On Friday, sports prediction company Novig sued the Wisconsin attorney general in a dispute over whether sports prediction markets fall under federal rules regulating financial derivatives or state gambling laws.
Prediction markets have evolved into a rapidly growing trading platform. Data from Artemis across 12 platforms shows that trading volume on prediction markets reached $9.50 billion on August 16, which is 67 times the $139.8 million a year earlier.
Cryptocurrency trading volume on the Kalshi and Polymarket platforms amounted to $1.46 billion, or 15.4% of the market. The outcome of the case could impact how easily prediction markets can operate across state lines and integrate with cryptocurrency infrastructure.
Lawsuit Filed Before State Can Sue
Ludlow Exchange LLC, the operator of Novig, filed a 45-page lawsuit against Attorney General Josh Kaul and State Gambling Official John Dillett in the U.S. District Court for the Western District of Wisconsin. The lawsuit claims that Novig began offering event contracts to Wisconsin residents a few weeks ago and is seeking a declaratory judgment.
Novig argues that a preemptive lawsuit is necessary because Wisconsin has already sued other prediction market operators over similar issues.
In April, Wisconsin launched its campaign by filing lawsuits against Kalshi, Polymarket, Robinhood, Crypto.com, and Coinbase regarding sports-related contracts, arguing that these contracts violate state commercial gambling laws and pose a public hazard.
Swaps Under Federal Law or Bets Under State Law
The main issue here is jurisdiction. According to Novig, its sports contracts qualify as swaps, which are regulated by the Commodity Exchange Act (CEA) and therefore fall under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC). Meanwhile, on June 16, Ludlow Exchange was approved to operate as a designated contract market by the CFTC.
However, despite federal legislation, Wisconsin asserts that sports betting is considered gambling under its laws.
The question of federal preemption is based on provisions of the CEA. Specifically, CEA §2(a)(1)(A) grants the CFTC exclusive jurisdiction over futures and swaps traded on designated markets. CEA §1a(47) provides a broad definition of "swap," while CEA §16(e) addresses federal preemption concerning state-imposed requirements.
Courts have applied different approaches. The Third Circuit Court in the April case KalshiEX LLC v. Flaherty ruled that the Commodity Exchange Act (CEA) preempts New Jersey's gambling laws regarding Kalshi's sports contracts, as they were deemed swaps traded on a market regulated by the CFTC.
In North American Derivatives Exchange v. State, the court preliminarily determined that sports contracts from Crypto.com were not swaps subject to CFTC jurisdiction.
This distinction matters: a federal designation does not exempt a prediction market from state laws. The operator must prove that its contracts comply with the Commodity Exchange Act and that state regulations do not apply.
Novig has faced adverse developments in Wisconsin. The Commodity Futures Trading Commission (CFTC) filed a request for a preliminary injunction against Wisconsin officials, which was denied by a federal judge. According to the judge, the CFTC did not present sufficient evidence to meet the court's requirements under the so-called federal preemption doctrine. The case is still pending.
Why This Sector Operates on Cryptocurrency
This dispute is significant for cryptocurrency investors, as prediction markets are increasingly intertwined with stablecoins, crypto infrastructure, and in-network trading. Cryptocurrency trading volume on leading prediction markets, Kalshi and Polymarket, reached $1.46 billion, or 15.4% of the market's total trading volume.
According to Galaxy Research, the cumulative volume of prediction markets has exceeded $150 billion, and Macquarie Equity Research claims that transaction volume will reach $1.5 trillion by 2030.
Novig is attempting to distinguish its business model from others that have drawn regulatory attention. The platform specializes in sports contracts rather than political prediction markets and requires its users to be at least 21 years old.
Nationwide Legal Campaign and Mets Deal
Wisconsin became the fifth state where Novig filed a lawsuit since August 4, following cases in New York, New Mexico, Massachusetts, and Washington. The nature of these lawsuits suggests that Novig has a strategy for seeking federal protection as it grows.
The company also had a license for sports betting in Colorado before transitioning to a federally regulated exchange-based betting model.
Alongside its legal campaign, Novig entered into a marketing agreement with the New York Mets, becoming the first Major League Baseball (MLB) team to offer a prediction platform. Through this deal, Novig will be able to place its brand at Citi Field and in various Mets game broadcasts, while also gaining access to official MLB data.
The merger places Novig at the intersection of derivatives regulation and state gambling laws. Moreover, in the cryptocurrency market, this decision could influence whether prediction markets are permitted to operate as national financial products or remain subject to state restrictions.
