Connecticut sues Kalshi over unlicensed sports wagering

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The Backstory

Connecticut escalates a test case for prediction markets

Connecticut’s lawsuit against Kalshi marks a shift from regulatory warning to direct court action in one of the most closely watched disputes in U.S. gambling and derivatives law. The state is asking a court to stop Kalshi from offering sports event contracts that officials say amount to unlicensed sports wagering. Kalshi argues the products are federally regulated financial contracts overseen by the Commodity Futures Trading Commission, not gambling products subject to state licensing.

The immediate fight is over access to Connecticut customers, but the stakes are broader. If courts accept Kalshi’s position, prediction market operators could offer sports-linked products nationally under federal market rules, potentially bypassing the state-by-state licensing system that has governed U.S. sports betting since the Supreme Court struck down the federal ban in 2018. If Connecticut prevails, states would strengthen their authority to police sports event contracts as wagers when they resemble traditional bets.

Cease-and-desist orders set the legal track

The current lawsuit follows Connecticut’s December enforcement action, when the Department of Consumer Protection Gaming Division ordered Kalshi, Robinhood and Crypto.com to stop offering sports event contracts in the state. In that action, regulators said the companies lacked gambling licenses and were offering illegal online wagering. The department also warned that noncompliance could lead to criminal charges.

That earlier action, described in Connecticut’s cease-and-desist orders against prediction markets, framed the state’s core consumer protection argument. Officials said the platforms were operating without oversight designed to prevent underage wagering, insider abuse, unfair settlement practices and risks to customer funds and personal data. Commissioner Bryan Cafferelli also pointed to state rules barring sports wagering by people younger than 21, a recurring issue because some prediction market platforms permit users as young as 18.

Kalshi responded by suing Connecticut, seeking to block enforcement. The company contended that its sports event contracts are swaps or similar instruments within the federal commodities framework, meaning state gambling authorities are preempted. Connecticut has rejected that view, saying federal commodities law was not designed to create a nationwide sports betting lane outside state gambling regulation.

A federal judge dealt Kalshi an early setback

Connecticut entered the latest phase of the dispute with an important court ruling already in hand. In August, U.S. District Judge Vernon D. Oliver denied Kalshi’s request for a preliminary injunction, allowing Connecticut to continue enforcing its gambling laws while the case proceeds. The decision did not resolve the merits, but it suggested skepticism toward Kalshi’s federal preemption theory.

As detailed in the Connecticut court ruling denying Kalshi’s injunction request, Oliver found that Kalshi’s sports event contracts did not depend on whether an event occurs or fails to occur in the way contemplated under the Commodity Exchange Act. Instead, the contracts depend on outcomes or discrete in-game occurrences, making them functionally similar to sports wagers.

The court also emphasized the public interest behind state gambling oversight. Sports wagering has long been regulated under state police powers because of risks tied to addiction, financial loss, integrity and consumer protection. Oliver was not persuaded that Congress had clearly displaced that authority by placing sports event contracts under CFTC oversight. He also noted that Kalshi had been on notice that states might challenge the products, weakening the company’s argument that it would suffer undue harm if forced to unwind contracts.

Kalshi has appealed to the Second Circuit Court of Appeals, ensuring that the Connecticut case could become an important appellate marker. A decision there may influence how other courts weigh the boundary between federally regulated prediction markets and state-regulated gambling.

Other states are moving on the same theory

Connecticut is not acting in isolation. Massachusetts Attorney General Andrea Joy Campbell has sued Kalshi in Suffolk Superior Court, alleging the company unlawfully promotes and accepts online sports wagers under the guise of event contracts. The Massachusetts case targets sports contracts structured around moneylines, point spreads and totals, products that closely track conventional sportsbook offerings.

In the Massachusetts lawsuit over Kalshi’s sports wagering operations, state officials said Kalshi had not applied for a sports wagering license from the Massachusetts Gaming Commission, despite offering products they view as sports bets. Campbell’s complaint also highlighted age restrictions and responsible gambling safeguards. Online sports betting in Massachusetts is limited to customers 21 and older, while Kalshi’s model has allowed access by younger adults. The state also pointed to the absence of protections such as compliant deposit limits, maximum wagers and risk education.

Those claims echo Connecticut’s arguments and show how states are aligning around a common position: The label “event contract” does not determine legality if the product behaves like a bet. Regulators also say licensed sportsbooks pay taxes, undergo suitability reviews, maintain responsible gambling programs and comply with market integrity rules. Prediction markets, they argue, gain a competitive advantage if they can offer similar products without those obligations.

Kalshi has faced additional pressure beyond New England. A recent wave of enforcement and litigation included Washington, Maryland and other jurisdictions. In a report on Kalshi’s regulatory setbacks during valuation talks, the company was described as facing orders and lawsuits at the same time it was seeking a funding round that could value it at $40 billion. That contrast underscores why the legal classification matters: A favorable ruling could support a fast-growing national business, while adverse rulings could force costly geofencing or product withdrawals.

Tribal gaming interests add another layer

The prediction market fight also intersects with tribal gaming rights. Native American tribes and gaming associations have argued that sports-linked event contracts threaten revenue streams protected through tribal compacts and federal Indian gaming policy. Their concern is that prediction market operators can reach customers in states where tribal casinos or tribal-affiliated operators hold key rights, without tribal consent or revenue-sharing arrangements.

According to the tribal brief supporting Connecticut’s position, the Indian Gaming Association and 16 federally recognized tribes said prediction market operators such as Kalshi divert money from tribal casinos. The brief supported Connecticut’s attempt to shut down unlicensed prediction platforms in the state. Similar claims have surfaced in other litigation, including actions by California tribes.

For tribes, the dispute is not merely about product definitions. Tribal gaming revenue often supports government services, infrastructure and community programs. If federally registered prediction markets can offer sports products nationwide without state or tribal approval, tribes argue that the balance negotiated through compacts could be undermined. That gives Connecticut and other states additional allies in arguing that sports event contracts cannot be separated from the gambling policy framework surrounding them.

Federal preemption remains the decisive question

The CFTC’s role is central to the conflict. Kalshi is regulated by the agency as a designated contract market, and the company says that federal status governs its products. The CFTC has also filed lawsuits against Connecticut and other states, arguing that prediction markets should be regulated federally rather than through state gambling laws. Connecticut is seeking dismissal of the federal case against it.

The unresolved question is whether sports event contracts are financial instruments within the commodities regime or wagers subject to state law. Courts may avoid a sweeping answer at first, focusing instead on specific contract design, marketing and consumer access. But the practical consequences will be national. A broad win for Kalshi could accelerate integration between trading apps, crypto platforms and sports prediction markets. A broad win for Connecticut could require operators to obtain state sports betting licenses or block users in states where they lack approval.

The latest lawsuit therefore builds on months of enforcement, litigation and political concern. Connecticut is trying to convert an early courtroom advantage into a direct prohibition on Kalshi’s sports offerings. Kalshi is trying to preserve a model that treats sports outcomes as tradable events rather than bets. The result will help define whether prediction markets become a parallel sports wagering system or are folded into the existing gambling regulatory structure.