Prediction-market operator Kalshi is facing another legal challenge, as a new class action lawsuit has been filed by a group of its users. The case adds to a growing list of disputes surrounding the platform, with the complaint accusing the company of running its business in a manner similar to an unlicensed sports betting outfit and failing to clearly outline how its system actually works.
In brief
- •Seven users of the Kalshi app filed a class action lawsuit claiming the platform operates like unlicensed sports betting.
- •The complaint argues that users are effectively wagering against the company through Kalshi Trading, which acts as a market maker.
- •Kalshi co-founder Luana Lopes Lara rejected the claims, explaining that the platform functions as a peer-to-peer exchange with no house involvement.
Users Challenge Kalshi’s Sports Markets
Seven users of the Kalshi app have filed a complaint, alleging that the platform appears to offer legal sports betting, even though it does not hold a gaming license in any U.S. state. The filing also targets Kalshi Trading, an affiliated entity, claiming it acts as a market maker that shapes the odds on the exchange in ways that could work against participants.
According to the filing, users are unaware that they are effectively being placed in sports-style wagers directly against the company. The complaint explains that customer positions are matched against funds supplied by a professional market maker working behind the scenes, creating an arrangement similar to wagering against “the House,” even though users may not realize it. The structure, the lawsuit states, allows unlicensed and unregulated bets to occur under the appearance of a prediction market.
Consumers do not realize they are actually being tricked into sports betting against Kalshi. When consumers place bets on Kalshi, they face off against money provided by a sophisticated market maker on the other side of the ledger. Market makers make it possible for consumers to place illegal, unregulated wagers “against the House.”
The class action was filed by the law firm Lieff Cabraser Heimann & Bernstein, adding further strain to Kalshi’s legal situation. The company is already defending itself against separate actions from state gambling authorities and Native American tribal groups, who also argue that the exchange is operating an illegal sports-betting framework.
Response From Kalshi and Industry Voices
Kalshi co-founder Luana Lopes Lara strongly rejected the claims, describing them as incorrect and based on a misunderstanding of prediction markets. She clarified that the platform operates as a peer-to-peer exchange, with no house involved. Users trade directly with each other, whether as individuals or organizations, and market makers participate openly to provide liquidity.
She also addressed Kalshi Trading’s role on the platform, stating that “one of the participants on the exchange is our affiliate, Kalshi Trading. This is a common and regulated practice in our industry, which helps provide liquidity for a better user experience. Many financial exchanges have similar setups, especially for new products.”
My statement regarding the recent lawsuit filed against Kalshi:
The lawsuit’s claims are fundamentally incorrect and misunderstand how prediction markets work. Kalshi is a peer-to-peer exchange where users trade directly with each other. There is no “house” involved.
Market makers, like Kalshi Trading, provide liquidity on exchanges, which is a common and regulated practice in financial markets. This ensures a better user experience.
We are committed to operating transparently and in compliance with all applicable laws and regulations.
June 20, 2024
Alex Immerman, a partner at Andreessen Horowitz, also supported this view, pointing out that prediction markets are designed so participants do not trade against a house. He noted that large technology and financial platforms frequently face class-action lawsuits, citing companies like Meta, Alphabet, Robinhood, and Coinbase, and suggested that Kalshi is encountering similar scrutiny within the industry.
Added Regulatory Setback
This lawsuit arrives at a time when Kalshi is already confronting a significant regulatory defeat. Earlier this week, a federal court ruled that the company falls under Nevada’s gaming laws, limiting its ability to expand its sports-related contracts.
Chief Judge Andrew Gordon in Las Vegas issued a ruling that became public on Tuesday, siding with the Nevada Gaming Control Board and overturning an April 9 court order that had given Kalshi room to continue listing sports-linked contracts. With the ruling now in effect, the platform faces stricter limits as it navigates ongoing regulatory oversight and multiple legal challenges.