A16z Backs CFTC Against State Bans on Prediction Markets, Warns of Liquidity Fragmentation

A16z has thrown its weight behind the Commodity Futures Trading Commission in a widening federal-state fight over prediction markets, arguing that state-level restrictions risk fragmenting access and liquidity for ordinary users.

“The Coalition for Prediction Markets said the definition of swaps is “certainly broad enough” to include sports in its response to the Commodity Futures Trading Commission”

CDC Gaming

In an 18-page comment letter submitted to the CFTC, the venture capital firm said cease-and-desist orders and proposed bans from state regulators create barriers that conflict with federal rules governing fair market access.

CDC Gaming

“Being forced to deny impartial access to users in states that seek to license or prohibit certain event contracts will likely severely circumscribe available liquidity,” A16z wrote.

The dispute centers on whether event contracts fall under federal commodities law or state-level gambling regulations, with the CFTC maintaining that event contracts qualify as swaps within its exclusive jurisdiction.

Cointelegraph and MEXC Exchange both describe the same core clash: state attorneys general and regulators argue that platforms offering contracts on political events and sports outcomes operate as unlicensed gambling services, while A16z rejects that framing and says the CFTC should define what constitutes “gaming.”

The CFTC’s legal actions cited across the coverage include lawsuits against Illinois, Arizona, Connecticut, New York, and Wisconsin, with the CFTC arguing those jurisdictions overstep by attempting to regulate markets under federal jurisdiction.

The stakes are immediate for platforms and participants because the letter frames state enforcement—from “cease-and-desist letters to criminal charges”—as undermining the federal regulator’s mandate to provide impartial access to markets and services.

A16z’s argument is not only jurisdictional but also operational, focusing on how state rules could force exchanges to block users based on residency and thereby distort market functioning.

In the letter, the firm contends that requiring exchanges to block users based on state residency undermines the principle of impartial access, which it describes as a core component of federal market regulation.

Cointelegraph

FinanceFeeds and MEXC Exchange both tie that access principle to liquidity, using the same quoted language about “severely circumscrib[ing] available liquidity.”

The filings are positioned as part of the CFTC’s advance notice of proposed rulemaking on prediction markets, with MEXC Exchange describing A16z’s letter as filed on Thursday in response to the CFTC’s advance notice.

Menafn similarly frames the letter as opposing state-level actions that restrict access to prediction-market platforms and urges the CFTC to preserve impartial access to markets and services.

Across the coverage, A16z also argues that the CFTC—not state legislatures—should define what constitutes “gaming” under federal commodities law, citing the agency’s “decades of oversight over event contracts.”

The same logic appears in Cointelegraph’s account, which says A16z pushed back on state attorneys general’s characterization of prediction markets as unlicensed gambling operations.

The letter’s emphasis on federal uniformity is echoed by the way the dispute is described as a “core clash over jurisdiction, access, and the proper scope of regulatory authority for event- and outcome-related contracts.”

The regulatory fight is unfolding alongside rapid growth in trading activity, and A16z’s letter uses that momentum to argue that prediction markets function as market infrastructure rather than a niche gambling product.

“The Most Interesting Comments On CFTC's Prediction Market Rulemaking Roundup: Senate bans senators from prediction market trading; Kalshi will limit trading hours on crop contracts”

Event Horizon

FinanceFeeds says cumulative lifetime volumes on leading platforms such as Polymarket and Kalshi surpassing $150 billion, and it adds that monthly volumes have climbed as participation rises.

It also reports that more than 80% of participants trade less than $10,000, describing the distribution as showing accessibility while also highlighting sensitivity to regulatory constraints.

Cointelegraph and Menafn both cite March monthly trading volume of $25.7 billion, and Cointelegraph adds that more than 80% of users are classified as retail, defined as those trading less than $10,000.

The same coverage ties growth to retail demand and to the policy and compliance debates that accompany it, with FinanceFeeds saying platforms are seeking to expand their reach.

Polymarket’s situation is central to that expansion, with FinanceFeeds stating Polymarket is in discussions with the CFTC to regain access for US users after a prior settlement that required the company to block domestic participation.

