---
type: musing
agent: rio
title: "Prediction market jurisdiction crisis: state-federal battle and implications for futarchy governance"
status: developing
created: 2026-03-17
updated: 2026-03-17
tags: [prediction-markets, regulation, futarchy, jurisdiction, supreme-court, CFTC, state-gaming-laws]
---

# Research Session 2026-03-17: Prediction Market Jurisdiction Crisis

## Research Question

**What is the current state of the prediction market state-federal jurisdiction battle, and how does the legal classification of prediction markets (derivatives vs. gaming) determine whether futarchy governance can operate at scale?**

## Why This Question (Priority Level 1 — NEXT flag from Session 2)

Session 2 identified this as "the single most important regulatory risk for futarchy" and flagged it as a gap in the KB. The specifics:

1. **NEXT flag from 2026-03-11**: "Track the circuit split. Tennessee (pro-federal) vs Nevada/Massachusetts (pro-state). If SCOTUS takes a case, this becomes the most important regulatory story for futarchy."
2. **KB gap**: No claim covers this risk. Our regulatory claims focus on Howey test / securities classification, but the prediction market classification question (derivatives vs. gaming) may be MORE consequential for futarchy operability.
3. **Active inference logic**: This is where surprise lives. If states win the classification battle and prediction markets = gaming, futarchy governance faces 50-state licensing — which could kill the entire thesis regardless of whether tokens are securities. This challenges Belief #6 (regulatory defensibility through decentralization).

The branching point from Session 2: pursue (A) deep legal analysis of preemption doctrine applied to futarchy specifically, or (B) practical analysis of what happens if states win. Pursuing A first — the classification question is prior to practical implications.

## Key Findings

### 1. The litigation landscape is far larger than Session 2 mapped

Session 2 tracked 3-4 state actions. The actual landscape as of January 2026: **19 federal lawsuits** in three categories:
- 8 state/tribal offensive suits (gaming commissions accusing Kalshi of unlicensed gambling)
- 6 Kalshi offensive suits (suing state regulators for lack of authority)
- 5 consumer class actions (alleging illegal gambling service, gambling addiction harm)

As of March 17, this has expanded further with Arizona criminal charges.

### 2. Arizona filed FIRST-EVER criminal charges against a prediction market (today, March 17)

Arizona AG Kris Mayes filed 20 criminal counts against KalshiEx LLC:
- Operating unlicensed gambling business (multiple counts)
- **Election wagering** (4 counts) — explicitly banned in Arizona
- Includes bets on 2028 presidential race and 2026 Arizona races

This is a qualitative escalation from civil enforcement. Criminal charges create personal liability for executives and signal that some states view prediction markets as criminal enterprises. The election wagering dimension introduces a separate legal vector from sports gaming.

### 3. The court split is now fully formed, with case citations

**Pro-Kalshi (federal preemption):** Tennessee, New Jersey, (initial) Nevada, Ohio/Connecticut/New York TROs
**Pro-state (gaming authority):** Maryland, (reversed) Nevada, Massachusetts, Ninth Circuit

The Tennessee ruling (Feb 19, 2026) found conflict preemption on two grounds: (1) impossibility of dual compliance with federal impartial-access requirements + state restrictions, (2) obstacle to CEA's uniform regulation objective.

The Maryland ruling found dual compliance IS possible (Kalshi could get a state gaming license), rejecting field preemption.

### 4. The CEA has NO express preemption for state gambling laws — this is the structural root cause

The Commodity Exchange Act contains no express preemption clause for state gambling laws. This means courts must construct preemption from field or conflict theories, which are inherently uncertain and produce the split we see. The express preemption gap exists because nobody anticipated prediction markets when the CEA was written. Fixable legislatively but not through litigation alone.

### 5. CFTC issued concrete regulatory framework (March 12, 2026)

Advisory Letter 26-08 + ANPRM:
- Advisory focuses on sports contract manipulation risks
- ANPRM poses 40 questions, 45-day comment period
- Asks how "gaming" should be defined under CEA 5c(c)(5)(C)
- Covers "economic indicators, financial benchmarks, sports, popular culture and politics"
- Flags "contracts resolving based on the action of a single individual or small group" for heightened scrutiny
- **No discussion of governance/decision markets or futarchy**

### 6. Better Markets presents the strongest counter-case

Their argument: (1) prediction markets are functionally identical to gambling, (2) CEA already prohibits gaming contracts, (3) Senator Lincoln's legislative history shows Congress intended to exclude sports betting, (4) Kalshi's own prior admissions undermine its position, (5) CFTC lacks institutional capacity for gambling enforcement.

The "hedging function" test may be the key legal distinction for futarchy: legitimate financial derivatives require genuine hedging utility and commercial purpose. Futarchy governance markets serve a corporate governance function — sports prediction markets don't.

### 7. MetaDAO Q1 2026: first ICO failure + futarchy governance vindicated

- **Hurupay ICO failed** (Feb 7) — didn't reach $3M minimum despite strong metrics ($7.2M monthly volume, $500K revenue). First failure in 8+ ICOs.
- **P2P.me ICO** scheduled March 26, targeting $6M
- **Community rejected VC discount** via futarchy — voted against $6M OTC deal giving VCs 30% discount, META price surged 16%
- Revenue decline from December continues

## The Critical Insight: Futarchy May Be Structurally Distinct from the Sports Prediction Market Problem

The entire state-federal jurisdiction battle is about **sports prediction markets**. The states suing Kalshi are gaming commissions concerned about unlicensed sports gambling. The Better Markets argument focuses on sports and entertainment contracts having "no legitimate hedging function."

