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Moments ago, I snapped up 100 “Yes” shares that Carlos Alcaraz will win the Men’s French Open at 51 cents apiece. Should Alcaraz clinch his second Roland-Garros title, my stake will settle at a dollar per share. I will pocket nearly $47.20 after fees. However, I didn’t purchase it through one of Maryland’s 24 active sportsbooks. Instead, I purchased it through Kalshi, an ostensibly legal and federally regulated event-futures exchange. Should my purchase be considered a financial transaction, or is it gambling? The answer could upend state gaming regulations for lotteries.
Everything Is in Play
From GameStop to Dogecoin to 0DTE, Wall Street keeps imitating Vegas. Kalshi is its latest roll of the dice—and its most brazen. On one hand, the New York start-up holds a Commodity Futures Trading Commission (CFTC) license as a Designated Contract Market (DCM). It is the same status CME Group uses to list everything from Treasury-bond and S&P 500 futures.
On the other, Kalshi’s offer is substantially different. Along with sports outcomes, its homepage lists binaries like whether gas prices will go above $3.15 a gallon, whether Karoline Leavitt will mention Ukraine in her next press briefing, or when Grand Theft Auto 6 will be released. Each contract pays $1 for a correct call and nothing for a miss. Prices quoted in cents translate directly into implied probabilities.
It is not the first time the U.S. has seen prediction markets. For instance, Intrade and its sports-focused sibling, TradeSports, were among the most infamous, running popular exchanges from Ireland in the early 2000s. Similar to Kalshi, they allowed Americans to punt on everything from Oscar winners to oil prices until regulators intervened. In 2012, CFTC sued Intrade for listing off-exchange options for U.S. customers. The overseas platform collapsed within months. Kalshi also has active competitors, such as Polymarket, which face their own legal challenges.
Kalshi’s license with the federal government is what makes the difference. Every transaction is a regulated derivatives contract, not a wager. It is now using that charter as a federal shield from both state governments and, ironically, CFTC itself.
Washington Folds
Kalshi’s first legal test came in 2023 when Kalshi offered self-certified contracts on which party would control the next Congress. CFTC balked, labeling election betting contrary to the public interest and invoking Rule 40.11(a)(1), which states that “gaming” is prohibited:
A registered entity shall not list for trading or accept for clearing on or through the registered entity any of the following: An agreement, contract, transaction, or swap based upon an excluded commodity, as defined in Section 1a(19)(iv) of the Act, that involves, relates to, or references terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law;
Kalshi sued in federal court, arguing that “gaming” in the statute must be defined in reference to actual games and not equated to all forms of betting or gambling. In September 2024, a federal judge, Jia M. Cobb, sided with the exchange. She ruled that CFTC’s interpretation of “gaming” was too broad and that ordinary usage “carries its plain meaning and involves playing a game.”
The Commission promptly appealed, asking the court to pause Kalshi’s activity, but the D.C. Circuit refused to grant a stay. Then, in early May this year, CFTC stunned observers by abandoning its appeal, leaving the pro-Kalshi ruling intact.
Politics may have played a role in the Commission’s folding. In January, Donald Trump Jr. joined Kalshi as a strategic adviser. Then, in February, the new administration nominated Brian Quintenz, who had been CFTC commissioner under Trump from 2017 to 2021. After stepping down in 2021, he joined Kalshi’s board, which he still serves. He said he will step down if he is confirmed.
UPDATE: Appearing before the Senate Agriculture Committee on June 10th, Quintenz answered tough questions on Kalshi from multiple senators. Cory Booker (D) warned that Kalshi’s hiring of Donald Trump Jr. could make it hard for a future chair “to push back on a company advised by the president’s son.” When asked why the agency had abruptly cancelled an April round-table on sports-event contracts, Quintenz said: “I have no information as to why it was canceled, and I’d be happy to reschedule it. Since I don’t have any plans to issue any guidance in the near term, I feel comfortable making that commitment.”
