Emma Greenman, a state representative in Minnesota, first became concerned about prediction markets early this year.
Teachers had complained to Ms. Greenman that underage users were downloading apps like Kalshi and Polymarket. She said she had grown worried that the platforms were becoming a back door to sports betting, which the state had never legalized.
“This wasn’t a problem we had, frankly, before 2025,” said Ms. Greenman, 47, a Democrat who also works as a voting-rights lawyer. “We see it as both a public safety and public health issue.”
So this spring, she worked with colleagues to introduce and pass a bipartisan bill to ban prediction markets, making Minnesota the first state to do so. A federal regulator and the companies immediately sued — and a federal judged paused the law’s enforcement, for now.
The legal battle has put Minnesota on the front lines of an escalating fight between states and the federal government over who regulates prediction markets. The closely watched case is expected to help set a precedent on whether states can pass laws banning the prediction markets — or whether federal regulators have the ability to pre-empt them.
“This is a test case of how much authority does the state have to step in,” said Richard Painter, a professor of securities law and legal ethics at the University of Minnesota Law School.
Kalshi, Polymarket and others have exploded in popularity over the last year, becoming part of the zeitgeist by allowing users to wager on everything from the timing of the Federal Reserve’s next rate increase to who will win the Super Bowl.
But the platforms have caused growing alarm among states, about 20 of which have tried to enforce existing laws on sports betting and gambling — or, in Minnesota’s case, pass a new one.
The companies and the Commodity Futures Trading Commission, the U.S. agency that oversees prediction markets, have fought back fiercely. With the backing of President Trump, they have filed lawsuits arguing that the companies are regulated only at the federal level.
The states have won some victories in recent weeks, with Washington and Nevada temporarily halting Kalshi, the largest platform in the United States, from operating in their states. And a federal appeals court ruled late last month that states had the ability to regulate prediction markets.
In an August statement, Michael S. Selig, the chairman of the Commodity Futures Trading Commission, said Congress did not intend for prediction markets “to be regulated under a patchwork of state gaming laws.”
“These are financial exchanges that offer financial instruments and operate across state lines,” he added.
Rick Heaslip, Kalshi’s general counsel, said Minnesota lawmakers had rushed “to pass an unprecedented ban of a product they didn’t understand.”
Minnesota allows some casinos and the lottery. But state legislative efforts to introduce the possibility of legalizing sports betting have hit roadblocks for at least a decade.
So many lawmakers, including Ms. Greenman, took notice as Kalshi and Polymarket surged in popularity.
In mid-March, she and others introduced bipartisan companion bills to outlaw betting on things like sports outcomes, the Oscars, assassinations and trial verdicts. A few categories, like weather, were eventually carved out because of their potential to act as legitimate financial tools for farmers looking to hedge their risk.
“What we really focused in on are things that look and act like gambling,” said State Senator Jordan Rasmusson, a Republican co-author of the companion legislation in the Senate.
As they pushed to pass the bills, Ms. Greenman and Mr. Rasmusson said, they and others became increasingly concerned. Kalshi fined and suspended three political candidates, including one from Minnesota, in April for betting on their own congressional races.
“There’s broad consensus here that whether Minnesota does or does not expand sports betting — how we do it, if we did it — should be our decision,” Ms. Greenman said in a committee meeting that month.
At the end of April, she helped attach the legislation to an omnibus public safety bill. That passed in May, and Gov. Tim Walz, a Democrat, signed it into law.
Many in Minnesota are supportive of the pushback.
Devon Bowker, a high school science teacher in St. Cloud, said he was alarmed at how openly his students discussed how they bet. It has become a way to connect and socialize, he said.
He tried to remind his students that betting affects their brains, creating dopamine hits faster than they can assess the risk.
“Do you want to be in control of your own destiny or leave it to chance on the app?” Mr. Bowker, 34, asked his students.
Taylor Jensen, a software engineer who lives in Lakeville, said he considered the prediction markets “very speculative investing” with high risk and high volatility. They are also fairer and less predatory than traditional gambling, he contended.
Mr. Jensen, 35, said he had first downloaded Kalshi in January while ice fishing with friends. They bet on a Chicago Bears football game, he added, but he decided to create a program to place bets on the weather. As of September, he was up just shy of $9,000 in earnings, he said.
His wagering could continue under the new law, thanks to the weather carve-out. But he’s not a farmer hedging risks.
Weather is “just another goofy thing to trade,” Mr. Jensen said.
One day after Governor Walz signed the law, the Commodity Futures Trading Commission filed a federal lawsuit, which Kalshi and Polymarket soon joined. “Minnesota has no authority to regulate — much less criminalize — event contracts listed on C.F.T.C.-regulated markets,” lawyers said in the filing.
Keith Ellison, the state’s attorney general, was quick to counter.
“Minnesota banned prediction markets because of how predatory, addictive and harmful they can be,” Mr. Ellison said in a statement at the time. The platforms facilitate “gambling, plain and simple.”
At the first hearing on July 2 in U.S. District Court in Minneapolis, Judge Kate M. Menendez heard arguments on whether she should issue an injunction.
“Who is going to take the ‘educating the middle-aged judge’ set of questions?” Judge Menendez, 55, asked at the start.
Federal regulation pre-empts any state laws, argued a lawyer for the Commodity Futures Trading Commission, Henry Dickman. “We see this as a direct invasion of our jurisdiction,” he said.
A lawyer for the state, Lindsey Middlecamp, countered that Kalshi and Polymarket were not “wrapped in federal immunity” as they claimed to be. She questioned the legitimacy of including wagers about Taylor Swift’s wedding choices under the commission’s federal mandate to regulate financial tools.
Judge Menendez halted the law’s enforcement until the conclusion of the court battle, which could take months. Still, she conceded that trading on the winner of the reality-TV show “Love Island,” for example, would be hard to classify as a federally regulated financial tool.
“One is hard-pressed to imagine the financial, economic or commercial consequence of the occurrence or outcome of these events,” the judge wrote.
Mr. Ellison, the state’s attorney general, said in a statement at the time that he acknowledged the complexity of the case. “We look forward to continuing to litigate this case and defend the state’s duly passed law,” he added. A pretrial conference is set for October.
Representative Greenman said she was hopeful the state would still prevail, in part because the bill was drafted carefully with a legal challenge in mind.
“I feel confident in the arguments we’re making,” she added.
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