State of Play: Prediction Markets

Introduction

Kalshiex LLC (“Kalshi”)is an upstart in the world of US sports betting and its legal battles involve a relatively nuanced area of law, but its journey will have a critical bearing on industry players evaluating their US business strategy over the next several years. As this litigation progresses, possibly as far as the Supreme Court, B2B platforms need to be prepared to pivot based on court rulings. This article examines legal developments in Kalshi and other prediction markets cases and explores a possible pathway to resolution.

Kalshi is a US designated contract market registered with the Commodity Futures Trading Commission (CFTC). It has been operating since 2021 providing a platform for both retail and institutional customers to trade on future events including economic indicators, weather patterns, political and legislative outcomes. The company first came to wider public attention in 2024 when it started offering contracts based on the outcome of the US election. The CFTC attempted to block the contracts arguing that they were illegal and could undermine election integrity. Kalshi contested the ban and was successful in the DC District Court, and the federal government dropped its appeal of the District Court ruling following the administration change in 2025.

The law around swaps and derivative trading and the functioning of the CFTC itself has its roots in early gambling law. At the turn of the 20th century, when futures trading started on commodities, there was an entire body of law that dealt with state differences. It said, for example, we will recognize that Chicago can trade commodities, but we’re not going to let it happen in Louisiana, because Louisiana views that as gambling. That situation persisted until the early 1970s when the CFTC was established. That created the conditions to allow futures trading on commodities to thrive in the United States. What the situation with Kalshi does is go back to the legal underpinning of futures trading which recognized that it resembled gambling.

Kalshi started offering contracts on the outcome of sports events at the start of 2025 and handled US$27 million in wagers on February’s Super Bowl. Despite being a small handle when compared to the estimated US$1.5 billion wagered through licensed sportsbooks, Kalshi’s activities drew the attention of several state gambling regulators, resulting in the issuance of cease and desist notices. In response, Kalshi filed suit against regulators in New Jersey, Nevada and Maryland, securing preliminary victories in New Jersey and Nevada. While neither order resolved the underlying legal issues, they were seen as a significant indicator as to Kalshi’s likelihood of future success, and potentially persuasive on future courts facing the same questions. New Jersey appealed the preliminary relief to the Third Circuit Court of Appeals. Meanwhile, the preliminary rulings allowed Kalshi to continue to trade.

All Eyes on Maryland

Kalshi initiated similar legal action against the Maryland Lottery and Gaming Control Commission, but anyone expecting another quick success was disappointed. Maryland authorities alleged that Kalshi’s sporting event-based contracts violated state gambling laws. Kalshi, as it has in each state, countered that its operations fall under federal jurisdiction as a CFTC-regulated exchange and argued that Maryland’s enforcement authority is preempted by federal law. Kalshi cited to the Dodd-Frank Act and the Commodity Exchange Act (CEA) for the basis of their position.

District Judge Adam B. Abelson denied Kalshi’s preliminary request for relief, marking the first significant legal roadblock faced by Kalshi in its sports betting endeavors and capturing the attention of industry observers and lawyers alike. The Maryland Court delivered a blow to Kalshi’s preemption arguments, ruling that federal commodities law does not strip states of their authority to regulate gambling even when sports wagering, through what Kalshi describes as “sports-event contracts,” is conducted through CFTC-approved Designated Contract Markets. While the court did not rule on the arguments themselves, crucially, it enjoined Kalshi’s sports-event contract trading in the state of Maryland whilst the case progresses. The Court determined that while the Dodd-Frank Act and the Commodity Exchange Act (CEA) did have a clear intention to preempt at least some state laws, that is not where the applicable preemption analysis ends, despite what Kalshi would prefer and in contrast to the New Jersey and Nevada district courts examining the same issue. Instead, the Maryland Court reasoned that it must determine if the “field” Congress intended to occupy through these acts included gambling.

Applying the presumption against preemption in areas of traditional state regulation, the Court found that Congress did not demonstrate a “clear and manifest purpose” to preempt state gambling laws when it enacted the Dodd-Frank Act, despite the CEA’s general preemptive scope over commodities trading. The analysis focused on several key factors undermining Kalshi’s position: the CEA’s Special Rule expressly preserving state authority to determine what conduct is unlawful, the express preemption clauses in the CEA not encompassing Kalshi’s operations, and Congress showing no intent to override then-existing federal gambling statutes like the Wire Act, Indian Gaming Regulatory Act (IGRA), or Professional and Amateur Sports Protection Act (PASPA) (since struck down but in effect at the time) when drafting the amendments.

The Court also noted that contemporary legislative statements suggested lawmakers viewed sports-event contracts as lacking commercial purpose and were concerned about potential gambling through derivatives markets. The Court also felt that while the “savings clause” in the CEA’s exclusive jurisdiction provision cuts both ways, such ambiguity cuts against finding for field preemption as these types of clauses generally negate an inference that Congress intended to preempt.

