Judge blocks Minnesota’s felony ban on Kalshi, Polymarket days before it takes effect

A federal judge blocked Minnesota from enforcing the nation’s first felony ban on prediction markets, handing Kalshi and Polymarket a reprieve just days before the law was set to take effect August 1.

U.S. District Judge Katherine Menendez granted a preliminary injunction on July 27, preventing Minnesota from enforcing SF 3432 while litigation over the law moves forward. The statute had been scheduled to take effect August 1 and would have imposed felony penalties tied to prediction-market activity.

Menendez found that the Commodity Futures Trading Commission (CFTC), Kalshi and Polymarket were likely to prevail on their argument that federal law preempts Minnesota’s restrictions in at least some circumstances. She also determined that the platforms could face irreparable harm if the law were allowed to take effect before the court resolved the underlying dispute.

The ruling does not permanently invalidate the legislation. Instead, it preserves the existing situation while the court considers the merits of the case.

For Kalshi and Polymarket, however, the decision represents a significant short-term victory in an increasingly important regulatory fight.

The legal battle comes down to “swaps”

At the heart of the prediction market ban dispute is a deceptively technical question: which event contracts qualify as “swaps” under the federal Commodity Exchange Act?

Menendez concluded that several contracts offered through the platforms could meet that definition because the underlying events have clear economic, financial or commercial implications. The judge pointed to contracts involving Senate elections, the winner of the World Cup and the reopening of the Strait of Hormuz as examples.

That distinction matters because the CFTC has federal authority over derivatives markets, including qualifying swaps. Kalshi operates as a CFTC-regulated designated contract market, while Polymarket has also been central to the federal challenge against Minnesota’s law.

But Menendez stopped short of accepting the platforms’ position across the board.

The judge noted that not every contract listed on a prediction market necessarily qualifies as a swap. Contracts concerning entertainment or fleeting statements during sporting events, for example, may not satisfy the federal definition.

That caveat could become crucial later.

Menendez wrote that the statute “may not be preempted in all its applications,” meaning the court could ultimately impose a much narrower remedy after examining the full record. She nevertheless concluded that preserving the status quo was appropriate given the law’s approaching effective date and the unusual legal circumstances surrounding the case.

Minnesota calls prediction markets gambling

Minnesota Attorney General Keith Ellison has rejected the argument that the platforms should be treated primarily as financial exchanges.

Following the ruling, Ellison said the state “respectfully disagree[s]” with the court’s approach and argued that the decision effectively permits what he characterized as predatory gambling applications to operate in Minnesota. He acknowledged that the legal issues are complex but vowed to continue defending the state law.

The state’s position highlights the central policy dispute surrounding the prediction market ban.

Minnesota and other states increasingly view markets covering sports, elections and other real-world events as functionally similar to gambling. The platforms, meanwhile, argue that event contracts are financial instruments that allow users to trade positions on outcomes rather than simply place conventional wagers.

That disagreement has already triggered litigation across the country.

The CFTC has challenged restrictions in several states, including Illinois, Arizona, Connecticut, Wisconsin and Minnesota, as regulators and lawmakers wrestle with where federal derivatives jurisdiction ends and state gambling authority begins.

CFTC Chairman Michael S. Selig previously described Minnesota’s legislation as an attempt to turn lawful market operators and participants into felons. He also argued that farmers rely on weather and crop-related hedging products to manage financial risks.

Temporary win, bigger battle ahead

The latest ruling gives the platforms breathing room, but the prediction market ban fight is far from over.

Kalshi has said it has more than 90,000 users in Minnesota and millions of dollars in open contracts, underscoring the commercial stakes involved in the case. A Kalshi spokesperson, Elisabeth Diana, said the ruling reinforces the company’s argument that states cannot prohibit activities outside their jurisdiction.

The timing of the injunction was also significant. The CFTC had warned the court that, without a ruling or stay by the relevant deadline, it would pursue emergency relief from the Eighth Circuit. Kalshi and Polymarket indicated they were prepared to seek similar appellate intervention. The judge’s Monday decision avoided that immediate escalation.

Still, the court’s warning about contracts that may fall outside the federal definition of swaps leaves a potentially important opening for Minnesota.

That means the prediction market ban could return in a narrower form if the court eventually determines that certain contracts are not protected by federal preemption. The final outcome could therefore establish a blueprint for how states can regulate prediction markets without conflicting with federal derivatives law.

For the rapidly expanding prediction-market industry, the stakes extend well beyond Minnesota.

A permanent ruling could clarify whether states can treat event contracts as gambling, whether federal derivatives authority takes priority, and how far platforms such as Kalshi and Polymarket can expand across the United States.

For now, the prediction market ban remains frozen. But the underlying jurisdictional fight, and the question of whether prediction markets belong in the financial markets or gambling regulatory framework, is only getting bigger.