Minnesota’s attempt to become the first state to outlaw prediction markets hit a swift legal wall on Monday when a federal judge granted a preliminary injunction against enforcement of the law. The ruling hands an early but critical victory to platforms Kalshi and Polymarket, which jointly sued alongside the Commodity Futures Trading Commission after Governor Tim Walz signed the legislation in May.
U.S. District Judge Katherine Menendez found that the Commodity Exchange Act likely preempts the Minnesota statute, meaning federal law overrides the state’s attempt to criminalize prediction market activity. The court’s order prevents Minnesota from enforcing the ban while the legal challenge proceeds. The full decision outlined that the state law would have made operating, hosting, or promoting prediction markets a crime within Minnesota borders, a move operators argued was unconstitutional.
This is the first time a state has passed legislation specifically targeting prediction market platforms. While betting exchanges and sportsbooks have faced regulatory headwinds in various jurisdictions, Minnesota’s law carved out a direct prohibition on political and event contract platforms that function through blockchain infrastructure. The law’s scope was broad enough to cover not just the companies but also anyone facilitating or advertising these markets.
The Federal Preemption Argument
The core of the ruling rests on the doctrine of federal preemption—the idea that when Congress legislates in a particular area, state laws that conflict with that framework must yield. In this case, the Commodity Exchange Act gives the CFTC authority over derivative contracts, and prediction markets that settle based on event outcomes arguably fall into that category. Judge Menendez’s preliminary injunction signals that the state’s ban likely intrudes on that federal turf.
The legal posture is complicated by the fact that the CFTC itself has a tense history with prediction market operators. The agency has previously challenged Kalshi’s listing of election contracts, and a separate court fight over the scope of CFTC jurisdiction is still unfolding. In this dispute, however, the CFTC joined the platforms as a co-plaintiff, aligning on the principle that a patchwork of state-level bans would fragment the oversight Congress intended. That alignment is a notable turn for a regulator that has often been at odds with these exact platforms.
What’s Still in Play
Despite the injunction, the case is far from over. A preliminary finding of likely preemption does not guarantee a final judgment, and other states may draft similar laws that attempt to skirt the federal preemption argument. Minnesota’s measure was novel in its direct ban, but if the court ultimately upholds the state’s power under a different legal theory, it could embolden further restrictions across the country.
The tension between state-level crypto regulation and federal oversight is not limited to prediction markets. A landmark crypto bill struggling in Congress has faced fierce opposition from banking interests, and the outcome of that legislative fight will shape how much room states have to craft their own rules. The Minnesota ruling reinforces the argument that markets involving derivatives-like contracts belong under federal jurisdiction, but the political process remains unsettled.
Prediction markets sit at the intersection of decentralized finance and real-world event exposure, sharing structural similarities with the tokenized real-world assets that recently crossed $20 billion on-chain. Polymarket, built on Polygon, operates on a blockchain that consistently ranks among the top blockchains by developer activity. The growth of such on-chain products makes the legal classification of event contracts increasingly urgent, as billions of dollars in value could be affected by whether these instruments are treated as gambling, securities, or CFTC-regulated derivatives.
For now, prediction market operators have secured breathing room in Minnesota. The ruling sends a signal that states cannot simply criminalize activity Congress has chosen to regulate through the CFTC. Yet the legal landscape remains fragmented, and platforms will be watching whether this decision influences policymakers weighing the fate of the broader crypto bill in the Senate.
