contracts can instead trade inside a national derivatives framework.
If New York’s view prevails broadly, that distinction gets much harder to maintain.
Platforms could face different product menus depending on customer location. Sports contracts might be available in one state and blocked in another. Compliance expenses would rise, and national liquidity could become more fragmented as access changes across jurisdictions.
That last point matters because prediction markets depend heavily on liquidity. A contract with thousands of participants generally produces tighter spreads and more useful price discovery than the same market divided among several regulatory jurisdictions.
There is also a competitive consequence.
If prediction exchanges must obtain state gambling licenses for sports contracts, they begin competing under a regulatory structure much closer to DraftKings and FanDuel. If federal preemption wins, prediction platforms retain a potentially powerful regulatory advantage: national distribution through a federally supervised exchange.
Polymarket’s Growth Makes the Legal Outcome More Valuable
The stakes are higher because Polymarket is no longer a small crypto experiment.
New York said the company’s business has reportedly been valued above $20 billion. Its markets have expanded across politics, sports, financial events and global news, while its regulated U.S. business is being built alongside the larger crypto-native platform that originally made the brand prominent.
Growth has also brought new operational and compliance pressure. Dave Finances recently reported that more than 80% of Polymarket deposits were rejected by Checkout.com during a February fraud attack, according to reporting on the incident.
The platform has separately faced questions over outages, market integrity and the reliability of prediction-market signals as volumes increase.
Those issues do not determine whether New York has jurisdiction, but they help explain why states are unwilling to treat prediction markets as purely abstract derivatives-law questions. Once millions of retail customers begin using platforms that increasingly resemble trading apps, sportsbooks and financial exchanges at the same time, consumer protection and regulatory ownership become much more consequential.
The Counter-Suit Raises the Stakes for the Entire Industry
Polymarket could have defended itself solely inside New York’s case. Filing its own federal lawsuit changes the strategy.
The company is asking for an affirmative ruling that New York cannot apply its gambling laws to the federally regulated business. A strong federal-preemption decision would therefore have value well beyond defeating one attorney general’s enforcement action.
It could strengthen similar arguments being made by Kalshi and other prediction-market operators facing state regulators.
A loss could do the opposite.
If courts conclude that CFTC supervision does not prevent states from regulating sports and other event contracts as gambling, prediction markets may have to accept that federal registration is only one layer of the regulatory structure rather than a nationwide shield.
That is why the dueling lawsuits matter more than their timing suggests.
New York is arguing that changing the name from a wager to an event contract does not change what the customer is doing. Polymarket is arguing that once Congress and the CFTC treat the instrument as a federally regulated derivative, states cannot simply regulate it again as gambling.
The courts are now being asked to decide which description controls.
For prediction markets, that answer could determine whether the next phase of growth happens under one national derivatives regime or a patchwork of state gambling rules.
Johan Shamshad is a financial markets writer at Dave Finances covering cryptocurrencies, trading platforms, brokers, fintech, financial regulation, and developments across global markets. He previously worked at Gulf News, adding newsroom experience to his coverage of fast-moving financial and digital-asset markets.
His work focuses on identifying market-moving events, company developments, regulatory changes, product launches, and shifts in trading and financial infrastructure.
Johan contributes news and analysis designed to help readers understand not only what happened, but why a development matters and how it may affect the wider financial landscape.