A federal judge in Minnesota issued a preliminary injunction on July 27, 2026, blocking a state law that would have made operating a prediction market a felony. The ruling keeps Kalshi and Polymarket US operational in the state ahead of an August 1 enforcement deadline and adds momentum to a pattern of federal preemption lawsuits the CFTC has filed in at least six states.

U.S. District Judge Katherine Menendez found that the plaintiffs, including Kalshi, Polymarket US, the Commodity Futures Trading Commission (CFTC), and the U.S. Justice Department, were likely to succeed in proving that Minnesota's law conflicts with federal authority. The Justice Department's participation reflects the Trump administration's posture of aligning with crypto operators against state-level restrictions, a dynamic that places a Republican-led DOJ on the same side as platform operators and against a law signed by Democratic Governor Tim Walz. "Kalshi and Polymarket US are designated contract markets, so the CFTC has exclusive jurisdiction to regulate transactions involving those 'swaps,'" Menendez wrote in her ruling.

Minnesota's statute, SF 3432, was signed by Governor Walz on May 18, 2026. It classified operating or advertising a prediction market as a felony carrying up to five years in prison and a $10,000 fine, making it the harshest state-level restriction on prediction markets in the country. The law drew backing from Minnesota tribal nations, who viewed the platforms as direct competition for casino gambling revenue, and passed with bipartisan legislative support. The CFTC filed its own legal challenge on May 19, 2026, the day after Walz signed the bill, with Kalshi and Polymarket joining the case shortly after.

The central legal question is whether the federal Commodity Exchange Act (CEA) overrides state gambling laws when platforms operate as licensed federal exchanges. The plaintiffs advanced three distinct theories in support of that position: express preemption, field preemption, and conflict preemption. The CFTC holds that Congress granted it exclusive jurisdiction over swaps traded on registered exchanges, a position the judge found persuasive enough to justify preserving the status quo until a full trial. Menendez was careful to note that the injunction is not a final ruling, and that contracts on these platforms that fall outside the legal definition of a swap may still be subject to state oversight. "The Minnesota statute may not be preempted in all its applications," she wrote. "But the Court finds the state law is likely preempted in many respects."

Minnesota Attorney General Keith Ellison pushed back. "Prediction markets are gambling, plain and simple, and Minnesota has every right to keep predatory gambling out of our communities," he said. State Representative Emma Greenman (D-Minneapolis), who sponsored the legislation, framed it as a public health matter: "Gambling has always been a public health and a public safety issue since states have been regulating it."

The Minnesota ruling is one of several in a developing national legal split. Federal courts in New Jersey, Nevada, Tennessee, and now Minnesota have sided with operators, and the Third Circuit Court of Appeals affirmed a preliminary injunction against New Jersey in April 2026 in KalshiEX LLC v. Flaherty. Courts in Maryland, Massachusetts, and Ohio have sided with state regulators. The CFTC has filed similar preemption lawsuits in at least five other states including Arizona, Connecticut, Illinois, New York, and Nevada. A Norton Rose Fulbright legal analysis concludes that the contradictory outcomes across circuits make this a strong candidate for eventual U.S. Supreme Court review.

The stakes are substantial on-chain. Polymarket and Kalshi recorded a combined monthly trading volume of roughly $24 billion in April 2026. Polymarket's year-to-date volume through July 10, 2026 stood at $33.50 billion, and the platform had recorded approximately 1.2 billion trades across 1.3 million markets and $61 billion in nominal volume as of April 2026, according to data published in the Polymarket-v1 academic database. Sports contracts account for 23.8 percent of Polymarket volume, with politics and government at 12.4 percent, according to PredScope data from Q1 2026.

The outcome of this legal contest matters well beyond Minnesota. Polymarket has attracted users across sub-Saharan Africa, where crypto adoption rates are among the world's highest and regulators are watching the U.S. preemption argument closely. Kenya, which enacted virtual asset legislation during 2025 and 2026, and Nigeria, which recently rewrote its securities framework to bring digital assets under federal oversight, both face versions of the same "gambling versus financial instrument" definitional question at the heart of the U.S. case. In India, where a state-by-state gambling framework mirrors the fragmented U.S. landscape before CFTC intervention, users already access Polymarket through VPNs in a legal grey zone. A Supreme Court ruling affirming federal preemption in the U.S. would give operators in those markets a more developed legal argument when challenging blanket bans domestically, even where court systems differ substantially.

The injunction preserves access for Kalshi and Polymarket users in Minnesota while the case proceeds on the merits. The CFTC's June 2026 proposed rulemaking, which would clarify the regulatory treatment of event contracts covering sports, elections, and entertainment on designated contract markets through proposed amendments to Rule 40.11, is running in parallel and could reshape the legal terrain before any appellate court issues a definitive ruling. With a full merits trial still ahead and Supreme Court review a real possibility, today's ruling is a significant but provisional victory for the platforms.