A federal judge in the United States has intervened to prevent Illinois from implementing new regulations targeting prediction-market platforms. The judge determined that sports event contracts offered by companies like Kalshi likely fall under the definition of swaps as outlined in federal law.
U.S. District Judge Martha Pacold issued preliminary injunctions in cases involving KalshiEX, Coinbase, and the Commodity Futures Trading Commission (CFTC). She found that certain Illinois regulations are likely overridden by the federal Commodity Exchange Act.
“Many of the financial instruments involved are likely swaps as defined by the Commodity Exchange Act—they are simply swaps that people find entertaining,” Judge Pacold stated.
Illinois aimed to impose regulations on prediction markets within its gambling framework, which included limitations on the types of contracts available, the locations where they could be offered, and the eligibility of traders. The state's regulations also mandated that companies prevent individuals under 21 from participating and imposed restrictions on sports-related offerings.
However, Judge Pacold indicated her willingness to maintain the state tax on transaction fees, which was set to commence in July. She noted, “The other laws Illinois wishes to enforce create a conflict because they regulate what can be sold, where it can be sold, and to whom it can be sold.”
According to the judge, Illinois' age, geographic, and trading restrictions would compel Kalshi to create a market exclusively for Illinois residents, risking criminal penalties if they did not comply.
Kalshi initiated legal action against Illinois in June after state legislators incorporated prediction-market provisions into the state budget. The CFTC had previously filed its own lawsuit in April, asserting that Illinois and other states were making “aggressive and overzealous” efforts to restrict prediction markets.
Judge Pacold remarked that the plaintiffs were likely to prevail and demonstrated that they would face irreparable harm without an injunction.
This ruling does not settle the underlying legal disputes. The involved parties are required to propose an injunction that aligns with Judge Pacold's opinion by October 29.
Illinois' proposed tax on prediction markets remains unresolved. The state intended to implement a 1.75% tax per wager on sports event contract trading, alongside licensing requirements that could incur significant costs.
“Taking a share of Kalshi and Coinbase’s profits, in isolation, may not present the same conflict as regulating an entire market,” Judge Pacold noted.
“The CFTC has never determined that Kalshi’s contracts are illegal gaming contracts. It has not instructed Kalshi to eliminate its contracts and supports Kalshi’s position in this litigation,” she added.
In April, Illinois Gaming Board Administrator Marcus Fruchter sent cease-and-desist letters to Kalshi, Polymarket, Crypto.com, and Robinhood, claiming “illegal gambling in violation of Illinois law.”
This ruling stands in contrast to a previous decision by a federal judge in Wisconsin, who denied the CFTC a preliminary injunction after concluding that the commission had not demonstrated that sports-event contracts likely qualified as swaps. The ongoing conflict between prediction-market firms and state regulators may eventually escalate to the U.S. Supreme Court.
Kalshi co-founder and COO Luana Lopes Lara described Judge Pacold's ruling as “beautiful.”