Kalshi Faces Legal Setback in Connecticut Over Sports Event Contracts

The prediction market Kalshi has faced another legal defeat after a judge in Connecticut denied its request for a preliminary injunction. U.S. District Judge Vernon Oliver ruled that the sports event contracts offered by Kalshi are sports betting and do not comply with the Commodity Exchange Act (CEA). This decision follows a ruling from December that allowed Kalshi to continue offering these contracts despite cease and desist letters from the Connecticut Department of Consumer Protection.

Background and Legal Context

Kalshi had filed the request arguing that the CEA prevents the enforcement of state gaming laws against prediction markets, and that regulation should fall under the Commodity Futures Trading Commission (CFTC). The recently published 38-page document indicated that the distinction between winning event contracts and exact score contracts was unclear, failing to meet the requirement of having potential financial consequences.

Arguments and Regulatory Issues

Oliver determined that Kalshi, valued at $22 billion, did not provide sufficient evidence that it would succeed in its argument that sports event contracts are swaps, nor that it would suffer irreparable harm if the injunction was not granted. In previous comments, Kalshi claimed that its offering was "a legal sports bet nationwide," but the judge concluded that, in essence, they are sports betting, and it is not within the CFTC's jurisdiction to regulate them.

Comparison with Other Operators

The judge also questioned why Kalshi did not opt to apply for a license in Connecticut. Currently, DraftKings, FanDuel, and Fanatics are licensed to offer sports betting in the state through partnerships with tribes. Online casino operations were launched in 2021 in Connecticut. The legal defeat in Connecticut adds to Kalshi's losses in states such as New York, Nevada, and Washington in the past 12 months.

Future Challenges and Regulations

In Nevada, Kalshi agreed to use third-party geofencing software to limit customer access to the platform. On August 7, the CFTC reminded prediction markets not to display event contract prices in the "American odds format used by bookmakers," as this could mislead market participants about the nature of the transaction.

The CFTC added that market participants must display information in a way that clearly indicates when a product is an event contract on a platform regulated by the CFTC, and not a higher-margin betting product. EGR reached out to Kalshi for comments.