CFTC-Regulated Kalshi Sued Over State Gambling Preemption Claim

A nationwide class action lawsuit has been filed against prediction markets platform Kalshi in the U.S. District Court for the Southern District of New York (SDNY). 

The suit alleges that the company has been operating an illegal online sports betting platform across the country. The claim escalates the firm’s ongoing legal battles from regulatory disputes to private liability.

Event contracts deemed illegal

The plaintiffs contend that Kalshi’s business strategy, based on “event contracts” dependent on the results of athletic events, amounts to illicit and unlicensed sports betting. They claim the exchange “knowingly circumvents state gambling laws and consumer protections by repackaging wagering as federal financial regulation.” This class action seeks to represent users across the country who have interacted with the platform in relation to the sports contracts.

The case highlights the functional similarity between Kalshi’s event contracts and traditional sports wagers. It is an event contract that allows users to stake a “yes” or “no” bet on event outcomes like licensed sports betting products, including moneylines, point spreads, and over/under bets. The complaint alleges that Kalshi skirted critical consumer safeguards mandated throughout regulated jurisdictions by failing to obtain required state sports betting licenses for its offerings.

Alleged state law violations

Specific allegations raised in related state actions, which often form the basis for such class actions, include the failure to adhere to minimum age restrictions—such as allowing 18-year-olds to wager where the legal age is 21—and the inadequate provision of responsible gaming tools, such as compliant deposit and wager limits. 

Plaintiffs seek money recovery 

The plaintiffs aim to recover the money that customers who took part in what they claim was an unlawful gambling activity nationwide lost. Kalshi, regulated by the Commodity Futures Trading Commission (CFTC) as a Designated Contract Market (DCM), has consistently argued that its event contracts are financial derivatives subject exclusively to federal oversight, claiming this federal authority “preempts” state gambling laws.

The prediction market firm has already filed lawsuits against multiple state regulatory bodies, including the New York State Gaming Commission, after receiving cease-and-desist orders. Kalshi’s complaints frequently argue that “New York’s attempt to regulate Kalshi intrudes upon the federal regulatory framework that Congress established for regulating derivatives on designated exchanges.”

Changing legal landscape

In previous rulings, federal courts in New Jersey and Nevada granted Kalshi preliminary injunctions, siding with the company’s argument that “because Kalshi is a CFTC-designated DCM, it is subject to the CFTC’s exclusive jurisdiction and state law is field preempted.”

However, the legal landscape is shifting. A federal court in Maryland previously denied Kalshi’s request for an injunction, and more recently, a judge in Nevada lifted a preliminary injunction, signaling growing judicial skepticism toward the broad application of Kalshi’s federal preemption defense against state gaming statutes.

Furthermore, the Massachusetts Attorney General has filed a separate lawsuit explicitly targeting Kalshi’s operations for alleged unlawful sports wagering.

Kalshi’s stakes are increased by the filing of a nationwide class action. A class action exposes the business to potentially enormous financial damages based on user losses and disgorgement of profits deemed to be from illegal operations, whereas regulatory disputes usually involve administrative fines or injunctive relief. 

Pressure on CFTC jurisdiction 

The outcome of this case may set a pivotal ruling that demarcates the legal boundary between a federally regulated financial derivative and state-regulated sports gambling. Additionally, it puts pressure on the CFTC to make clear what falls under its purview when it comes to contracts pertaining to sports. These sports contracts have driven a significant percentage of the platform’s overall trading volume, reportedly as high as 75% in 2025, meaning their legality is crucial to the financial viability and future growth prospects of the company.

The nationwide class action against Kalshi could be a turning point in the regulatory status of prediction markets in the United States. The battle lines pit the financial technology industry’s assertion of federal authority and market innovation against states’ long-established power to regulate gambling and protect consumers. As the SDNY court considers the class action, the fundamental question remains unresolved: whether Kalshi’s sports-related event contracts are legitimate, federally regulated financial instruments or simply illegal, unlicensed sports wagers.

Also Read: Coinbase Taps Kalshi to Build Regulated Prediction Market

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