Editor’s note: CasinoBeats is publishing a recurring feature called “The Pulse” that analyzes the current state of a specific “beat” in the gaming industry. This installment focuses on the mounting legal challenges for prediction markets, including Kalshi and Polymarket.
Prediction markets have grown exponentially since they launched sports event contracts last year. The two leading platforms, Kalshi and Polymarket, are valued at around $20 billion. The companies have formed an increasing number of partnerships with sports leagues, media outlets, and gambling companies. But amid the rapid expansion, a wave of opposition has emerged. The question many are asking is: Are these platforms even legal?
Our “Pulse” series attempts to break down some of the most pressing issues in the gambling industry, and there is none bigger at the moment than the legal status of prediction markets.
If you ask Kalshi, as we did, then the matter is simple: prediction markets, including those on sports, are fair and legal under federal law.
“As other courts have recognized, Kalshi is a regulated, nationwide exchange for real-world events, and it’s subject to exclusive federal jurisdiction. It is very different from what state-regulated sportsbooks and casinos offer their customers. We are confident in our legal position,” a spokesperson told CasinoBeats.
Nevada Leads State Challenges
State regulators view things differently. There are legal battles in 13 different states between prediction market operators and gambling authorities.
The most successful state so far at clamping down on sports markets has been Nevada. Polymarket, Crypto.com, and now Kalshi have all been forced to block users in the Silver State from accessing sports event contracts.
“This situation is unprecedented — Nevada is currently the only state with temporary restrictions in effect due to a court order,” noted Kalshi.
The company added that it will fight to reactivate its sports, election, and entertainment markets, which have been temporarily prohibited. It will have another chance to put forward its case at a hearing on April 3.
Gaming lawyer Daniel Wallach noted on LinkedIn that Nevada has upgraded its penalties for conducting unlicensed gambling. It is now a category B felony, carrying a sentence of 1-10 years in prison, fines up to $50,000, and mandatory disgorgement of all profits, gains, and gross receipts.
Arizona Files Criminal Charges
While Nevada has not yet pursued criminal charges, Arizona has. It became the first state to file those charges against Kalshi.
“States like Arizona want to individually regulate a nationwide financial exchange, and are trying every trick in the book to do it,” said Kalshi.
“Arizona filing criminal charges against Kalshi represents an escalation of enforcement,” lawyer Stephen Piepgrass told CasinoBeats. “Relative to other state regulators, this was a very aggressive move by the Arizona Attorney General’s office, as other state regulators have, to date, pursued actions in civil court seeking to enjoin the operation of prediction markets. This will test the theory that there are strategic reasons for states so far avoiding that course of action.”
The charges include 16 counts of illegal betting and wagering, and four counts of illegal election wagering. All charges are misdemeanors, each carrying a maximum penalty of $20,000.
When announcing the unprecedented action, Arizona Attorney General Kris Mayes stated, “Kalshi may brand itself as a ‘prediction market,’ but what it’s actually doing is running an illegal gambling operation and taking bets on Arizona elections, both of which violate Arizona law. No company gets to decide for itself which laws to follow.”
We asked Kalshi for their reaction, and a spokesperson responded via email, “These state-court charges are seriously flawed. It’s gamesmanship,” before adding, “We look forward to fighting them in court.”
Piepgrass said that states have so far avoided going down the criminal charges route, as criminal cases are generally much harder to win.
In criminal cases, there “are principles like the ‘rule of lenity,’ that apply when interpreting criminal laws, but do not apply in civil cases. Under the rule of lenity, any ambiguity in the interpretation of a statute must be resolved in favor of that criminal defendant and against the state prosecuting the offense,” said the experienced lawyer.
Given the differing judgments made in federal courts, Piepgrass believes that “a judge may well apply the rule of lenity and dismiss these charges.”
New Lawsuit Could Be Game-Changer
While it may be difficult for Arizona to get a conviction on the criminal charges, Wallach believes a lawsuit citing federal rather than state law is the one to watch.
The lawsuit, filed in Georgia, claims Kalshi’s sports markets violate the Commodity Exchange Act (CEA), which explicitly prohibits markets related to gaming. The complaint also notes that the company previously said it viewed sports markets as gambling.
When defending its right to offer election markets, Kalshi lawyer Jacob Roth stated, “Contracts that involve games are probably not the type of contracts that we want to be listed on an exchange, because they don’t have any real economic value to them.”
Roth gives examples of activities that are clearly games and therefore should be treated as gaming, including football, golf, and horse racing.
“If you have an event contract on who’s going to win the Super Bowl or the point spread in the Super Bowl, it involves a game. There’s an underlying game,” said Roth.
The first sports market Kalshi offered was on the Super Bowl, despite the company admitting that this should be forbidden under the CEA. The full transcript of Roth’s arguments can be read here, with the relevant statements appearing around page 15.
The complaint alleges Kalshi is acting in bad faith by now offering sports markets, despite admitting they have no inherent economic significance.
“While the bad faith requirement is a high bar, Kalshi’s prior judicial admissions that sports-event contracts involve ‘gaming’–followed by its quick pivot into sports contracts and aggressive expansion in the face of state objections–may be enough to clear that bar by a significant margin,” said Wallach.
Are New Laws Needed?
In total, there are 32 active court cases involving prediction markets. As legal teams refine their arguments against the legality of sports event contracts, a faster approach is to enact new laws.
Some lawmakers are going down that route. Senators Adam Schiff and John Curtis have introduced the “Prediction Markets Are Gambling Act”.
“Sports prediction contracts are sports bets — just with a different name,” said Schiff. With the CFTC not willing to restrict sports markets, Schiff said it is necessary for Congress to intervene.
“The Prediction Markets Are Gambling Act is about respecting states’ authority, protecting families, and keeping speculative financial products out of spaces where they don’t belong,” said Senator Curtis.
Bills have also been introduced in Minnesota, New York, Illinois, Hawaii, and California that would explicitly forbid sports prediction markets.
If no new laws are passed, it will likely be the Supreme Court that decides whether sports prediction markets are legal. Like most things, you can wager on when it will happen at Polymarket. The platform’s market makes it 61% likely SCOTUS will hear a case by the end of the year.
Wallach says he believes it might not be until 2028. In the meantime, there will undoubtedly be plenty more court cases in state and federal courts. Check back for our next update.
The post ‘The Pulse’ on Legality of U.S. Sports Prediction Markets appeared first on CasinoBeats.
Editor’s note: CasinoBeats is publishing a recurring feature called “The Pulse” that analyzes the current state of a specific “beat” in the gaming industry. This installment focuses on the mounting legal challenges for prediction markets, including Kalshi and Polymarket. Prediction markets have grown exponentially since they launched sports event contracts last year. The two leading
The post ‘The Pulse’ on Legality of U.S. Sports Prediction Markets appeared first on CasinoBeats.