New York has escalated its battle with prediction market platform Kalshi, filing a sweeping lawsuit that seeks to shut down its operations in the state and recover at least $36 billion in penalties and restitution. State officials say the company has been running an unlicensed gambling enterprise under the guise of a federally regulated derivatives exchange, and they want a court to bring that operation to an immediate halt.
According to the New York Attorney General’s Office, Attorney General Letitia James lodged the complaint on Friday, asking a state court to bar Kalshi from offering certain types of event contracts to New Yorkers. The suit demands restitution for users, the forfeiture of revenues allegedly earned unlawfully, and massive civil penalties tied to each contract the platform made available inside the state.
Prosecutors argue that Kalshi has been listing contracts based on the outcome of real-world events – including sports contests, elections, and various cultural happenings – without obtaining the necessary authorization from the New York State Gaming Commission. Under New York law, the complaint claims, those event-based bets qualify as gambling, not financial derivatives, meaning they fall squarely under state jurisdiction rather than federal commodities oversight.
The lawsuit also alleges that Kalshi has permitted New Yorkers under the legal gambling age of 21 to trade on these markets. By doing so, state officials say, the platform exposed young users to financial loss and addictive behavior while sidestepping age-verification requirements and consumer protections built into New York’s gambling framework. On top of that, the complaint accuses the company of failing to pay taxes that would normally apply to gaming operations.
Alongside the main complaint, New York filed a motion for a temporary restraining order seeking to immediately suspend the specific event contracts the state considers unlawful. The motion goes beyond a simple shutdown request: it demands restitution for affected users, disgorgement of all revenue linked to the contested products, treble damages, and an additional civil penalty of up to $100,000 for each allegedly illegal contract offering.
Court papers cited by the Attorney General’s Office suggest that once all of Kalshi’s New York-facing business is fully accounted for, the total compensatory and punitive damages could exceed $36 billion. That figure underscores how aggressively New York is willing to pursue financial sanctions to deter other platforms from attempting similar business models without state approval.
New York’s political leadership has publicly backed the enforcement push. Governor Kathy Hochul, in a statement released through the Attorney General’s Office, accused Kalshi of ignoring rules designed to safeguard the public. She argued that New York’s gaming laws are not mere technicalities but mechanisms to shield consumers from exploitation, to combat problem gambling, and to ensure that businesses contributing to gambling-related risks also contribute tax revenue to public services.
Attorney General James framed the case in even starker terms, emphasizing the state’s focus on minors and vulnerable players. She reiterated that New York’s gambling laws exist to keep children away from betting and to reduce the harm associated with gambling addiction. Whether Kalshi calls its products “prediction markets” or “event contracts,” she said, they are functionally gambling products and must be regulated as such.
This lawsuit lands after months of mounting friction between Kalshi and New York regulators over how to classify the company’s offerings, particularly sports-related event markets. The core dispute turns on whether these contracts are properly viewed as commodities derivatives overseen by federal law or as bets subject to state gambling statutes. The answer has profound implications not only for Kalshi but for the broader prediction market industry.
At the federal level, U.S. District Judge Analisa Torres has already declined multiple emergency bids from Kalshi seeking to block New York’s enforcement efforts while the company pursues an appeal in the U.S. Court of Appeals for the Second Circuit. Earlier this week, she again refused to grant temporary relief, leaving the company exposed to state actions while the legal fight continues.
Torres previously rejected Kalshi’s request for an injunction pending appeal on July 27, finding that the company had not met the demanding legal threshold required for such extraordinary relief. She concluded that the harms Kalshi cited – including compliance costs and potential business disruption – were primarily financial and therefore did not rise to the level of irreparable injury needed to justify an injunction.
Her July 7 ruling was even more consequential for the larger legal debate. In that decision, Torres concluded that the federal Commodity Exchange Act was unlikely to override, or “preempt,” New York’s gambling laws as applied to Kalshi’s sports-event contracts. That determination, if upheld by the Second Circuit, could give states broad leeway to regulate or restrict prediction markets even when they operate on federally registered platforms.