Menafn and Cointelegraph both specify that Polymarket paid a $1.4 million penalty in a 2022 settlement and agreed to block U.S. customers over unregistered event contracts.

Menafn further says a successful return would require a formal vote by the commission, and it adds that the process could move more quickly if vacancies in four CFTC commissioner seats remain unfilled in the near term.

In this framing, the federal-state dispute becomes a question of whether growth continues within a unified regulatory framework or becomes fragmented across jurisdictions, with A16z arguing that state restrictions would undermine liquidity and price discovery.

While A16z argues for federal uniformity, other participants in the CFTC’s rulemaking process are pushing different priorities, including how to define “gaming” and how to protect sports integrity and consumers.

The Coalition for Prediction Markets said the definition of swaps is “certainly broad enough” to include sports in its response to the CFTC, and it said the CFTC’s public commentary period ends Thursday afternoon with more than 1,400 comments posted over the 45-day period.

FinanceFeeds

The coalition and its five members—Coinbase, Crypto.com, Kalshi, Robinhood and Underdog—also said any new definition of gaming should cover casino-style games traditionally regulated by states in its comments submitted Thursday.

Event Horizon’s roundup describes the deadline as Thursday and says there were more than 1,500 submissions, with the newsletter sent to 3,696 subscribers, framing the public comment process as crowded and repetitive.

The same roundup includes a letter from Dan Spillane, Executive Vice President and Assistant General Counsel, League Governance & Policy, stating: “There is no higher priority for the NBA than protecting the integrity of our games and preserving public confidence in our league and in our sport.”

It also quotes the NBA’s view that sports prediction markets should be subject to “robust and comprehensive regulations that are specifically designed to protect the integrity of sports leagues and their competitions.”

The NBA letter includes a minimum-age argument, saying sports event contract trading is currently available to individuals of 18 years of age or older, and it argues the Commission should “categorically prohibit trading of sports prediction contracts by individuals under 21.”

Quest Meeks, Senior Vice President & Head Counsel, Policy, Integrity & Compliance, is also quoted supporting “pre-self-certification communications” with relevant sports leagues and recommending information-sharing agreements with leagues themselves.

Outside the CFTC’s comment process, state politics and advocacy groups are shaping the pressure around prediction markets, with Texas emerging as a focal point in the reporting.

Houston Public Media says that in March, Lt. Gov. Dan Patrick directed state senators to explore ways to close “gambling loopholes” that allow online prediction markets to operate in Texas, raising concerns that state elections and sporting events could be manipulated for profit.

Menafn

The same report says the directive was the first time a state leader officially acknowledged the existence of rapidly growing prediction markets, and it describes the federal roadblock as the Trump administration insisting that oversight belongs to a U.S. agency, not the states.

It adds that the CFTC has taken steps to retain exclusive regulatory oversight, suing to block five states from taking legal action against predictive markets, including a lawsuit filed Tuesday against Wisconsin.

Kalshi’s corporate development head Sara Slane is quoted saying, “We are regulated at the federal level,” and she adds that Kalshi is “doing a lot of educating on the state level,” including in Texas.

Opponents of legalized gambling are quoted in the same report, with Russ Coleman, board chair for Texans Against Gambling, saying: “This is public health. It rewires the brain, it requires increasing amounts of dopamine, people will bet more and more and more.”

Coleman also warns about consequences, saying: “The number of suicides that will result, the number of families that will be broken up, the number of embezzlement cases — it will hit.”

Jonathan Covey, director of policy for Texas Values, argues that markets facilitating wagering on elections could cause additional harm, saying: “Elections, they’re not just economic activity, they’re core functions of our state sovereignty,” and adding that “We have Penal Code chapter 47 that says election betting is illegal, and prediction markets have been trying to sort of relabel that activity.”

The report also notes that Texas Attorney General Ken Paxton’s office did not respond to requests to join legal briefs, and it says the office declined to comment when asked to view internal communications, citing attorney-client privilege.