Kalshi has overtaken legal sports betting surprisingly quickly in the United States. Since it is regulated at the federal level, there is not much states can do to slow its rise. States have tried to push back against prediction markets, but they have had little success.
Illinois is attempting to treat Kalshi like a traditional sportsbook because it has some of the strictest sports betting regulations in the country. However, Kalshi is not willing to accept that classification.
Kalshi sued Illinois last week, seeking to block new taxes and licensing requirements that are set to take effect on July 1. Legal battles are nothing new for the company, as its rapid rise has been accompanied by a steady stream of lawsuits and regulatory disputes.
Illinois Classifies Kalshi as a Sports Betting Operator
Illinois has some of the highest tax rates and regulatory requirements for sportsbooks in the United States. If an operator like DraftKings wants to do business in the state, it must take on a significant financial burden.
Illinois classifies Kalshi and other prediction markets as unlicensed sports betting operators because they offer many of the same markets as sportsbooks, even though they operate as prediction market exchanges where users trade against one another instead of the house.
Naturally, Kalshi does not want to pay state sports betting taxes and strongly disagrees with Illinois' classification. The company believes it should be able to offer event contracts under federal oversight without complying with state sportsbook regulations.
In its complaint, Kalshi wrote, "This action challenges the State of Illinois's clear violation of the Supremacy Clause with respect to the regulation of event contracts." The company plans to argue that event contracts should be regulated exclusively by the Commodity Futures Trading Commission rather than individual states.
The new requirements were enacted through Senate Bill 3019. The law requires prediction market operators to pay a new transaction tax and obtain a state sports betting license. It imposes a 1.75% tax on the first five million prediction market trades each fiscal year and 3.5% on every trade after that. It also requires companies like Kalshi to purchase a $15 million sports betting license.
Kalshi argues the law conflicts with federal regulations. The company claims requiring prediction markets to obtain state licenses and use geolocation technology would violate the CFTC's requirement that federally regulated exchanges provide uniform nationwide access to their markets.
Should Prediction Markets Be Considered Sports Betting?
The legal fight over prediction markets is just getting started, and it could take years before there is a definitive answer. States rely on sports betting taxes for revenue, and prediction markets are increasingly attracting customers without contributing to those state tax collections.
States do have a legitimate argument. Prediction markets like Kalshi offer many of the same markets that sportsbooks do. Nearly every sporting event available at a sportsbook can also be traded on Kalshi, and in some cases, prediction markets offer even more options.
The biggest difference comes with how the platforms operate. Sportsbooks act as the bookmaker, while Kalshi functions as an exchange where users trade contracts with one another. Although Kalshi has introduced combo products, its parlay offerings still trail traditional sportsbooks. That exchange model will likely remain the company's strongest argument for why it should not be subject to state sports betting laws.
The Trade Handle Prediction Markets Take
The debate over how prediction markets should be classified will continue for years, but I believe they should remain regulated at the federal level.
While prediction markets offer many of the same contracts as sportsbooks, the most important distinction is that they do not operate as the bookmaker. Instead, they simply provide a marketplace where buyers and sellers trade with one another. That difference may ultimately determine how courts and regulators choose to classify the industry moving forward.