New York State has sued KalshiEX LLC, operator of a prediction market, alleging it is running an unlicensed gambling business. The complaint, filed by the state attorney general on July 31, 2026, with the Supreme Court of the State of New York, New York County—the state's trial-level court—argues that contracts on elections and culture, in addition to sports, constitute gambling, and seeks a permanent injunction against unlicensed operation within the state.
There is a backstory to the timing of this lawsuit. On July 7, a federal district court issued a preliminary ruling that applying New York state law to Kalshi's sports contracts is not preempted by the Commodity Exchange Act (CEA). Although Kalshi appealed, it failed to obtain a preliminary injunction halting state enforcement. The state then moved beyond a cease-and-desist order to a lawsuit seeking findings of illegality and monetary relief. However, the federal district court's ruling concerned only sports contracts; whether state law can be applied to the election and culture contracts included in this complaint was not decided by that ruling.
Breaking Down the State's $36 Billion Estimate
The relief the state seeks is not a single fixed amount. The complaint asks the court to order an accounting of transactions Kalshi accepted within the state, money lost by customers, and profits earned by the company. Based on that accounting, the state seeks restitution to customers, disgorgement of illegal gains and damages, and a penalty equal to three times the profits obtained through illegal conduct. It also seeks a $100,000 penalty for each instance in which unlicensed sports betting was offered or attempted to be offered.
AP reported the state's estimate, contained in a separate court filing, as $36 billion. However, this is neither a damages figure determined by a court nor a lump-sum amount stated in the complaint as a demand. Because the applicable formulas under each statutory scheme would be applied only after examining the number of transactions and gains, the final amount demanded or determined will change as the litigation proceeds.
The complaint includes an example in which the attorney general's office verified whether trading was actually possible from within New York State. On April 6, 2026, an investigator purchased four "Yes" contracts predicting a win by the University of Connecticut in an NCAA men's basketball game. The state explains that the investigator paid $1.14, including the contract price and a $0.06 fee, and received nothing back after the university lost. The state further cites Kalshi's publicly announced $22 billion valuation and $178 billion annualized trading volume to illustrate the scale of its business, and seeks an accounting of transactions and gains. Both figures are the company's own publicly disclosed numbers as cited by the state, not figures determined by a court.
Is Trading Yes or No Gambling Under State Law?
Kalshi's contracts involve trading a binary Yes/No position on whether a future event will occur. The price roughly corresponds to a probability, and the contract settles at $1 per unit if the predicted outcome occurs, or zero if it does not. The counterparty is not the house but another market participant holding the opposite side of the contract, with Kalshi collecting a trading fee. The company has described this structure as financial trading.
New York State's penal law, however, defines gambling as staking something of value on a future contingent event not under one's control or influence, upon an agreement that one will receive something of value if a particular outcome occurs. Sports betting as defined under the state's Racing, Pari-Mutuel Wagering and Breeding Law includes not only wagers on game outcomes but also wagers on portions of a game or the performance of individual players. The state's argument is that regardless of a product being named an "event contract," the flow of money and dependence on an outcome satisfy this definition.
The complaint takes a two-pronged approach. Claims based on the state constitution and penal law extend to election- and culture-related contracts in addition to sports. Meanwhile, claims regarding state licensing, the 21-and-over age requirement, and restrictions on college sports are based on the sports betting law. Not all contracts are alleged to be illegal under the same provision.
There are also differences regarding age and product scope. Kalshi allows account opening for users 18 and older, while New York State's mobile sports betting is limited to those 21 and older. Games involving in-state college teams are prohibited even for licensed operators. The complaint specifically cites games from March 2026 involving Siena University and Hofstra University that Kalshi offered for trading.
The Line Between CFTC Designation and Self-Certification
Kalshi is not operating outside federal regulation. On November 3, 2020, the Commodity Futures Trading Commission (CFTC) designated the company as a Designated Contract Market (DCM). DCMs are required to maintain audit trails, monitor trading, and police against market manipulation and misuse of nonpublic information. The CFTC can also investigate and prosecute violations.
However, DCM designation and the legality of every product traded on it are not the same thing. A DCM self-certifies that a contract complies with the law and can generally list it after one business day. Kalshi self-certified its sports contracts on January 22, 2025. The CFTC did not grant prior approval on a case-by-case basis.
The July 7 federal district court ruling separated DCM designation from the legality of individual contracts. The court, for purposes of its analysis, assumed that the sports contracts were swaps under the CEA, but did not make a final determination on their classification. Even on that assumption, the court did not find that the CFTC's exclusive jurisdiction wholly displaces state gambling law. This is because the CEA itself contains a mechanism allowing the CFTC to determine that event contracts involving activity illegal under state law or "gaming" are contrary to the public interest.
The court further held that self-certification should not be treated as a declaration of legality, and that the CFTC's failure to halt a contract does not itself prove legality. It also found that obtaining a New York State license and treating in-state users as a separate category could be compatible with the fair access requirements imposed on DCMs. This was a ruling at the preliminary injunction stage, not a final judgment on the merits. Even so, it provided the state with a foothold to proceed with the present lawsuit.
Who Should Oversee Market Surveillance and Consumer Protection?
The federal government and the state are looking at different risks posed by the same contracts. The CFTC's regime requires audit trails and monitors for fraudulent trading to protect market integrity. New York State imposes a 21-and-over age restriction, regulates advertising and self-exclusion, and requires operators to address problem gambling. The complaint states that the state's mobile sports betting operators are taxed at roughly 51% of gross revenue, and that in 2024, more than $1 billion in state tax was collected from approximately $2 billion in total gaming revenue.
A Kalshi spokesperson told AP that the state's lawsuit was "political theater" and countered that the state cannot shut down a federally licensed exchange. The CFTC has also strongly opposed state intervention. On July 14, when Kalshi attempted to unwind already-executed trades in response to a Michigan court order, the CFTC ordered it to halt the emergency rule change and settle the trades as originally executed. This reflects the federal position of maintaining a uniform nationwide derivatives market.
Court rulings are already split. According to a summary of the July 7 order in which the New York federal district court denied Kalshi's motion for a preliminary injunction, Kalshi obtained preliminary injunctions in the Third Circuit and in Tennessee, while being denied in the Sixth Circuit as well as in Arizona, Maryland, and Nevada. New York's ruling is also being contested before the Second Circuit Court of Appeals.
On June 10, the CFTC proposed a 90-day review process, among other measures, under which it would examine event contracts—including sports contracts—on a contract-by-contract basis to determine whether they involve gaming or activity illegal under state or federal law, and would halt any contract found contrary to the public interest. While this remains only a proposed rule, how the final rule treats activity illegal under state law during contract review will determine whether prediction markets remain a uniform nationwide product or become subject to state-by-state licensing, age, and product restrictions. This line-drawing carries more weight for the market's future than the $36 billion estimate making headlines today.