As a political savant and a leading figure in the world of policy and legislation, Donald Gainsborough has spent his career at the intersection of government authority and market innovation. Currently at the helm of Government Curated, Gainsborough has become the go-to expert for navigating the increasingly turbulent waters of state-federal jurisdictional disputes. We sat down with him to discuss the Commodity Futures Trading Commission’s recent and unprecedented decision to sue three states—Arizona, Connecticut, and Illinois—over their attempts to regulate or ban prediction markets like Kalshi and Polymarket. The stakes are immense, as the outcome of these lawsuits will likely define the future of digital asset trading and the boundaries of federal preemption in the 21st century.
Our conversation delves into the legal mechanics of the Commodity Exchange Act and how it serves as a federal shield against a fragmented patchwork of state gambling laws. We explore the specific legal battles brewing in Arizona, where criminal charges have introduced a high-stakes chill into the industry, and in Connecticut, where officials are raising the alarm over consumer protections and the potential for addiction among younger populations. Furthermore, we examine the precarious position of traditional gaming operators in Illinois who find themselves caught in the crossfire between federal mandates and state license requirements. Through this expert lens, we look at the broader implications for market integrity and the regulatory tug-of-war over who truly has the final word on prediction markets.
The Commodity Exchange Act aims to create a uniform national market for futures trading. How does this federal mandate specifically override state-level gambling statutes, and what legal thresholds must a platform meet to be classified as a designated contract market rather than an illegal wagering business?
The tension we are seeing today is the result of a deliberate choice by Congress to prevent exactly the kind of regulatory chaos that is unfolding across state lines. Under the Commodity Exchange Act (CEA), the federal government established a clear hierarchy where the Commodity Futures Trading Commission (CFTC) maintains exclusive jurisdiction over accounts, agreements, and transactions involving swaps or futures. When a platform like Kalshi or its peers undergoes the rigorous federal certification process to become a Designated Contract Market (DCM), they are essentially entering a federal sanctuary. To reach this status, a platform must prove it can maintain market integrity, prevent price manipulation, and ensure financial solvency—thresholds that are far more stringent than those of a local betting parlor. By meeting these federal requirements, these platforms are no longer viewed through the lens of local “wagering” statutes; they are recognized as vital instruments of price discovery and risk management. Chairman Michael Selig was very clear in his statement that allowing states to impose “inconsistent and contrary obligations” would result in a fragmented system that ultimately weakens consumer protection. When the feds sue, they are arguing that once a platform is a DCM, state-level gambling labels are legally irrelevant because the federal scheme occupies the entire field of regulation.
Arizona has filed criminal charges against platforms for allowing bets on elections and operating without state licenses. What are the immediate operational risks for these companies during active litigation, and what specific steps can they take to protect their users while these jurisdictional disputes remain unresolved?
The situation in Arizona is particularly fraught because Attorney General Kris Mayes has escalated this from a civil disagreement to a criminal prosecution, which carries a visceral weight for any corporate board. When you see charges alleging the operation of an illegal gambling business, it creates an immediate reputational and operational “freeze” that can scare off banking partners and institutional investors who are sensitive to any hint of criminal activity. For a company like Kalshi, which has already filed its own preemptive lawsuit against Governor Katie Hobbs and the Department of Gaming, the primary risk is the potential for a sudden shutdown order that could trap user funds in a legal limbo. To mitigate this, these platforms must lean heavily into their federal status, essentially wrapping themselves in the “DCM” flag to reassure users that their contracts are federally sanctioned and protected. They also need to maintain extreme transparency regarding their legal reserves, ensuring that even if a state like Arizona attempts to seize assets or block access, there are robust contingencies to honor user withdrawals. It is a high-wire act where the company must project the confidence of a federally regulated exchange while simultaneously fighting off the very real threat of state-level law enforcement actions that could disrupt their digital infrastructure.
Connecticut officials have raised concerns about data security, integrity controls, and advertising aimed at college students or those with gambling addictions. How should these platforms restructure their internal safeguards to address these specific criticisms, and what metrics best demonstrate that a market is functioning with integrity?
