Kalshi faces a major regulatory battle in New York as the CFTC orders it to keep operating amid a lawsuit that could expose the prediction market to more than $36 billion in damages.
Kalshi is facing a major regulatory battle in New York after state authorities launched a legal challenge that could expose the prediction-market platform to more than $36 billion in damages.
The dispute has now escalated to the federal level. The Commodity Futures Trading Commission (CFTC) ordered Kalshi to continue operating after the company declared a market emergency linked to New York's enforcement campaign.
The intervention highlights a growing conflict over whether states can use gambling laws to restrict event contracts offered by federally regulated derivatives exchanges.
The dispute comes at a crucial time for Kalshi, which is reportedly seeking a $40 billion valuation as its trading activity and revenue continue to expand.
On August 11, the CFTC directed KalshiEX LLC to continue operating under the Commodity Exchange Act's core requirements.
The decision came after Kalshi told the regulator that New York's enforcement action had created a market emergency.
New York Attorney General Letitia James filed a lawsuit against Kalshi on July 31, arguing that the company offers sports prediction markets without a license from the New York State Gaming Commission.
New York claims Kalshi is effectively operating an unlicensed gambling business while avoiding requirements imposed on casinos and sportsbooks, including taxes and consumer-protection rules.
The state is seeking several forms of relief, including the surrender of gains allegedly generated through the violations, restitution for affected consumers and penalties equal to three times those gains.
According to the CFTC, the potential financial exposure could exceed $36 billion.
The CFTC's intervention centers on the question of federal versus state authority.
Kalshi operates as a federally regulated derivatives exchange, matching contracts between users and clearing transactions through a national financial infrastructure.
CFTC Chairman Michael Selig argued that federally regulated event contracts should not be subjected to different gambling rules in individual states.
Selig said New York's approach could effectively allow state gambling laws to interfere with federally regulated financial markets.
The CFTC therefore argues that keeping Kalshi operational is necessary to preserve market resilience, orderly trading and price discovery.
However, the emergency order does not settle the underlying legal dispute.
The courts will still have to determine whether federal derivatives regulation prevents states from applying their own gambling laws to Kalshi's event contracts.
The legal dispute is not the only pressure Kalshi faces in New York.
On August 12, New York City Council Speaker Julie Menin announced that the City Council had been examining marketing practices across the prediction-market industry.
The council sent letters to Kalshi, Polymarket, Coinbase and Gemini Titan, requesting information about how the companies promote contracts involving sports, politics, culture, weather and other events.
The investigation focuses on allegations involving potentially misleading or aggressive marketing practices.
Among the concerns raised are undisclosed influencer promotions and marketing materials that could give consumers unrealistic impressions about the profitability of prediction-market trading.
The City Council is also considering whether existing consumer-protection rules are sufficient or whether additional legislation, enforcement measures and public education initiatives are needed.
The New York dispute reflects a broader debate surrounding prediction markets.
Platforms such as Kalshi and Polymarket allow users to trade contracts based on the outcome of events.
The industry has expanded rapidly, particularly into sports and other areas that have traditionally been associated with betting.
That growth has created a regulatory question: should these contracts be treated primarily as financial products or as gambling products?
The answer has significant consequences.
If prediction markets are treated as federally regulated derivatives, companies such as Kalshi can operate under federal rules established by the CFTC.
If states can independently classify certain contracts as gambling, platforms could face different licensing requirements and restrictions across the country.
The CFTC has already become involved in similar disputes with several states, including Arizona, Connecticut, Illinois, New York, Rhode Island and Wisconsin.
The agency has also submitted legal briefs in related cases.
The regulatory dispute has not stopped Kalshi's rapid commercial expansion.
The company is reportedly in advanced discussions to raise a Series G funding round at a valuation of around $40 billion.
That would represent a significant increase from the approximately $22 billion valuation attached to its May funding round.
Kalshi's revenue has also accelerated.
The company's annualized revenue reportedly exceeded $4 billion in July, compared with more than $2 billion just two months earlier.
Sports trading has been an important contributor to that growth.
During the World Cup, Kalshi reportedly processed approximately $27 billion in trading volume and attracted around 3 million users.
More recently, the platform processed approximately $11 billion in trading over a 30-day period, according to the data cited in the source.
The rapid growth makes the regulatory dispute increasingly important for the company's future valuation.
Kalshi's potential $40 billion valuation reflects investors' expectations for continued growth in prediction markets.
However, the ongoing conflict with New York introduces a significant risk.
The company's expansion depends partly on being able to offer event contracts across the United States under a consistent federal regulatory framework.
If states successfully establish greater authority over those contracts, Kalshi could face a more complicated operating environment.
Different state rules could potentially create additional licensing, compliance and legal costs while limiting the products that prediction markets can offer in certain jurisdictions.
On the other hand, a favorable federal ruling could strengthen Kalshi's position and provide greater certainty for the broader prediction-market industry.
The CFTC's emergency intervention gives Kalshi federal backing while the underlying legal dispute continues.
But it does not eliminate New York's lawsuit or resolve whether state gambling laws can apply to federally regulated event contracts.
The outcome could therefore have consequences far beyond Kalshi.
A ruling that favors New York could strengthen states' ability to regulate prediction markets under gambling and consumer-protection laws.
A decision favoring Kalshi and the CFTC could reinforce federal authority over nationally traded event contracts and make it more difficult for individual states to impose separate gambling restrictions.
For Kalshi, the stakes are particularly high.
The company is simultaneously pursuing rapid revenue growth and a potential $40 billion valuation while facing a legal challenge that could expose it to more than $36 billion in potential damages.
The coming court battles could therefore determine not only how Kalshi operates, but also whether prediction markets can continue expanding across the United States under a single federal regulatory framework.
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