Split Decision

Shortly after receiving the Maryland ruling, Kashi filed an appeal. On the same day, it also moved for summary judgment in the Nevada District Court matter, seeking to capitalize on a favorable ruling on its preliminary request for injunctive relief. These actions, when combined with the New Jersey appeal, set the stage for potential escalation to the US Supreme Court.

The Maryland ruling sets up a potential circuit split as to the preemption issue. While Maryland (Fourth Circuit) ruled in favor of the regulators, district courts in New Jersey (Third Circuit) and Nevada (Ninth Circuit) determined that Kalshi was likely to succeed on the merits of its preemption claim. New Jersey regulators already appealed the ruling to the Third Circuit, where oral arguments are expected to be held in early September.

The outcomes of the eventual rulings may not be as divergent as they appear at this stage, however. It is not uncommon to win the injunction and go on to lose the case and vice versa. In Nevada and New Jersey, the courts may have simply decided they did not want to adversely impact a commercial operation based on arguments that appeared to be weak, but that would also likely take years to fully resolve. Also, by the time the court in Maryland started its deliberations, more and more states were crying foul, and the commercial and tribal operators were bringing forward their own arguments against a potentially disruptive competitor. Meanwhile, Kalshi continued its activities and grew rapidly to two million customers. Given the money involved, the media coverage, and uncertainty surrounding prediction markets, a court was always going to take a step back at some point and take time to review what is going on in the marketplace. Maryland’s position reflects just that.

Big Picture

While the micro issues of compatibility between CFTC regulation, state laws and the Indian Gaming Regulatory Act (IGRA) are going to be resolved, the macro issue will be decided on a more fundamental question: is this sports betting, and if so, what should we do about it? That is not to say that Kalshi’s position is frivolous and dead on arrival, particularly in light of the litigation that let to IGRA and considering the current political climate. But, there is an undeniable body of law beginning with the Interstate Horse Racing Act and carrying through IGRA, the Unlawful Internet Gaming Enforcement Act and the Wire Act that stands for the basic proposition that the power to determine what is and what is not gambling within a particular jurisdiction falls to the individual states.

The US Supreme Court, should the case end up there, leans heavily towards a federalist approach and favors state sovereignty as to health, safety, and welfare decisions within their own borders. They are unlikely to accept the Kalshi argument as that would, in effect, create a deregulated federal gambling market imposed on each individual state regardless of their gambling laws. Additionally, the Supreme Court tends to avoid ruling on the merits of cases that are not fully developed in the lower courts. As such, the Supreme Courts’ involvement will likely be minimal unless and until the district and appellate circuit courts develop full records to review. But, depending on the outcome in the lower courts, it is within the realm of possibility that this Court issues an opinion favorable to the states.

In the alternative, a situation could develop where one of the circuit courts takes the lead and gives a quick opinion that the others adopt the reasoning of to avoid any circuit splits. Such decisions could then be taken to the Supreme Court where, depending on the adopted position, it could simply issue a denial of certiorari and render the circuit court level ruling as the law of the land.

None of this is going to happen quickly: it will likely take two or more years to reach any meaningful point across the full scope of the Kalshi litigation. Meanwhile, more and more organizations are going to be drawn into discussions as to which side of the argument to align with from a business perspective, creating both opportunities for consultation and litigation support that will be a boon for IMGL lawyers.

Twist in the Tail

In many industry sectors or jurisdictions, this level of regulatory uncertainty could kill a company like Kalshi, and potential investors are certainly going to be undertaking thorough due diligence reviews of their fundraising memos. However, while the constant litigation may be a distraction, Kalshi can use the extended status quo to its advantage. The longer it continues to trade, thereby attracting customers and money, the more difficult it becomes, from an equitable standpoint, to shut it down. The longer Kalshi is in the marketplace the more likely it is that it will keep going, show that it is a responsible sports betting company and that the competition will not be irreparably damaged if it’s activities are allowed to continue. In fact, an overly lengthy wait for a ruling may induce state legislators and Kalshi to come to points of compromise, particularly when and if other regulated sports betting entities begin to engage in similar behavior under the umbrella of their wagering licenses. Furthermore, drawn out litigation and uncertainty foster an environment where black market gambling can prosper, capitalizing on the favorable, but non-final rulings to entice gamblers to offerings that are neither saddled by nor restrained by regulation.

There will be a lot of background noise from supporters of both sides of the case, some twists and turns along the way, and many opportunities for gaming lawyers to make their way into Kalshi-adjacent projects. Kalshi itself will almost certainly emerge from the fray with some positive growth and success, and that is before considering any potential political influence. With so much on the line, a number of influential parties will advocate for their share at both the state and federal level. As such, there is always a chance that the next swerve in the litigation path stems from outside the courtroom.

As the saying goes, this case will run and run.

Daniel McGinn is a member of IMGL https://www.imgl.org/user/Daniel.McGinn/

IMGL President, Marc Dunbar, a Partner at Jones Walker in Tallahassee appeared on SBC’s iGaming Daily Podcast discussing these issues in July 2025 https://youtu.be/DBxnDBeYteo?si=38NOTaQ9GwxWuos5