The Kalshi logo appears on a smartphone placed on a laptop keyboard showing a betting curve on the screen in Creteil, France, on March 9, during a major scandal and a $54 million lawsuit concerning bets related to the recent strikes in Iran. (Photo by Samuel Boivin/NurPhoto via Getty Images)
NurPhoto/NurPhoto via Getty Images
ALBANY — The ultimate fate of prediction markets, the latest craze in a world saturated with sports betting and other forms of gambling, could rest on the outcome of an ongoing legal battle between the nascent industry and the state of New York.
Prediction markets such as Kalshi and Polymarket have exploded in popularity over the last year, with users placing wagers on everything from sports games, the weather forecast and what words President Donald J. Trump will say in a speech. Their rise in popularity has led to the companies’ valuations climbing to billions of dollars, lucrative partnerships with sports and news organizations and incredulity from many people — including many attorneys general across the U.S. — on how such practices can even be permitted.
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In New York, the state’s gaming commission sent Kalshi a cease-and-desist letter in October, alleging violations of New York’s gambling laws. Kalshi responded by suing the gaming commission in federal court in Manhattan. Several states across the nation, including Arizona, Michigan and Massachusetts, have filed lawsuits against Kalshi, alleging the company has operated as an unlicensed sports betting operation in those states. (Polymarket, unlike Kalshi, is not yet fully available to all Americans).
Daniel Wallach, an attorney specializing in gaming and sports betting regulations, said that Kalshi’s case against the gaming commission in New York could prove the most significant of its current legal battles if the federal judge in the case, Analisa Torres, denies the company’s request for a preliminary injunction that would pause the gaming commission’s cease-and-desist order.
If that happens, Wallach said, it could provide New York Attorney General Letitia James an opening to bring a civil enforcement proceeding that has the potential to shut down Kalshi, force them to pay back customers from across the U.S. and hold the company’s executives personally liable.
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“Letitia James has the ability to bring down Kalshi like a house of cards, if she is able to avoid a preliminary injunction in federal court and then goes for the jugular in the state court system,” Wallach said.
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Powers of the state
Sections of New York law and precedent in previous cases contain elements that could bode ill for Kalshi, if the state were to pursue action against the company.
New York Executive Law allows the state to seek disgorgement, a type of restitution for profits determinted to be obtained illegally. Both Kalshi and Polymarket are headquartered in New York City.
The power of that provision was on display in 2022, when convicted fraudster Martin Shkreli was forced to pay a disgorgement of $64.6 million to victims across the nation through a federal lawsuit filed by seven states, including New York, as well as the Federal Trade Commission. The judge in that case cited the pertinent section of New York Executive Law in her ruling, ordering Shkreli to pay back the ill-gotten gains of his pharmaceutical company.
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Precedent would also allow individuals at Kalshi, such as its co-founders Tarek Mansour and Luana Lopes Lara, to be held personally liable for violations found to be committed by the company. In 1999, a state Supreme Court ruled that individuals who ran an online gambling platform in Antigua were personally liable for soliciting New York users to illegally use their service.
“New York is nationwide disgorgement plus individual liability for the officers, directors and shareholders,” Wallach said. “No other state possesses that kind of sweeping, remedial powers.”
Despite sports betting enjoying legal status in 38 states, Kalshi advertisements boast of the app’s availability in the entire U.S. That’s because, the company claims, it’s not actually offering betting at all. Instead, the company says it offers derivative futures contracts: a type of financial instrument used by Wall Street traders and regulated by the federal Commodity Futures Trading Commission, rather than state gaming authorities.
Regarding Kalshi’s legal position that it isn’t subject to state gaming authorities due to its federal approval for offering contracts, Wallach said that the argument “doesn’t hold water.”
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“The truth lies in the substance of the kinds of contracts that Kalshi is offering, which are straightaway sports gambling,” Wallach said. “No amount of creativity or fanciful legal argument can change the fact that Congress has never authorized the CFTC to regulate sports gambling or to override state sports gambling laws.”
Kalshi officials declined to comment for this story.
What are futures markets?
Regular futures contracts are agreements to purchase something at a predetermined price in the future, often associated with commodities such as oil, corn and even frozen concentrated orange juice. Traders can buy or sell contracts on the market, like with stocks, causing prices to go up or down. For example, the price of oil futures have risen as a result of conflict in the Middle East, because traders believe the price of oil will go up in the future.
