Kalshi has taken legal action against the Ohio Casino Control Commission (OCCC) and the Ohio Attorney General’s Office by filing a lawsuit in the US District Court for the Southern District of Ohio Eastern Division. This move follows the OCCC’s cease-and-desist order issued in the spring and its subsequent warning in August directing sportsbooks to refrain from offering event contract products. In June, Ohio Attorney General Dave Yost was among 34 attorneys general supporting New Jersey’s regulation efforts over prediction markets.
This lawsuit is part of an increasing number of cases at both federal and state levels that are examining whether contracts related to sports events are effectively illegal sports betting or are attempts to bypass existing state laws. Kalshi has requested a preliminary injunction to block Ohio from applying its gaming laws to the Kalshi platform. The company argues it operates under the federal oversight of the Commodity Futures Trading Commission (CFTC), which grants it a nationwide operational scope beyond state gambling regulations.
The lawsuit asserts, “Ohio’s regulatory approach infringes on the federal regulatory framework that Congress established for derivatives on designated exchanges. The state’s actions are both field-preempted and conflict preempted. Therefore, this Court should provide both a preliminary and permanent injunction, along with declaratory relief.”
At the Global Gaming Expo (G2E) in Las Vegas this week, discussions on prediction markets were prominent, including in panels focused on sweepstakes casinos and the crackdown on illegal and offshore operators. A notable panel titled “Unpredictable: How the Emergence of Event Contracts Challenges the Paradigm of Regulated Gaming” highlighted these issues. Kevin King, a partner at Covington & Burling LLP, pointed out that these legal challenges revolve around three key issues: preemption, procedure, and patience. He noted that the central question remains whether federal laws overseeing futures markets take precedence over state and tribal powers in regulating sports event contracts. Prediction market operators like Kalshi argue that federal law does take precedence, whereas multiple states and industry groups like the American Gaming Association disagree.
King described the ongoing legal battles as being in the “first quarter” of what is likely a long and complex series of legal actions. Kalshi has secured initial injunctions against regulatory enforcement in New Jersey and Nevada. However, a Maryland judge denied Kalshi’s request for a preliminary injunction, and despite initial successes, a Nevada judge recently refused an injunction for Crypto.com.
Dustin Gouker, owner of Closing Line Consulting, suggested to the G2E audience that despite the complexity of federal and state legal contests, there is potential for sports event markets on platforms like Kalshi to ultimately be recognized as legal sports betting. He remarked, “We’re really going to spend the next two or three years in court figuring that out.”
While some state regulators and legislators are acting aggressively, Gouker emphasized a proactive stance might be more effective. He referenced a letter from Kevin O’Toole, the executive director of the Pennsylvania Gaming Control Board, expressing concerns to Pennsylvania’s US senators and representatives about sports prediction markets. O’Toole cautioned that these markets operate under the guise of financial derivatives or swaps, claiming exemption from state gambling laws, effectively creating a backdoor to legalized sports betting without the rigorous oversight typical of state-regulated systems.
Beyond Ohio, additional states like Michigan and Arizona have also issued warnings to sportsbooks about integrating prediction markets into their product offerings. Sportsbook operators such as FanDuel and Underdog have announced plans to launch event contract products despite these cautions. Jackie Johnson, Director of the Arizona Department of Gaming, expressed on a G2E panel that prediction markets are sidestepping state policies and the extensive protections that state laws offer. “We’re focusing on consumer protection and maintaining the integrity of our current market. We can’t just stand by and do nothing,” she emphasized.
Meanwhile, Congress has also shown interest in the matter. A group of US senators, including Catherine Cortez Masto of Nevada and John Curtis of Utah, has written to the CFTC raising alarms over state law circumvention. Cortez Masto was quoted in The New York Times expressing concerns that using event contracts for sports betting illegally bypasses the regulatory authority of states like Nevada.
Under the Biden administration, the CFTC has taken steps against prediction markets, aiming to halt the acceptance of money for election predictions and proposing a rule to prohibit sports event contracts. However, a federal court overturned the CFTC’s order to stop Kalshi’s election contracts in October, leading to over $700 million in contracts during the 2024 presidential election. Since President Trump’s term, there have been significant changes within the CFTC, with four commissioners stepping down, leaving acting Chairwoman Caroline Pham as the sole commissioner. Brian Quintenz, initially nominated by Trump for the chairman role, had his nomination withdrawn this month.
Kalshi has recently named Donald Trump Jr as a strategic adviser, further expanding into sports event contracts. Former CFTC commissioner Kristin Johnson warned in her farewell address about the dangers of insufficient regulatory oversight in the prediction market industry, highlighting the need for more substantial regulatory frameworks to manage the burgeoning sector.
As the legal and regulatory landscape continues to evolve, prediction markets remain at the heart of a complex debate that intertwines federal oversight, state regulation, and the burgeoning field of event contracts. The upcoming decisions and regulations will likely set significant precedents for how these markets will be governed and integrated into the existing gaming industry framework.