Venture capital firm Andreessen Horowitz (a16z) has formally sided with the Commodity Futures Trading Commission (CFTC) in its dispute with state regulators over the legality of prediction markets, arguing in a May 2 letter that federal law preempts states from banning the platforms.
"Being forced to deny impartial access to users in states that seek to license or prohibit certain event contracts will likely severely circumscribe available liquidity," a16z wrote in its 18-page submission to the CFTC, directly supporting the agency's push for exclusive jurisdiction over platforms like Kalshi and Polymarket.
The letter comes as the CFTC pursues lawsuits against at least six states—including New York, Illinois, and Wisconsin—that have tried to shut down prediction markets, alleging they constitute illegal gambling. A16z contends that the Commodity Exchange Act (CEA) grants the CFTC sole authority to define and regulate these event contracts, a position recently bolstered by federal court rulings in favor of Kalshi on contracts related to political control and sports outcomes.
This jurisdictional clash is escalating as the platforms gain significant traction, with monthly trading volume reportedly hitting $25.7 billion in March. The outcome could determine whether platforms like Polymarket, which is currently in talks with the CFTC to resume full U.S. operations after a 2022 settlement, can access the world's largest economy or face a fragmented, state-by-state compliance battle.
Federal Authority vs. State Gambling Laws
The core of the conflict lies in whether prediction markets are financial instruments under federal oversight or gambling operations subject to state law. State attorneys general argue that contracts on sports and political outcomes are a form of unlicensed gambling.
However, a16z’s letter asserts that the CFTC has decades of experience overseeing event contracts and is the proper authority to define "gaming" within the context of federal commodities law. This view was recently upheld in the U.S. Court of Appeals for the D.C. Circuit, which ruled that trading on an event's outcome is not the same as "gaming" on the event itself. That ruling could nullify state arguments centered on sports gambling laws.
The CFTC has countersued states that have taken legal action, filing amicus briefs and seeking to "reaffirm its exclusive jurisdiction," according to agency statements. The conflict has created strange bedfellows, with the federal government, which previously sought to block some of Kalshi's political contracts, now defending the platform's right to operate against state interference.
Insider Trading Concerns and Market Growth
The regulatory debate is unfolding against a backdrop of rising concerns over potential market manipulation. The U.S. Senate recently voted unanimously to ban its members and staff from trading on prediction markets after several congressional candidates were caught betting on their own races on Kalshi.
In response, both Kalshi and Polymarket have voiced support for the ban and are implementing new compliance systems. Kalshi announced it was deploying "technological guardrails" to block politicians and athletes from trading in relevant markets, while Polymarket is using a new on-chain system from Chainalysis to monitor trading and enforce its rules.
Despite these issues, user engagement is growing. Over 80% of the reported $25.7 billion in March trading volume came from retail users trading less than $10,000, according to data from Token Terminal, showing a broad base of interest in the platforms.
This article is for informational purposes only and does not constitute investment advice.