States Face Long Odds
Trump Jr. was not the only significant change in January. It was the same month Kalshi launched sports contracts. Regulators in seven states have fired off cease-and-desist letters. Nevada, New Jersey, and Maryland are already in federal court after Kalshi sued to block those orders. They argued the platform was an unlicensed sportsbook masquerading as a swap market. Kalshi struck back, suing each state for infringing on an activity blessed by Washington.
The early results for state regulators have not been positive. In April, Nevada Judge Andrew Gordon granted a preliminary injunction allowing Kalshi to operate while the case proceeds. Judge Gordon strongly signaled that Kalshi’s legal position was on solid ground. He accepted Kalshi’s argument that the Commodity Exchange Act (CEA) occupies the field, leaving no room for state-level intervention in CFTC-regulated markets:
In sum, if Kalshi were offering its contracts without CFTC designation, then the [state] could regulate it. But because Kalshi is a CFTC-designated DCM, it is subject to CFTC’s exclusive jurisdiction, and state law is field preempted. Nevada regulatory agencies thus have no jurisdiction to decide that Kalshi’s conduct violates state law where, at least at present, those activities are legal under federal law.
Under the Supremacy Clause, federal law outranks conflicting state law. When Judge Gordon uses the term “field preempted,” he means that Congress—or CFTC in this case—regulates DCMs so pervasively that it leaves no room for states to approve or reject anything. The same principles apply to aviation safety, immigration, and nuclear power plants.
New Jersey Judge Edward Kiel issued a near-identical order weeks later. Judge Kiel’s opinion closely tracked the Nevada court’s reasoning and even cited it as persuasive authority. As of this writing, Maryland’s court had yet to take a position.
The Closing Line
State lotteries, even those without sports betting, should view the fight with unease. If Kalshi can offer sports contracts, could they ever provide a Powerball-esque contract? In Cobb’s ruling from 2024, she points to the only federal statute that uses the term “gaming,” the Indian Gaming Regulatory Act (IGRA), to provide a definition. IGRA defines sports betting as a Class III gaming activity alongside blackjack, slot machines, roulette, and, yes, lotteries.
While IGRA’s definition should not be considered the definitive authority, it does help scope how Cobb may have interpreted sports contracts as gaming compared to election predictions. If CFTC now does not believe either sports betting or their other contracts fall under “gaming,” then anything, including lotteries, is at risk.
Lottoland and other lotto betters have shown how innovative fintech companies have used lottery brands for financial gain. They sold Powerball and Mega Millions wagers, backed by sophisticated insurance models, all without ever issuing a real lottery ticket. These models siphon off money that should go to good causes and create potential reputational harm for lotteries. Even a binary contract on whether Powerball’s jackpot tops $750 million could cannibalize ticket sales.
For lotteries that do offer or regulate sports betting, the immediate threat is graver. Luckily for sportsbooks, Kalshi is currently only offering a straight wager type bet, which is a bet on a single event and a specific outcome. Historically, it has been the least profitable option for sportsbooks. Parlays, on the other hand, are very profitable. That is when a wager links two or more individual bets, and every bet—or leg—has to win for the parlay to pay out. For the player, it means the reward increases. As does the risk. If Kalshi can figure out a way to offer a parlay-esque sports contract, the threat they pose to the regulated market increases exponentially.
Clearly, lotteries have a new competitor. CFTC’s decision to avoid creating binding appellate precedents leaves ambiguity about how aggressively the agency may seek to regulate or restrict event contracts in the future. Of course, CFTC could change its mind and renew the case against Kalshi after the addition of sports contracts to its offerings. The Department of Justice could also step in. The Interstate Wire Act of 1961 forbids transmitting sports bets across state lines.
For now, sports contracts will be allowed in all 50 states, as well as any other contract Kalshi’s traders suggest. But the contract that this publication wants Kalshi to propose is: Will America decide whether a sports contract is a sports bet before December 31, 2028?