Prediction market platform Kalshi filed a federal lawsuit Monday against the New York State Gaming Commission, dramatically escalating a nationwide legal battle over whether state gambling laws can regulate federally approved derivatives contracts tied to sports outcomes. The Manhattan-based company filed the complaint in the U.S. District Court for the Southern District of New York just days after receiving a cease-and-desist letter from state regulators on October 24, making New York the eighth state to challenge Kalshi's sports event contracts since the platform expanded into sports markets earlier this year.
The Core Legal Dispute
At the heart of the conflict lies a fundamental question about regulatory authority: Can states enforce gambling laws against a company that operates as a federally designated contract market under Commodity Futures Trading Commission oversight?
Kalshi, which received CFTC designation as a designated contract market in 2020, argues it has the exclusive federal right to list and clear derivatives tied to real-world events, including sports outcomes. The company self-certified its first sports contracts with the CFTC on January 22, 2025, launching markets on NCAA tournaments, NFL games, and other major sporting events.
"The text, purposes, and statutory history of the CEA leave no question that Congress sought to preempt state regulation of derivatives on exchanges overseen by the CFTC," Kalshi stated in its complaint filed Monday, represented by law firm Milbank LLP.
The company argues that allowing states to apply their own rules would "create a fragmented system Congress sought to avoid" when it granted the CFTC exclusive jurisdiction over derivatives trading through the Commodity Exchange Act.
New York's Position and Market Stakes
The New York State Gaming Commission views the matter differently. In its cease-and-desist letter, regulators asserted that Kalshi is offering sports wagering without the required state license, violating state Penal Law and Racing Law. The commission warned it "reserves all rights to investigate further and to levy and collect civil penalties and fines" for Kalshi's activities.
The stakes are particularly high in New York, America's largest regulated online sports betting market. Licensed operators in the Empire State generated a $2.29 billion handle in September alone, making it a crucial market for any sports-related platform.
New York's cease-and-desist order identified 20 specific event contracts that regulators deemed unlawful, demanding Kalshi "cease and desist immediately from illegally operating, advertising, promoting, administering, managing, or otherwise making available sports wagering and/or a mobile sports wagering platform in New York State."
The Rock and a Hard Place Dilemma
Kalshi argues it faces an impossible choice that could threaten its very existence. If the company complies with New York's order, it risks violating CFTC requirements that designated contract markets operate as truly national exchanges with impartial access for all participants. If it doesn't comply, it faces potential civil and criminal penalties from New York.
"If it doesn't comply, it will face civil and criminal liability, and if it does comply it will incur substantial economic and reputational harm as well as the potential existential threat of the CFTC taking action against it for violating the CFTC's Core Principles," the company stated in its filing.
The platform is seeking emergency relief, including a preliminary and permanent injunction to block New York from enforcing its gambling laws against the platform, along with a declaratory judgment that state law cannot regulate its federally approved operations.
A Growing Patchwork of State Actions
New York's enforcement action represents the latest front in an expanding multistate legal battle. Since launching sports contracts in January, Kalshi has received cease-and-desist orders from Arizona, Illinois, Montana, Ohio, and other states, with active litigation now pending in Nevada, New Jersey, Maryland, and Ohio.
The company's track record in court has been mixed but initially promising. In April, a Nevada federal judge granted Kalshi a preliminary injunction, finding the platform had shown a likelihood of success on the merits of its preemption argument. A New Jersey federal judge came to a similar conclusion later that month, also issuing a preliminary injunction.
However, in August, a Maryland federal judge denied Kalshi's request for a preliminary injunction, marking the first time state regulators successfully argued that federal law does not preempt their authority to regulate sports event contracts. Judge Adam B. Abelson's ruling essentially agreed with state gaming experts who argue that sports event contracts are "simply sports betting" under a different name.
Kalshi immediately appealed the Maryland decision to the U.S. Court of Appeals for the Fourth Circuit, where it remains pending. The company's lawsuit in New Jersey is also under appeal in the Third Circuit.
Event Contracts vs. Sports Betting: The Central Question
The fundamental dispute centers on whether prediction market contracts constitute gambling or legitimate financial derivatives with economic utility.
State regulators argue that Kalshi's offerings are de facto sports betting, allowing users to stake money on the outcome of sporting events with the expectation of receiving value based on results—the definition of sports wagering under most state laws.
Kalshi CEO Tarek Mansour has consistently pushed back against this characterization. In an April interview, he argued to TechCrunch that "state law doesn't really apply" to Kalshi's operations, comparing prediction markets to derivatives exchanges that provide unique economic information and help market participants "price" uncertain events.
"Gambling involves creating artificial risk and betting on it—such as rolling a die and wagering money on the number that comes up," Mansour explained. "Kalshi's event contracts function as derivatives that allow stakeholders, such as advertisers, sponsors, networks, and sportsbooks, to hedge exposure to economically significant sports outcomes."
The Business Impact
The legal uncertainty hasn't slowed Kalshi's momentum. The platform processed more than $500 million in trading volume during the 2025 March Madness tournament alone, and has thrown more than $1 billion into political markets following its successful legal battle against the CFTC over election contracts last year.
Kalshi has expanded aggressively beyond simple game winner markets, self-certifying contracts for point spreads, over/unders, and player props—the bread-and-butter offerings of traditional sportsbooks. In August, the company submitted filings to offer touchdown scorer markets and other in-game betting options.
The company has also secured partnerships that lend legitimacy to its sports offerings, though these deals have raised eyebrows given the ongoing regulatory disputes. Kalshi frequently advertises that it offers "legal sports betting in all 50 states" and recently announced plans to expand globally to more than 140 countries.
CFTC's Ambiguous Stance
Adding complexity to the legal landscape, the CFTC itself has sent mixed signals about sports contracts. In October guidance, three acting CFTC directors noted in a footnote that "the Commission has not, to date, been requested to take or taken any official action to approve the listing for trading of sports-related event contracts on any DCM."
This statement potentially undermines Kalshi's argument that state-level geographic restrictions would violate CFTC requirements. The guidance even cautioned exchanges to prepare contingency plans for potentially geo-fencing certain markets, suggesting federal regulators may not view national accessibility as an absolute requirement.
Conclusion
The outcome of Kalshi's growing collection of lawsuits could fundamentally reshape the boundaries between federal and state regulatory authority over emerging financial products. If courts side with Kalshi's preemption argument, it could open the door for prediction markets to operate nationwide without state licenses, potentially disrupting the carefully regulated sports betting industry that has generated billions in state tax revenue since the Supreme Court's 2018 Murphy v. NCAA decision legalized state-level sports wagering.
Conversely, if states prevail, Kalshi and similar platforms may face a fragmented regulatory landscape requiring state-by-state licensing, potentially making their business models unworkable or forcing them to operate only in states willing to license them under existing sports betting frameworks.
With federal district courts now split on the preemption question, legal experts suggest the issue may ultimately require resolution by the U.S. Supreme Court to provide clarity for the entire prediction market industry.
For now, Kalshi continues operating in all 50 states - including New York - while it fights in court to maintain that status.