Minnesota became the first US state to ban prediction markets – and quickly faced a federal lawsuit.

Minnesota Governor Tim Walz signed the legislation on Monday, making it a crime to create, operate, or advertise a prediction market that allows users to place bets on future events, as part of a public safety bill.

The operators or creators of prediction markets could be charged with a felony, potentially facing up to five years in prison and a $10,000 fine. However, those who place bets on such sites would not be arrested or prosecuted.

“We are really concerned about the self-dealing,” said State Representative Emma Greenman, as reported by the New York Times. “To me this is a clear place that the State of Minnesota should be acting on behalf of our citizens.”

While at least 14 other states have introduced regulatory legislation, Minnesota is believed to be the first state to make it a law, which is supposed to take effect starting August 1st.

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Just hours after the bill was signed, the Commodity Futures Trading Commission (CFTC) filed a federal lawsuit to block the law. The CFTC argued that Congress – not individual states – oversees prediction markets because they are classified as federally regulated derivatives.

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“Minnesota banning prediction markets is like trying to ban the New York Stock Exchange,” Jack Such, a spokesman for the prediction market platform Kalshi, explained. “States can’t ban federally regulated exchanges.”

The commission called the law “the most aggressive move by a state” to “undermine the federal regulatory regime set up by Congress more than 50 years ago.”

Following the ban, CFTC Chairman Michael Selig accused Minnesota of attempting to criminalize legal financial trading activity, as he said the law turned “lawful operators and participants in prediction markets into felons overnight.”

Keith Ellison, the attorney general of Minnesota, told the New York Times that his office was currently reviewing the lawsuit and preparing to respond in court.

Earlier in April, investment firm Bernstein estimated that prediction markets would grow to roughly $1 trillion by 2036, with ongoing state-level legal challenges unlikely to deter long-term growth.