Illinois federal court blocks state action against Kalshi and CFTC

A federal judge in Illinois has handed prediction markets a rare legal win, ruling against state attorney general Kwame Raoul and in favour of the Commodity Futures Trading Commission and two of its registered exchanges.

U.S. District Judge Martha Pacold issued the memorandum and order on 2 October, according to SBC Americas. It consolidates three separate lawsuits brought against Illinois: one from Coinbase, one from KalshiEX, and one from the CFTC itself. The Coalition for Fair Markets and the Crypto.com-affiliated exchange OG joined the litigation as intervenors.

Pacold has told the parties to confer and submit a proposed injunction that reflects her findings by 29 October. The order is not a final judgment, but it breaks a run of defeats for prediction market operators in disputes with states over sports event contracts, following unfavourable rulings for the industry at the Sixth and Ninth Circuit appeals courts.

At the core of the ruling is Pacold's finding that sports event contracts offered by Kalshi and similar firms function as swaps under the Commodity Exchange Act, meaning federal law likely preempts parts of Illinois' regulatory regime. She found the outcomes underlying these contracts, such as who wins a championship, carry a financial or commercial consequence that satisfies the swap definition.

The judge also concluded that the plaintiffs had shown they would suffer irreparable harm absent an injunction, and that the balance of other equitable factors favoured granting one. On that basis, she found the companies were likely to succeed on the merits of their claims.

Pacold's 28-page opinion repeatedly called the contracts "bets" even while classifying them legally as swaps, writing that account holders could have wagered on the World Cup final between Spain and Argentina or on LeBron James's free agency, noting a contract on James joining the Miami Heat traded around 10 cents before settling at zero once he signed with the Philadelphia 76ers. She added that "many of the financial instruments at issue are likely swaps as defined by the Commodity Exchange Act—they just happen to be swaps that people find entertaining and fun," a line Kalshi co-founder and chief operating officer Luana Lopes Lara praised on social media.

The decision sets up a potential split within the Seventh Circuit, which covers both Illinois and Wisconsin. In the Wisconsin case, federal judge William Griesbach denied the CFTC a preliminary injunction, finding the commission had not demonstrated that the contracts qualified as swaps and that CFTC registration did not override state gambling law. That ruling is under appeal at the Seventh Circuit.

The underlying dispute traces back to April, when the CFTC sued Illinois over what it described, per SBC Americas, as overly aggressive state efforts to restrict prediction markets. Kalshi filed its own suit in June after Illinois' budget legislation classified sports event contracts as state-regulated wagers, requiring CFTC-registered exchanges to pay multi-million-dollar licensing fees and a per-wager tax starting at 1.75%. Kalshi argued the scheme violated the Supremacy Clause.

Pacold wrote that some of Illinois' measures improperly reach into the sale of Kalshi's swaps, while others raise unresolved questions, and that the state's age, location and trading restrictions would effectively force Kalshi to build a separate market just for Illinois residents under threat of criminal liability. She acknowledged Illinois might have grounds to argue Kalshi is listing contracts barred under the CEA's gaming-contract rule, but said the CFTC has never made that determination or ordered the contracts removed, and that Illinois cannot assert that control itself under existing precedent.