Kalshi Takes Legal Action Against New York to Safeguard Sports Prediction Markets

Kalshi Sues New York to 'Protect' Sports Prediction Markets

Summary:
Kalshi, a federally regulated derivatives exchange, has filed a lawsuit in New York against the state’s attempt to shut down its sports prediction markets. The litigation, initiated in response to state regulators’ enforcement actions, underscores the conflict between federal authority over derivatives trading and state gambling regulations.

Key Takeaways:

Kalshi has filed a lawsuit against New York to counter state efforts to stop its sports prediction markets.
The New York State Gaming Commission alleges that Kalshi's contracts violate state gambling laws.
Kalshi argues that it has federal authorization to operate and that state interference is unlawful.
The case may have broader implications for prediction markets and cryptocurrency regulations across the United States.

Kalshi Sues New York to 'Protect' Sports Prediction Markets

Legal Challenge Over Sports Contracts

Kalshi, a derivatives exchange regulated at the federal level, has launched a lawsuit in the U.S. District Court for the Southern District of New York. This legal action targets the New York State Gaming Commission’s efforts to shut down its sports prediction markets, claiming that such actions infringe on federal authority regarding derivatives trading.

The case, known as KalshiEX LLC v. Robert Williams, aims to halt civil penalties and fines the Gaming Commission has threatened against the exchange. These penalties arise from Kalshi’s offerings of event contracts that let users predict sports outcomes.

The Background of the Dispute

The legal confrontation arose after the New York regulators issued a cease-and-desist letter on October 24, 2025, asserting that Kalshi’s sports-related contracts contravened state gambling laws and ordered an immediate cessation of operations within New York.

Kalshi contends that the authority to regulate derivatives trading has been explicitly granted to the Commodity Futures Trading Commission (CFTC) by Congress. This makes any state interference both field-preempted and conflict-preempted under the Supremacy Clause of the U.S. Constitution.

Federal Authority Versus State Regulations on Gambling

Central to Kalshi's argument is its classification as a CFTC-designated contract market, a designation that the commission unanimously awarded in 2020 after confirming that Kalshi had met strict regulatory standards.

On January 22, 2025, Kalshi self-certified its initial sports contracts according to federal law, allowing predictions on events like NCAA tournament outcomes and the U.S. Open Golf Championship winner.

Operating under the Commodity Exchange Act, Kalshi aims to prevent a fragmented approach to state regulation and maintain a cohesive national marketplace for derivatives trading.

In contrast, regulators in New York assert that Kalshi's contracts are classified as sports wagering under state law, thus necessitating a sports gaming license to operate legally within New York.

The state has threatened both criminal prosecution and civil fines unless Kalshi halts what they deem illegal gambling practices accessible to New York residents.

Threats to the Future of Prediction Markets

The lawsuit has raised concerns beyond Kalshi’s business operations; it could shape how prediction markets function across state lines, especially as different states adopt diverse regulatory stances.

Kalshi's legal struggles reflect a wider trend, as seen with Robinhood, which recently filed lawsuits in New Jersey and Nevada citing similar regulatory conflicts after those states disregarded federal court opinions that supported Kalshi, warning the brokerage that offering event contracts would breach state laws.

These event contracts work as derivatives, allowing a range of stakeholders—like sponsors and sportsbooks—to hedge against significant sports outcomes, with their prices influenced by market perceptions of event probabilities.

Kalshi argues that preventing access to these federally sanctioned instruments not only causes economic and reputational issues but also generates uncertainty for users and business partners.

If Kalshi is compelled to navigate state-specific restrictions, it may face scrutiny from the CFTC for failing to uphold the requirement that designated contract markets operate nationally without barriers for participants.

They pointed out that devising technological solutions to selectively block certain state residents while maintaining platform integrity would involve complex and untested systems, which could jeopardize Kalshi’s standing with regulators.

Evolving Regulatory Landscape in New York

New York's assertive approach to prediction markets mirrors broader state efforts to impose regulations on new financial technologies, including cryptocurrency, which currently lack comprehensive federal oversight.

In August, Assembly Member Phil Steck proposed a new law imposing a 0.2% excise tax on all digital asset transactions, with funds designated for substance abuse prevention programs in upstate schools.

This proposed tax, set to take effect on September 1, 2025, would place compliance burdens on anyone involved in cryptocurrency transactions, presenting challenges for exchanges, traders, and decentralized finance initiatives.

Assembly Bill A08966 broadly defines digital assets as anything issued or transferred through blockchain or distributed ledger technology, covering currencies, coins, and non-fungible tokens (NFTs).

Different global jurisdictions have adopted varying strategies regarding crypto taxation and regulations, ranging from the United Arab Emirates’ evolving tax reporting framework to Hong Kong’s comprehensive licensing regime aimed at fostering the growth of crypto businesses.