Kalshi Faces Its Latest State Challenge From a Familiar Crypto Foe as NY Files Suit

Kalshi is a New York-based prediction markets exchange that allows users to trade contracts based on whether certain events will occur, including sporting results, elections and economic data releases. The platform matches users taking opposing positions, with winning contracts typically settling at $1 and losing contracts at zero. 

According to New York Attorney General Letitia James, Kalshi meets the state's legal definition of gambling but has no licence from the state's gaming commission. The lawsuit seeks to stop the platform from operating in New York and recover fines, restitution and alleged illegal gains.

"No matter what they call themselves, prediction markets like Kalshi are gambling platforms, plain and simple," said James, whose office has previously pursued companies including KuCoin, CoinEx, Celsius, Gemini, Genesis, Bitfinex and Tether over alleged registration failures, fraud or investor-protection violations.

The issue has drawn increasing attention as prediction markets attract a broader range of financial and gaming companies. Robinhood, Coinbase, DraftKings and FanDuel are among the firms that have entered or expanded in the sector. Traditional exchange operators are also moving in, with CME Group, Nasdaq and the New York Stock Exchange announcing event-contract products, partnerships or acquisitions aimed at institutional investors.

Which authority - state or federal - regulates the red-hot sector is of vital importance to crypto exchanges that have been expanding into prediction markets to help compensate for weak trading volume brought on by the depressed state of the crypto market. Should prediction markets be controlled at the state level, revenue and profits would likely be hurt as companies would have to seek permission state-by-state, each with its own approval criteria, tax rates and regulations. For instance, Nevada's state online betting operator tax rate is 6.75% while New York's is 51%.      

Battle over jurisdiction

At the federal level, Kalshi is registered with the Commodity Futures Trading Commission (CFTC) as a designated contract market, allowing it to list federally regulated event contracts. 

The CFTC argues that these products are derivatives under its exclusive jurisdiction. However, several US states are challenging the definition, claiming that contracts tied to sports and other uncertain outcomes are wagers subject to local licences, taxes, age limits and gambling protections.

CFTC Chair Mike Selig criticized New York's action in a X post, calling it an attempt to unilaterally shut down federally regulated markets. "Rather than seek reasoned answers from the courts, Letitia James and New York seek to force an unprecedented sudden shutdown of prediction markets nationwide," Selig said. "The CFTC has already sued to stop this and will continue to defend its jurisdiction."

Courts split on Kalshi

Kalshi said annualized trading volume on its platform reached $178bn in April. The surge in activity, however, has coincided with legal challenges across several US states. 

A federal court decision in early July denied Kalshi's request to block New York from enforcing its gambling laws. The judge found that the Commodity Exchange Act did not necessarily displace state law for sports-related event contracts.

In Wisconsin, a federal court delivered a similar preliminary ruling on 29 Jul, rejecting the CFTC's request to block the state from enforcing its gambling laws against prediction markets platforms. Wisconsin sued Kalshi, Polymarket, Crypto.com, Robinhood and Coinbase, alleging that they offered illegal sports betting. The CFTC responded with its own lawsuit, arguing that the state was interfering with a federally regulated derivatives market.

The rulings have not been consistent. A Minnesota judge gave Kalshi a win by temporarily blocking a state law that would have criminalized operating or facilitating prediction markets, finding that the CFTC and the platforms were likely to prevail on their federal pre-emption argument. A court has also temporarily barred Arizona from pursuing criminal enforcement.

State challenges multiply

The CFTC has filed proceedings against Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island and Wisconsin. It has also intervened in disputes involving Michigan and filed briefs in Massachusetts and federal appeals courts.

Michigan created one of the clearest practical conflicts by ordering Kalshi to cancel existing trades involving state residents. The CFTC responded by directing the exchange to fulfill the contracts, arguing that state action could undermine the certainty of a national derivatives market.