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In the terminology used in prediction markets, when you wager a certain outcome of a sporting event or words used in a political speech, you aren’t “betting” but rather purchasing “event contracts” with a price determined by how probable traders think the event is likely to occur. If the New York Yankees are given a 45% chance to win an upcoming game on Kalshi, then the event contract of a Yankees victory will be priced at 45 cents, but will pay out $1 if the Yankees win. As with regular futures, the probability can rise and fall before and during a game, meaning users could cash out their contracts with a profit before the final out.
Ahmet Karagozoglu, a distinguished professor of finance at Hofstra University, said there are key differences between regular futures and the event contracts offered in prediction markets.
“I would not characterize them as a futures market, because the events are not contracts in the true sense,” Karagozoglu said of prediction markets.
Beyond speculation, futures contracts exist because opposing parties have a vested economic interest in what the future price may be — farmers may be concerned the price of the corn they sell will drop in the future, while food retailers may be concerned the price of corn they buy will rise. Futures contracts can help reduce the risk for both parties with an agreement to purchase at a known price.
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Karagozoglu said that prediction markets have no such element of risk reduction, also known as hedging, meaning the value of the event contracts becomes purely speculative.
“There is no risk to hedge. And if the risk is always on one side, who’s going to take the other side?” Karagozoglu said. “That would be the house, and in the casino, the house always wins.”
Prediction markets also claim their products can provide more accurate assessments in future outcomes, such as political elections, than traditional polling can. They point to the 2024 U.S. presidential election, where traditional polls had President Donald J. Trump and then-Vice President Kamala Harris neck-and-neck while prediction markets indicated a solid Trump victory.
But Karagozoglu said the “wisdom of the crowds” can have its limits. He gave a theoretical scenario of a giant meteor hurtling towards Earth, with prediction markets speculating on whether or not it would make impact.
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“If we use the information from this prediction market to say OK, we don’t need NASA, we don’t need to look at space, because the wisdom of the crowd said it’s not going to happen, then the outcome might be really, really bad,” Karagozoglu said.
Attempts to regulate
The idea of prediction markets are not new. In 1988, the Iowa Electronic Markets were created at the University of Iowa that act as prediction markets for political elections, although they operate on a purely nonprofit model for academic purposes. In 2001, the U.S. Defense Advanced Research Projects Agency proposed a “Policy Analysis Market,” a futures exchange based on possible political developments in the Middle East, but the idea was quickly shot down after members of Congress condemned the idea as betting on assassination and terrorism.
The Commodity Futures Trading Commission, now led by Trump-appointed Chairman Michael Selig, has remained unmoved in engaging in any type of regulation against predictive markets. In fact, the commission appears to be doubling down on its approval, with the trading commission filing its own lawsuits against three states for their attempts to regulate prediction markets.
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Beyond its legal battles, Kalshi has also begun lobbying efforts to prevent any kind of state regulation. In New York, the company retained the lobbying firm Brown & Weinraub at the start of this year.
State Sen. Jeremy Cooney, who has proposed legislation that would require predictive markets to obtain a license and be regulated by the state’s Division of Financial Services, said he’s had “very preliminary” contact with Kalshi lobbyists.
“The hallway conversation has been that CFTC has jurisdiction, and therefore they’re going to fight any sort of state regulation,” Cooney said.
The state gaming commission declined to comment for this story, citing the ongoing litigation with Kalshi. During a commission meeting on March 16, several members spoke of their views on prediction markets and the ongoing lawsuit.
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“It is my hope of course that if we do succeed, and I feel we will, that those people who have gambled in the meantime and have lost would be refunded their bets,” Commission Chairman Brian O’Dwyer said during the meeting. “We will make sure that this is well considered either in the Legislature or by administrative action.”
Gaming Commissioner John Cotty also said he had met with legislators to discuss possible bills holding prediction markets to account.
“We’ve started working on various bits of legislation to introduce that will make the losses personally liable,” Cotty said. “We’ll add another level of liability to promoters of these services that are not operating with a license from us. To the extent that they hurt the state and hurt the revenues of the state, they become civilly liable for the diminution of revenue to the state.”
The attorney general’s office also declined to comment. In February, the office issued a consumer alert warning ahead of the Super Bowl saying prediction markets put New Yorkers at significant financial risk.
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“Prediction markets may appear as modern, high-tech platforms for speculation or ‘forecasting,’ but in practice, many operate as unregulated gambling without the basic protections New York consumers both deserve and expect from properly licensed operators,” the warning stated.
Karagozoglu said that without proper regulation, prediction markets pose a danger to the overall economy. He compared them to credit default swaps, another type of derivative where a lack of oversight has been blamed for causing the financial crisis in 2008.
“People now are referring to (credit default swaps) as financial instruments of mass destruction,” he said. “It is possible that the next financial instrument of mass destruction could be the prediction markets if they are not well-regulated.”
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