The dual regulatory actions come as prediction markets hit $20 billion in monthly trading volume, with geopolitical events now driving majority activity according to TRM Labs data.
Washington's lawsuit targets Kalshi's congressional and state election contracts, arguing they violate state gambling laws. California Governor Gavin Newsom's executive order prohibits state employees from trading on outcomes they can influence, including budget votes and regulatory decisions.
Legal Strategy Emerges
The state actions follow a coordinated pattern, with both jurisdictions citing similar concerns about election integrity and market manipulation. Washington Attorney General Bob Ferguson's complaint specifically challenges contracts on legislative outcomes, while California's order addresses insider information advantages.
"Public officials cannot profit from information asymmetries in prediction markets," said California Deputy Attorney General Maria Santos, who helped draft the executive order.
The timing coincides with federal pressure, as the CFTC continues litigation against Kalshi over congressional control contracts. Legal experts note states are leveraging existing gambling statutes rather than creating new prediction market regulations.
Volume Surge Amid Crackdown
Prediction markets paradoxically reached record activity levels during the regulatory offensive. TRM Labs reports geopolitical contracts now account for 60% of total volume, up from 35% in January. Middle East conflict markets and election betting drive most activity.
NYSE parent Intercontinental Exchange invested an additional $600 million in Polymarket this week, signaling institutional confidence despite regulatory headwinds. The investment values Polymarket at $3.2 billion, according to securities filings.
"Regulatory clarity will ultimately benefit the space," said ICE Digital Markets Head Jennifer Park, defending the investment timing.
Platform Response Strategy
Kalshi plans to contest Washington's suit while seeking federal preemption arguments. The company argues CFTC oversight supersedes state gambling laws for event contracts.
"We operate under federal derivatives regulations, not state gaming statutes," said Kalshi General Counsel David Kim in a statement to Fensory Intelligence.
Polymarket, operating offshore, faces less direct state pressure but monitors compliance issues for US users. The platform temporarily restricted certain political contracts pending legal review.
Risk Considerations: Prediction market operators face fragmented state regulations, potential federal restrictions, and resolution disputes that could impact trading access and platform viability.Data sources: TRM Labs, CFTC filings, California Governor's Office, Washington State Attorney General. Analysis as of March 28, 2026.