New York Sues Kalshi for $36B Over Prediction Market Operations

New York escalates fight over prediction markets, sues Kalshi and seeks at least $36 billion New York Attorney General Letitia James has sued prediction market platform Kalshi, asking a court to bar the company from operating event contracts in the state and to recover at least $36 billion in penalties, restitution and other damages. The lawsuit, filed Friday, accuses Kalshi of running unlicensed gambling activity and flouting New York’s gaming laws. What New York alleges - Kalshi offered event contracts tied to sports, elections and cultural events without a license from the New York State Gaming Commission, which state officials say makes those contracts illegal gambling rather than federally regulated derivatives. - The complaint claims Kalshi allowed New Yorkers under the state gambling age of 21 to participate, exposing minors to financial risk and avoiding state consumer protections. - New York also alleges Kalshi sidestepped taxes related to gambling operations. Relief sought Alongside the complaint, the state filed for a temporary restraining order to immediately halt Kalshi’s offending event contracts in New York. The filing requests: - restitution to affected users; - disgorgement of revenue earned from the offerings; - treble damages and an additional $100,000 penalty per offering. Court papers cited by the attorney general estimate compensatory damages could reach at least $36 billion pending a full accounting of Kalshi’s New York business. Official reactions Governor Kathy Hochul said Kalshi has “chosen to ignore New York’s gaming laws, which exist to protect consumers, prevent problematic gambling, deliver funding for critical public services, and ensure that every company plays by the same rules.” AG Letitia James added, “No matter what they call themselves, prediction markets like Kalshi are gambling platforms, plain and simple.” Federal regulators and the preemption fight This suit is the latest turn in a broader tug-of-war over whether event contracts like Kalshi’s fall under federal commodities law—or are subject to individual state gambling statutes. - Kalshi has argued its contracts are federally regulated under the Commodity Exchange Act (CEA) and thus preempt state gambling laws. The company has appealed to the Second Circuit after an adverse ruling in New York federal court. - U.S. District Judge Analisa Torres recently denied Kalshi emergency relief while the appeal proceeds, concluding the company had not shown the high standard needed for an injunction pending appeal. Torres also previously found the CEA was unlikely to preempt New York law as applied to Kalshi’s sports-event contracts (ruling issued July 7). - The Commodity Futures Trading Commission (CFTC) is involved as well: it filed a motion seeking to block New York from enforcing criminal or civil actions against CFTC-registered prediction market platforms, asserting exclusive federal jurisdiction over qualifying event-contract markets. - The CFTC has proposed new rulemaking that would create a contract-by-contract review for event contracts involving sensitive topics (gaming, unlawful conduct, war, terrorism, assassination). Public comments closed July 27; a final rule has not been issued. Conflicting rulings nationwide States and federal courts are issuing mixed decisions, leaving legal clarity unsettled: - In Minnesota, U.S. District Judge Katherine Menendez temporarily blocked the state from enforcing a new ban against CFTC-registered designated contract markets such as Kalshi and Polymarket US. Her preliminary ruling found plaintiffs were likely to succeed in arguing the CEA grants the CFTC exclusive jurisdiction over qualifying swaps—but she cautioned that some contracts may still fall outside federal protection after review. - Minnesota AG Keith Ellison has vowed to defend the state’s law, saying prediction markets are gambling. - Other states have moved the opposite way: Michigan and Washington judges recently issued temporary injunctions barring Kalshi from offering sports-related event contracts, concluding those activities violated state gambling laws. - Earlier this year, the Third Circuit held New Jersey couldn’t regulate Kalshi’s sports-event contracts because they fell under the CFTC’s exclusive jurisdiction—showing circuit splits that will likely need higher-court or regulatory resolution. What’s at stake for crypto and prediction markets The outcome of Kalshi’s Second Circuit appeal, ongoing CFTC rulemaking, and a growing number of state lawsuits will shape the future of prediction markets—many of which intersect with crypto and blockchain platforms. Key questions include: - Which event contracts qualify as federally regulated swaps versus state-regulated gambling? - How will platforms comply with age, tax and consumer-protection rules under conflicting state and federal regimes? - Will the CFTC’s final rule clear the air or create more litigation over contract-by-contract judgments? For Kalshi, the immediate practical risks are substantial—beyond reputational damage, the state’s request for at least $36 billion in damages and aggressive injunctive relief could curtail its business in New York while the legal fights continue. For the broader market, the dispute is a bellwether: regulators, courts and lawmakers are still grappling with how to treat prediction markets in the age of crypto-native trading venues.