New York Sues Kalshi in Fight Over Prediction Market Regulations

New York State is upping the ante in the battle over regulation of prediction markets. Attorney General Letitia James on Friday (July 31) filed a lawsuit against Kalshi in New York Supreme Court in Manhattan, claiming the platform is operating an illegal gambling business.

James petitioned the court for a temporary restraining order against the platform and proposed a formula for compensatory damages that could total as much as $36 billion.

“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,” New York Gov. Kathy Hochul said in a joint statement issued by James’ office. “This choice has consequences, and working closely with Attorney General James, New York is taking action to stop this illegal behavior and bring Kalshi into compliance, because no company is above the law.”

Kalshi, which is based in New York, had anticipated the action and filed a petition seeking to have the case moved to federal court within hours of James’ filing, calling the lawsuit “political theater from the leadership in our own state.” Kalshi had preemptively filed a petition against New York in federal court in October seeking to prevent the state from taking any enforcement action against it. On July 8, however, U.S. District Judge Analisa Torres refused Kalshi’s injunction against the state, a decision upheld by a federal appeals court on Wednesday.

This is not New York’s first tangle with prediction markets. James filed similar petitions in April against Coinbase and Gemini. New York is also one of nine states to be sued by the Commodity Futures Trading Commission (CFTC), which claims exclusive jurisdiction over markets it defines as swaps.

Like Kalshi, CFTC had also anticipated New York’s action and filed an “emergency” motion in the federal court late Thursday night to stop New York from subjecting Kalshi to state gambling laws, calling it “overreach” that would irreparably harm the agency and markets it regulates, according to Reuters.

New York “seeks to place itself in the position of a nationwide derivatives regulator,” Kalshi said in a statement. “Through this action—which seeks to shut Kalshi down nationwide—New York ‌seeks to ⁠fundamentally subvert the exclusive jurisdiction of the CFTC.”

Kalshi, like Coinbase, is a CFTC-registered Designated Contract Market (DCM), a type of derivative exchange often used by agriculture, energy and other businesses to hedge risk.

In its petition for a temporary restraining order, however, New York included as an exhibit a screenshot of a Kalshi page offering contracts on the outcome of World Cup matches, golf tournaments and other sporting events, which New York and other states classify as gambling.

“Respondent also offers point spread and point total bets on sports events, such as wagers over whether the University of Alabama will defeat Hofstra University in a college basketball game by over 10.5 points,” New York said in its filings. “Respondent further offers bettors the ability to bet a “combo,” also known as a parlay, whereby bettors can combine individual bets to receive a larger payout if all combined bets are successful.” Both offers echo the sort of wagering offered by licensed sports books.

In refusing to stop potential New York enforcement ⁠activity, per Reuters, Judge Torres ​found the state’s interests in preventing gambling addiction, preserving the integrity of sports, and avoiding a ​proliferation of unregulated contracts “heavily” outweighed Kalshi’s interests in ensuring the primacy of federal law and avoiding “intractable” technology issues for customers.