Kalshi has appealed that ruling, arguing that its operations fall within the exclusive domain of federal commodities regulation and that state gambling laws should not apply to trading conducted on a registered exchange. The appeal is still pending, and the outcome will help define where the line is drawn between state and federal authority over innovative financial products that resemble wagers.
In rejecting Kalshi’s emergency motions, Torres also downplayed the company’s contention that following New York’s rules might jeopardize its federal registration. She characterized that concern as speculative, noting that regulators had not actually threatened to revoke Kalshi’s status solely for complying with a state enforcement action. As a result, she found no present conflict so severe that it would justify emergency court intervention.
The judge declined to rely on the Commodity Futures Trading Commission’s proposed rule issued in June, which asserts that the Commodity Exchange Act expressly preempts conflicting state laws for transactions on CFTC-registered exchanges. Because that rule remains a proposal rather than a final regulation, Torres said courts have an independent duty to interpret federal statutes themselves, especially in light of the Supreme Court’s Loper Bright decision, which narrowed judicial deference to agency interpretations.
Complicating matters further, the CFTC has entered the fray directly. In a separate action, the agency filed its own motion for a temporary restraining order aiming to stop New York from launching or pursuing criminal and civil proceedings against Kalshi and other prediction market platforms registered with the commission. The CFTC maintains that Congress intended it to wield exclusive regulatory power over event-contract markets that operate as designated contract markets under federal law.
From the regulator’s perspective, allowing states to impose overlapping or conflicting rules on federally supervised exchanges would fragment the national market and undermine Congress’s goal of a uniform regulatory environment for derivatives trading. New York’s position, however, is that the state retains the sovereign right to define and police gambling within its borders, especially when vulnerable residents could be harmed.
The clash encapsulates a broader uncertainty surrounding prediction markets in the United States. Some courts have taken a relatively permissive view, treating event contracts as legitimate financial products when they serve risk management or price-discovery functions. Others, like New York’s regulators and Judge Torres in this context, see many of these offerings as indistinguishable from conventional bets that should be regulated as gambling if they are accessible to the general public.
For Kalshi, the stakes are existential. If New York succeeds in its effort to classify the platform’s markets as illegal gambling, other states may follow suit, potentially carving up its user base and saddling the company with a patchwork of compliance obligations. The threat of multibillion-dollar penalties also raises the prospect that simply operating in one large state could carry crippling financial risk for prediction market operators.
The case also has far-reaching implications for other platforms that operate or plan to operate in the space. Many are experimenting with contracts on sports, elections, entertainment, and macroeconomic indicators, often pitching themselves as tools for forecasting or hedging rather than gambling. The outcome of New York’s suit and the related federal litigation will heavily influence which of those models are viable – and where.
Consumer protection is likely to remain a central theme in these fights. Regulators have signaled particular concern about easy access, sleek interfaces that resemble trading apps, and the potential for heavy losses by inexperienced or underage participants. Expect greater scrutiny of know-your-customer procedures, age verification, limits on marketing to younger users, and transparent disclosures about risk and expected losses.
Another emerging question is whether prediction markets can convincingly demonstrate a public benefit that justifies more accommodating rules. Proponents argue that these markets generate valuable information about the future, improve decision-making, and allow businesses and individuals to hedge real-world risks. Critics counter that when markets revolve around sports scores, celebrity events, or political races, the dominant effect is gambling, not risk management or price discovery.
Over the coming months, the Second Circuit’s handling of Kalshi’s appeal, the court’s response to the CFTC’s attempt to shield its registrants from state enforcement, and New York’s own lawsuit in state court will collectively shape the regulatory map. The financial technology sector, online betting operators, consumer advocates, and policymakers will be watching closely to see how aggressively states can move against prediction markets and how firmly federal regulators can defend their turf.
Ultimately, the confrontation between New York and Kalshi is not just about one company or a single set of contracts. It is becoming a test case for how the law will treat a new generation of platforms that sit between finance and gambling – and whether the United States will allow a unified national framework for prediction markets, or leave them to be defined, and potentially restricted, state by state.