The criticism from Connecticut’s Department of Consumer Protection is a serious indictment of the current “wild west” perception of these markets, particularly regarding the vulnerability of personal data and the risk of insider trading. To address these concerns, platforms need to move beyond simple compliance and implement “integrity-by-design” features, such as advanced biometric verification to ensure users aren’t circumventing self-exclusion lists. They should also consider adopting the same rigorous transparency standards as traditional stock exchanges, where any “insider” activity is flagged in real-time by automated surveillance algorithms. A key metric of success here is the “manipulation resistance” of a contract—meaning the cost and difficulty for a single bad actor to significantly move the market price. If these platforms can show that their markets are driven by a broad base of informed participants rather than a few whales with privileged information, they can start to dismantle the “unlicensed gambling” narrative. Furthermore, the industry needs to rethink its presence on college campuses; advertising to an impulsive, financially inexperienced demographic is a recipe for the “compulsive behaviors” that Governor Ned Lamont has highlighted as a primary danger.
The Illinois Gaming Board warned that established gambling companies risk forfeiting their licenses if they participate in prediction markets. What are the long-term implications for the gaming industry if these markets remain federally protected, and how might traditional operators navigate these conflicting state and federal regulatory frameworks?
This is perhaps the most aggressive move we’ve seen, as the Illinois Gaming Board is essentially taking the traditional gambling industry hostage to exert pressure on prediction markets. By threatening the forfeiture of lucrative state licenses, Illinois is forcing established operators to choose between the innovation of the future and the guaranteed revenue of the present. Long-term, if the CFTC successfully defends its exclusive jurisdiction, we could see a massive migration of capital away from state-regulated sportsbooks and toward federally-protected prediction markets, which often offer better odds and more diverse “event contracts.” For traditional operators, the path forward is a legal minefield; they may have to create separate, ring-fenced corporate entities to participate in prediction markets so as not to “pollute” their state-level gambling licenses. It creates a bizarre situation where a company might be legally allowed to offer a swap on an election under federal law but lose its right to run a slot machine in Chicago because of it. This conflict will likely force a consolidation of gaming laws, as traditional operators will eventually lobby for the same federal protections enjoyed by DCMs to escape the heavy hand of state boards.
Governor Ned Lamont has proposed banning prediction market access for anyone under 21 to mitigate financial distress and compulsive behavior. What are the practical challenges of enforcing age-based restrictions on these digital platforms, and how do these risks compare to those found in traditional sports betting?
Enforcing a 21-plus age limit in the digital sphere is an endless game of cat-and-mouse, especially when dealing with platforms that are often tied to decentralized finance and VPN-accessible interfaces. Unlike a physical casino where a bouncer checks an ID at the door, digital platforms must rely on third-party identity verification services that can sometimes be bypassed with sophisticated spoofing or “borrowed” credentials. Governor Lamont is right to point out that these markets share many psychological triggers with sports betting—the rush of the “win,” the rapid feedback loop, and the potential for chasing losses—but prediction markets are arguably more dangerous because they can feel “intellectual” or “educational” to a young person. A college student might feel they are just “trading information” rather than gambling, which can mask the reality of the financial risk they are taking. The challenge for these platforms is to prove they can implement friction—deliberate delays or cooling-off periods—that prevents the “impulsive individuals” Lamont mentioned from entering a downward spiral. If they cannot prove they can keep 19-year-olds off the platform as effectively as a Vegas casino does, they will continue to face the wrath of state governors who view them as a public health crisis.
What is your forecast for prediction markets?
I believe we are heading toward a period of extreme consolidation and “regulatory clearing” where the federal government will ultimately emerge as the victor, but only after a series of bruising battles in the Supreme Court. The sheer weight of the Commodity Exchange Act and the necessity for a “uniform and predictable nationwide market” are too powerful for a patchwork of 50 state regulators to overcome in the long run. My forecast is that within the next three to five years, we will see a formal federal framework that mirrors the one used for the stock and bond markets, effectively “de-risking” these platforms for institutional players and traditional gaming giants. However, this peace will come at a high price: prediction markets will likely be forced to accept significantly tighter controls on “socially sensitive” contracts, such as those involving local election results or controversial public policy outcomes. We will see the birth of a more mature, slightly more boring, but much more stable asset class that finally moves out of the “gambling” shadows and into the mainstream financial light. Prediction markets are here to stay, but they will look much more like the New York Stock Exchange and much less like a back-alley sportsbook by the time the dust settles.
