The Federal Shield Just Cracked 🎯

Welcome to Advance Genie, the newsletter that helps operators in high-friction industries find smarter paths to capital.

A few weeks ago, CFTC Chairman Michael Selig told state attorneys general he'd see them in court. 

He filed federal briefs defending prediction markets as derivatives, not gambling. He assembled a 35-member advisory committee. 

The message was clear: these markets are federally regulated, and states have no jurisdiction.

Then the industry handed its opponents exactly what they needed.

$529 million wagered on Polymarket contracts tied to the Iran strikes on February 28.  

On Kalshi, contracts tied to whether Iran's Supreme Leader would be "out" drew more than $54 million in volume.

Then the contract design failed.

Within six days, three bills were introduced in Congress to restrict or ban the markets entirely. A Nevada judge remanded cases back to state court. And a former Trump chief of staff launched a coalition to reclassify the entire industry as gambling.

The federal shield that prediction markets depend on just took its worst hit.

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What Happened on the Platforms

When reports emerged that Ayatollah Ali Khamenei had been killed in U.S.-Israeli strikes, traders who bet "yes" on Kalshi's Khamenei-ouster market expected a payout.

It never came.

Kalshi invoked a "death carveout" buried in the contract's formal terms and settled positions at the last traded price before death was confirmed. 

A trader expecting a full payout received pennies on the dollar. 

CEO Tarek Mansour said the carveout was published in the market rules from the outset and that the company reimbursed all fees and net losses so no trader ended net-negative.

Traders disagreed. On March 6, a class action was filed in U.S. District Court for the Central District of California. 

Plaintiffs allege the carveout was not incorporated into the user-facing rules summary and was not displayed in a way that would notify a reasonable consumer. 

The lawsuit seeks damages equal to full payouts on the $54 million in total market volume.

On March 2, Kalshi filed a "Draft Death Caveat Rulebook Amendment" with the CFTC, formalizing how the exchange handles markets when the primary subject dies. The new rule takes effect March 17.

Under U.S. commodity law, contracts on death and war are prohibited. The platforms argued their contracts were about "leadership change," not death specifically.

That distinction did not survive contact with $529 million in war bets.

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Three Bills in Six Days

The backlash moved from statements to statute faster than any previous regulatory response to a frontier industry.

March 5: Senators Jeff Merkley and Amy Klobuchar introduced the End Prediction Market Corruption Act, banning the president, vice president, and members of Congress from trading event contracts. Fines start at $10,000 per violation with mandatory profit clawbacks.

March 6: Representatives Blake Moore (R-UT) and Salud Carbajal (D-CA) introduced the Event Contract Enforcement Act. Bipartisan and far broader. 

It would strengthen CFTC authority to prohibit contracts tied to terrorism, assassination, war, gaming, election outcomes, and government activity. It would also allow states to opt out of the gaming prohibition independently. That scope goes well beyond "ban death bets." It targets the permissive federal event-contract model itself.

March 10: Senator Adam Schiff and Representative Mike Levin introduced the DEATH BETS Act. This one removes CFTC discretion entirely and writes the prohibition into statute. A future CFTC chair cannot reverse it.

Three bills. Six days. Both parties.

That velocity matters. CFTC Chairman Selig has been moving in the opposite direction. In February, his agency withdrew a 2024 proposal that would have broadly banned political prediction markets. In January, he directed staff to draft new rules establishing "clear standards for event contracts." Schiff's bill is explicitly designed to constrain what those rules can permit.

Mick Mulvaney, former Trump White House chief of staff, launched "Gambling Is Not Investing" the same week to campaign for state gambling regulation of prediction markets. His argument: the CFTC is "set up to regulate markets" but "is not set up to protect consumers."

Then the national security framing. If someone trades prediction markets on classified intelligence, Mulvaney warned, adversaries can extract information from the market activity itself.

Critics are arguing these markets are a national security threat - that alone gives legislators two independent reasons to act.

The Legal Ground Shifts

While Congress drafted bills, Nevada converted its legal wins into operational enforcement.

On March 2, the judge remanded enforcement cases against both Kalshi and Polymarket back to state court. 

The ruling rejected the core argument that federal commodities law automatically preempts state gambling regulation.

Nevada immediately sought a temporary restraining order to halt Kalshi's operations in the state. Polymarket has already been geofenced in Nevada since a January TRO. 

Both platforms filed emergency appeals.

Legal analyst Daniel Wallach warned of a cascading effect: once Kalshi has to geofence one state, it becomes harder to argue in other jurisdictions that implementing geolocation technology would impose "irreparable harm." 

States may begin pursuing this strategy with greater frequency.

The results across states are mixed. A federal judge in Tennessee sided with Kalshi in February. Massachusetts granted an injunction but an appeals court stayed it. On March 10, a Michigan judge denied Polymarket's TRO against state enforcement. 

The legal patchwork is growing, not resolving. Nearly 50 active legal cases are working through courts nationwide.

The CFTC is fighting back. 

The CFTC filed an amicus brief in the Ninth Circuit asserting that states "cannot invade the CFTC's exclusive jurisdiction."

But the CFTC is now fighting on three fronts simultaneously:

• Against states enforcing gambling laws.

• Against Congress writing prohibitions into statute.

• And against the platforms' own credibility problems.

At the FIA Global Cleared Markets Conference, they reiterated the agency will issue formal guidance on event contracts and "continue to assess litigation strategies to make sure the agency's voice is heard."

The Pattern

This is the same cycle from our January issue, accelerated.

Stage 1: Prove the model. Prediction markets processed $63.5 billion in total volume in 2025, up roughly fourfold from the prior year. Kalshi took $1 billion in action during the Super Bowl alone. Combined monthly volume hit $17.9 billion in February. DraftKings, FanDuel, and Coinbase all entered the space.

Stage 2: Governments extract and restrict. Three bills in six days. State enforcement multiplying. Tax structures already in place in Chicago, Illinois, and Maryland.

Stage 3: The infrastructure question. Will banking access follow the CFTC's federal framework, or will state enforcement fragment the market into the same patchwork that cannabis operators know intimately?

On March 10, Nasdaq CEO Adena Friedman called for consistent regulation at the same conference where Selig spoke. NYSE-parent Intercontinental Exchange invested up to $2 billion in Polymarket. Nasdaq filed with the SEC to launch binary options on the Nasdaq 100. Institutional capital is entering. But so is institutional opposition.

For operators across frontier industries, the prediction market fight matters because it's a live test of the principle that governs your access to banking, payments, and capital. Federal classification determines access. When that classification is contested, everything downstream becomes uncertain.

The CFTC is still fighting. But the industry gave its opponents the strongest ammunition imaginable. 

And those opponents are no longer writing tweets. They're writing bills.