Kalshi Faces Class Action Over Alleged Illegal Gambling

• Kalshi lawsuit tests the line between regulated prediction markets and illegal sportsbooks.
• Plaintiffs allege users unknowingly bet against Kalshi’s house-linked market makers.
• States and tribes oppose Kalshi, while it asserts its election contracts fall under the CFTC. 

Kalshi has landed a class action lawsuit in the U.S. District Court for the Southern District of New York and is being accused of illegal sports gambling operations. Filed by seven plaintiffs nationwide, it challenges Kalshi’s trading model, advertising claims, and platform structure. The case questions whether Kalshi operates as a regulated prediction market or a disguised sportsbook under federal and state law.

Claims of Misleading Betting Structure

Plaintiffs state that Kalshi misled users into thinking they traded against other consumers on a neutral platform. However, they allege users actually wagered against the platform itself through linked market makers. This structure, they argue, created a hidden house edge similar to traditional sportsbooks.

According to the complaint, this setup removed true peer-to-peer trading from the process. Users allegedly faced counterparts tied financially to Kalshi instead of independent traders. As a result, the lawsuit seeks treble damages, restitution, disgorgement, and injunctive relief.

Notably, the filing describes Kalshi’s sports contracts as central to the dispute. Plaintiffs claim sports wagers formed nearly 90% of Kalshi’s total trading volume in September. They estimate total activity close to $2 billion within a single month.

Advertising and Volume Draw Regulatory Attention

Legal experts also pointed to Kalshi’s advertising practices as a core issue in the case. Gaming lawyer Daniel Wallach stated that Kalshi ads appeared styled as breaking news. These ads reportedly claimed sports betting on the platform remained legal across all 50 states.

However, plaintiffs argue those claims did not match regulatory reality. They say such messaging influenced users’ understanding of the platform’s legality. Therefore, the lawsuit frames the ads as deceptive and misleading to ordinary consumers.

Moreover, the complaint highlights a mismatch between public messaging and operational structure. Plaintiffs argue that Kalshi positioned itself as an information market while facilitating sportsbook-like activity. That contrast now forms a central theme throughout the litigation.

States, Tribes, and Federal Oversight Collide

Beyond the class action, several states have taken direct action against Kalshi. Massachusetts, New York, Nevada, Maryland, New Jersey, and Ohio initiated regulatory or legal measures targeting their sports contracts. These efforts challenge Kalshi’s claim of federal protection.

In Nevada, a federal judge ruled that state gaming regulators can enforce gambling laws against Kalshi. The ruling rejected claims that Kalshi’s sports contracts qualify as federally protected swaps. Therefore, the decision strengthened state authority over such operations.

Tribal gaming groups have also entered the dispute. The Ho-Chunk Nation of Wisconsin and other organizations argue that Kalshi undermines protected tribal gaming rights. They claim the platform bypasses established frameworks that support licensed tribal operations.

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Meanwhile, Kalshi maintains its position as a designated contract market regulated by the Commodity Futures Trading Commission. It insists its event contracts qualify as financial derivatives, not gambling products. Therefore, it argues that state gaming laws should not apply.

The company stated that the lawsuit shows misunderstandings of how federally regulated DCMs operate. Kalshi dismissed the claims as meritless and said it will respond through court filings. It continues to assert that self-certified sports contracts fall under exclusive CFTC oversight.

However, the case raises a structural question for regulators. The lawsuit forces a review of whether prediction markets serve public-interest information functions or replicate gambling systems. That examination affects future licensing, liquidity rules, and market-making rights.

Regulators now face pressure to define clear boundaries between prediction markets and betting platforms. The outcome may directly influence institutional participation in event-based trading. As discovery proceeds, scrutiny of Kalshi’s operations remains intense. Courts will examine whether its design prioritizes market transparency or platform control.