Gambling Industry Unites Against Prediction Markets: Can Kalshi Weather the Coming Storm?

Kalshi’s Carefree Existence

Kalshi’s existence in the U.S. has been relatively carefree until now. The company saw explosive growth and initially avoided any language tied to betting or gambling like the plague. Kalshi positioned itself as a CFTC-regulated entity, exempt from state gambling regulations. Yet, its platform saw a surge in markets for sports events like the Super Bowl and March Madness, which became increasingly hard to distinguish from what sports betting operators offer. During March Madness alone, the platform recorded a volume of $500 million, though this metric can’t be directly compared to the handle reported by betting operators.

This sent a loud and clear signal to operators and state regulators that an outsider had crept into their backyard and quietly started building a flashy treehouse. State regulators stepped in for the first time, issuing cease-and-desist orders to Kalshi, as they do with offshore operators. But things didn’t unfold as usual. Kalshi not only ignored the orders but also took the matter to court. A quick initial victory in Nevada, securing a preliminary injunction, allowed Kalshi to continue operations unimpeded.

Both in Nevada and later in New Jersey, the process went smoothly, but Judge Adam Abelson in Maryland began asking tougher questions, complicating matters. Kalshi still had some aces up its sleeve, like Donald Trump Jr. as a strategic advisor and board member Brian Quintenz, nominated by President Trump to head the CFTC (The very agency regulating Kalshi). The situation grew murkier, and Kalshi’s messaging faltered: first distancing itself from betting, then marketing itself as a betting platform, only to later try distancing itself again while continuing similar marketing tactics. Dustin Gouker meticulously tracks instances where Kalshi claims it offers betting in 50 states.

Gambling Industry Brings Out the Big Guns

Now to the crux of what appears to be the most forceful and coordinated action against Kalshi. It all starts in New Jersey, where a lower court’s decision to grant a temporary injunction was appealed by the Attorney General, landing before the U.S. Court of Appeals for the Third Circuit.

The New Jersey AG’s action opened the door for third parties, not directly involved, to file amicus curiae briefs (“friend of the court”). This allows entities with specialized knowledge or stakes in the case to present their arguments and concerns. Thus, a storm erupted, with over 100 separate entities flooding the Third Circuit with amicus briefs.

The extensive list includes:

• Attorneys General from 34 U.S. States and Territories
• Native American Tribes (including 60 Tribes and the Indian Gaming Association)
• American Gaming Association (AGA)
• Casino Association of New Jersey (CANJ)
• Stop Predatory Gambling, Association of American Physicians and Surgeons, Texans Against Gambling
• New Finance Institute (NFI)

Each organization presented a range of arguments. Sometimes overlapping, sometimes vastly different, and varying in validity. Taken together, they paint a comprehensive picture of why Kalshi’s operations are so problematic for many.

Federalism and States’ Rights to Regulate Gambling

Historical State Authority: It’s argued that states have long held the power to regulate gambling, reflected in diverse legal frameworks across states. Allowing the CFTC to override state gambling regulations would violate these rights.

No Clear Congressional Intent: It’s emphasized that Congress clearly signals when it intends significant federal preemption. The absence of explicit language in the Commodity Exchange Act (CEA) stripping states of gambling regulatory power suggests Kalshi’s interpretation is flawed.

Invalidating State Precedents: Allowing Kalshi’s operations could undermine key rulings like Murphy v. NCAA, which struck down the Professional and Amateur Sports Protection Act (PASPA).

Economic Importance of Regulated Gambling: States heavily rely on tax revenue from regulated gambling, supporting economic prosperity. Kalshi’s model threatens the stability of these frameworks and causes financial losses.

Nature of Kalshi’s Contracts as Gambling

Equated to Gambling: Kalshi’s event contracts are seen as “blatantly betting on sports outcomes,” akin to casino poker. They’re deemed Class III gambling, violating state and federal regulations, including the Indian Gaming Regulatory Act (IGRA).

Attempt to Skirt Laws: Kalshi’s model is called a “too-clever-by-half” attempt to evade gambling laws, marketed as a trading platform but functioning as an online casino.

Kalshi’s Marketing as Evidence: Kalshi’s direct and indirect marketing portrays its product as gambling, confirming its true intent.

CFTC’s Inadequate Expertise and Oversight

CFTC’s Lack of Expertise: The CFTC lacks the knowledge, infrastructure, or enforcement tools to effectively oversee sports betting markets, unlike state gambling regulators.

CFTC Inaction: The CFTC is criticized for failing to take a formal stance on sports event contracts and allowing Kalshi’s self-certification of contracts, seen as a breach of its regulatory duties and the Administrative Procedure Act (APA).

Regulatory Ineffectiveness: A three-prong test of regulatory authority constitutionality is applied, arguing the CFTC fails all points: no final agency decision, no action, and ineffective enforcement.

Regulatory Gap: CFTC inaction created a “regulatory gap,” altering the legal landscape and enabling illegal sports betting in many states post-PASPA.

Impact on Tribes and the Indian Gaming Regulatory Act (IGRA)

Undermining Tribal Sovereignty: Kalshi’s operations threaten tribes’ sovereign rights to regulate gambling on their lands under IGRA. Kalshi’s contracts occur on tribal lands without geofencing, violating their autonomy.

Tribal Financial Losses: Kalshi’s offerings harm tribes’ revenue from regulated gambling, critical to their economies.

No Conflict Between CEA and IGRA: It’s noted that CEA language doesn’t conflict with IGRA, so the CFTC lacks grounds to interfere with tribal regulations.

Public Harm

Addiction Risks: Allowing platforms like Kalshi could cause “massive public harm,” exacerbating gambling addiction, especially among youth.

Lack of Safeguards: Kalshi’s contracts lack protections like regulated gambling’s 21+ age limit (Kalshi allows 18+), addiction safeguards, or marketing restrictions.

Underage Gambling and Election Betting: Risks of underage gambling and promoting election betting are highlighted, violating state norms.

Court’s Dismissal of Harm: The lower court is criticized for downplaying public harm, addressing it with “one perfunctory sentence.”

Kalshi’s Ethics and Credibility

Board Controversy: The ethics of Brian Quintenz, Kalshi’s board member and future CFTC head, are questioned. Though he pledged to resign from the board post-nomination, concerns about a clear conflict of interest persist.

Partisan Marketing Strategy: Kalshi is described as an “online casino with a partisan marketing strategy,” undermining its credibility as a legitimate trading entity.

Broader Implications for Gambling Regulation

Far-Reaching Consequences: Kalshi’s operations could destabilize state gambling regulatory frameworks and reshape the national legal landscape beyond sports betting.

Legal Uncertainty: The CFTC’s inaction and ongoing court battle create an untenable stalemate requiring urgent resolution.

Unity Across Divides

Until now, arguments in ongoing cases have focused on specific issues, like whether Kalshi’s contract events have financial implications.

Now, reputable organizations have presented the Third Circuit with a comprehensive array of arguments, reflecting the case’s complexity. These arguments are coherent, address genuinely significant issues, and show that the court’s decision on Kalshi will have major repercussions, not just for the gambling industry but for society.

“Sometimes, the number and identities of the signatories alone convey that message, like a rare, bipartisan coalition of attorneys general, basically all of sports-betting America,” said lawyer Andrew Kim, who has closely followed prediction markets, to The Closing Line.

The scale is indeed impressive, as is the fact that entities often at odds have united against Kalshi. The court’s decision will be one of the most significant ever made on prediction markets. Can Kalshi withstand this onslaught?