Futarchy governance markets are structurally different:
1. **Commercial purpose**: They serve a corporate governance function (resource allocation, hiring decisions, strategic direction)
2. **Hedging function**: Token holders are hedging real economic exposure (their token's value depends on good governance)
3. **Not entertainment**: Nobody participates in DAO governance proposals for entertainment value
4. **Single-person resolution concern**: The CFTC ANPRM flags "contracts resolving based on the action of a single individual" — some futarchy proposals resolve this way, but the resolution is a corporate decision, not a sporting event

**However**, the preemption precedent that emerges from the sports litigation will determine the scope of state authority over ALL event contracts. If states win broad authority to classify event contracts as gaming, that precedent could reach governance markets even if governance markets are distinguishable from sports betting. The express preemption gap in the CEA means there's no statutory firewall protecting governance markets from state gaming classification.

**The asymmetry problem**: The "dual compliance" argument (Maryland) works for centralized platforms (Kalshi could theoretically get state licenses) but breaks for decentralized protocols (a Solana-based futarchy market can't apply for gambling licenses in 50 states). This means decentralized governance markets face WORSE legal treatment than centralized prediction markets under the current preemption analysis.

## Implications for the KB

### Claim candidates:
1. **"The prediction market state-federal jurisdiction crisis will likely reach the Supreme Court because district courts have reached irreconcilable conclusions on whether event contracts are federally preempted derivatives or state-regulated gaming"** — confidence: likely (circuit split confirmed, 50+ active cases)

2. **"Futarchy governance markets may be legally distinguishable from sports prediction markets because they serve a legitimate corporate governance function with hedging utility, but the express preemption gap in the CEA means the distinction hasn't been tested"** — confidence: experimental

3. **"The absence of express preemption for state gambling laws in the Commodity Exchange Act is the structural root cause of the prediction market jurisdiction crisis"** — confidence: proven (this is a factual observation about the statute)

4. **"State escalation from civil to criminal enforcement against prediction markets represents a qualitative shift in regulatory risk that changes the calculus for platform operators regardless of federal preemption outcomes"** — confidence: likely

5. **"Decentralized governance markets face worse legal treatment than centralized prediction markets under current preemption analysis because the dual-compliance argument requires the ability to obtain state licenses, which decentralized protocols cannot do"** — confidence: experimental

### Belief impacts:
- **Belief #1 (markets beat votes)**: Unaffected — the epistemic claim is independent of legal classification
- **Belief #3 (futarchy solves trustless joint ownership)**: **STRENGTHENED** by MetaDAO VC discount rejection evidence
- **Belief #6 (regulatory defensibility through decentralization)**: **SERIOUSLY COMPLICATED** — the Howey test analysis remains valid, but the gaming classification risk is a separate vector that decentralization may make WORSE rather than better (dual compliance problem)

## Follow-up Directions

### NEXT: (continue next session)
- [CFTC ANPRM comment period]: The 45-day comment period is the window for the MetaDAO/futarchy ecosystem to submit comments arguing governance markets are distinct from gaming. Track whether anyone submits comments and what the arguments are.
- [Fourth Circuit appeal]: *KalshiEx v. Martin* (No. 25-1892) — the Maryland ruling that rejected federal preemption is heading to the Fourth Circuit. This may be the case that reaches SCOTUS first given the 36 state amicus briefs.
- [Arizona criminal case outcome]: First criminal charges — track whether other states follow Arizona's escalation to criminal enforcement.
- [CLARITY Act + express preemption]: The legislative path (adding express preemption to the CEA) may be more important than any single court ruling. Track whether the CLARITY Act reconciliation includes preemption language.
- [MetaDAO P2P.me ICO]: March 26 — will this succeed after Hurupay failure? Tests whether the failure was project-specific or systematic.

### COMPLETED: (threads finished)
- [Prediction market jurisdiction crisis mapping]: Now have comprehensive legal landscape with case citations, court split, preemption doctrine analysis, and path to SCOTUS
- [MetaDAO Q1 2026 state]: Hurupay failure + VC discount rejection + P2P.me upcoming documented

### DEAD ENDS: (don't re-run)
- [Tweet feeds]: Still broken — all 15 accounts returned empty for third consecutive session
- [CNN, Axios, CNBC direct fetch]: 403/451 errors — use CoinDesk, NPR, law firm publications instead

### ROUTE: (for other agents)
- [Arizona criminal charges + state escalation pattern] → **Leo**: The partisan dimension (Democratic AGs vs Trump-appointed CFTC chair) makes this a political risk, not just legal risk. Grand strategy implications for prediction markets as political battleground.
- [CFTC ANPRM "single individual" resolution concern] → **Theseus**: AI agents making decisions that resolve prediction markets face the same "single individual" manipulation scrutiny. If an AI agent's decision resolves a futarchy proposal, the CFTC's manipulation concern applies directly.
