Kalshi Faces Lawsuit Over Alleged Illegal Online Sports Betting Scheme

TLDR

• Kalshi is accused of operating a hidden house in sports prediction trades
• Sports trades allegedly made up 90% of Kalshi’s total trading volume
• Lawsuit says users often bet against platform-linked market makers
• Several U.S. states have launched actions against Kalshi’s operations

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Kalshi, a CFTC-regulated prediction market, is under legal scrutiny after a class-action lawsuit was filed in the Southern District of New York. The lawsuit claims Kalshi has been operating an unlicensed sports betting platform by allowing users to trade on sports events, while allegedly positioning platform-linked market makers as the “House.”

The complaint includes seven plaintiffs from various states and claims that Kalshi misled users. According to the lawsuit, traders were led to believe they were competing against each other, but they were instead betting against the platform itself or institutional market makers connected to Kalshi.

Market Makers and Alleged Hidden House Structure

The plaintiffs allege that Kalshi’s internal structure resembled that of a traditional sportsbook. In sports betting, the “House” sets the line and profits when consumers lose. The lawsuit says Kalshi adopted a similar model by using institutional market makers that often took positions opposite to retail users.

According to the filing, nearly 90% of Kalshi’s trading volume in September 2025 was from sports-related contracts. That figure equates to an estimated $2 billion in total activity for the month. Plaintiffs argue that this shows the platform was functioning primarily as a sports betting site.

Gaming attorney Daniel Wallach stated that Kalshi “appears to have operated under the legal radar by labeling bets as derivatives.” The case argues that this setup gave Kalshi a house edge, turning it into a betting operation rather than a neutral trading platform.

Advertising and Regulatory Pushback

Kalshi’s advertising methods have also been cited in the lawsuit. Plaintiffs claim the platform released promotional content that resembled news headlines. These ads allegedly stated that Kalshi’s services were legal across all 50 U.S. states. The lawsuit argues that these statements were deceptive.

Multiple U.S. states have responded with regulatory or legal actions. Massachusetts, New York, and Nevada have challenged Kalshi’s operation. A Nevada federal judge ruled that the state has the right to enforce gaming laws against Kalshi, despite its claims of federal protection under the CFTC.

Massachusetts regulators claim that Kalshi’s sports trading volume now exceeds that of licensed sportsbooks. State officials argue that Kalshi must follow state gambling regulations if it continues offering these types of contracts

Federal Oversight Versus State Gambling Laws

Kalshi maintains that all event contracts on its platform are regulated financial products. It claims its designation as a contract market under the Commodity Futures Trading Commission (CFTC) protects it under federal law.

The lawsuit challenges this position by alleging that the contracts closely resemble wagers. It states that when the platform profits from users losing, it no longer operates as a neutral market. The case could test how the law differentiates financial derivatives from bets.

The outcome of this lawsuit may affect other prediction markets that rely on similar structures. Discovery in the case is underway, and several state regulators are tightening their scrutiny. Kalshi has not yet commented in detail on the pending litigation.

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