Connecticut sues Kalshi over unlicensed sports betting

Kalshi, a predictive markets platform, is facing new legal action in Connecticut, where the state has filed a lawsuit seeking a court order to block its sports betting operations. State officials, including Attorney General William Tong, Consumer Protection Commissioner Bryan T. Cafferelli, and Governor Ned Lamont, argue that Kalshi offers contracts related to sporting events, which are considered equivalent to sports betting under current law.

Lawsuit and Central Requests from Connecticut

The 24-page lawsuit seeks a temporary or permanent injunction for Kalshi to stop offering any sports betting services in Connecticut. The document also calls for restitution and civil penalties for each violation committed under state law. The state further demands that Kalshi "reimburse all revenues, benefits, and profits obtained, in whole or in part, through the unfair and/or deceptive acts and practices mentioned in the complaint."

Tong stated that Kalshi's offering is not "magically protected" by federal regulations against local consumer protection laws. According to the Attorney General, such regulations aim to safeguard minors and individuals with gambling problems, and a court order would serve to "stop the risk of related harms."

Lamont reinforced the state's position, reminding that the legalization of sports betting in 2021 aimed to create a safe and regulated market for Connecticut consumers, "not to open the door to unregulated sports betting." Cafferelli was emphatic, pointing out: “These markets have been running a coordinated campaign to convince the public that they offer safe investments when, in reality, they are indistinguishable from sports betting. They target minors and individuals who have opted for self-exclusion, do not comply with technical standards designed to protect funds and personal information, and violate all gaming laws in the state."

Kalshi, the CFTC, and the Swap-based Defense

Kalshi and other predictive market operators assert that they are federally regulated by the Commodity Futures Trading Commission (CFTC) and therefore do not require state licenses for sports betting. They define their products as "swaps," not sports betting. In this vein, following the lawsuit, Kalshi's Head of Litigation Jovy Dedaj stated:

"Connecticut has just filed this lawsuit to shutter Kalshi immediately, but allows other predictive markets to continue operating in the meantime. This is just another case of arbitrary and inconsistent enforcement by the states, demonstrating that it is not about protecting the consumer. If that were the goal, the same remedy would apply to all players. This unequal treatment is precisely why federal oversight is needed." — Jovy Dedaj, Kalshi's Chief of Litigation

Kalshi's position underscores the tension between federal regulation and state regulatory authority, a recurring aspect in the evolution of the U.S. betting and prediction markets.

Regulatory Background and Previous Actions

The legal action follows cease-and-desist letters sent by the Gaming Division of the Department of Consumer Protection of Connecticut last December to Kalshi, Robinhood, and Crypto.com. The regulator alleged that all three platforms were offering unlicensed sports betting within the state. In response, Kalshi sued the state arguing that its event contracts constitute swaps and, consequently, fall under the authority of the CFTC.

However, in mid-August, Federal Judge Vernon Oliver denied Kalshi's motion, ruling that the contracts related to sporting events on the platform equate to sports betting under state law.

Implications for Other States

The situation in Connecticut is not isolated for Kalshi. In the last 12 months, the company has faced similar judicial setbacks in other states, including New York, Washington, and Nevada. In the latter, the platform agreed to employ third-party geofencing software to prevent access from consumers located within its borders.

Implications for Operators and the Industry

The conflict between the federal regulation of the Commodity Futures Trading Commission and state laws regarding gambling and sports betting signifies a line of uncertainty for innovative platforms like Kalshi. Connecticut argues that contracts related to sporting events must comply with the strict state regulations established after the legalization of sports betting in 2021. Meanwhile, Kalshi and others seek support from CFTC federal oversight, raising relevant questions for other operators and jurisdictions regarding hybrid business models between traditional predictive markets and sports betting.

This dynamic will remain central in the development of new products and in the regulatory strategy for platforms and operators in the high-potential U.S. markets.