Justices on the state’s highest court signaled that prediction market Kalshi is “swimming upstream” in its attempts to do an end-run around state sports gambling regulations. This thrusts the Bay State into a national debate over whether the booming prediction markets offer commodities subject to federal regulation or run-of-the mill sports betting traditionally regulated by the states.
In September, Massachusetts Attorney General Andrea Campbell sued Kalshi for offering what she claims equates to “illegal sports betting” without proper licensing. The lawsuit accuses Kalshi of skirting its responsibility to implement gambling guardrails, including adherence to the state’s legal betting age of 21. A Suffolk Superior Court judge issued an injunction in February, prohibiting Kalshi from operating in the state.
Kalshi wants the state to stay out of it, arguing it can only be regulated by the federal authorities because its offerings are no different from other derivatives such as financial swaps.
Derivatives were placed under the jurisdiction of the Commodity Futures Trading Commission (CFTC) by the 2010 Dodd Frank Act so a single authority could regulate swaps after the 2008 financial crisis. But several states – including Massachusetts – argue that Kalshi functions, advertises, and profits as a sportsbook because among its offerings are point-spread bets, over/under bets, proposition bets, and parlays.
The case in Massachusetts is just one of several involving Kalshi nationwide. Earlier this year, Arizona, Illinois, Connecticut, and New Jersey sent letters demanding the company – and other prediction market firms – cease operations within their borders. On April 6, a federal appeals court ruled New Jersey cannot classify Kalshi’s operations as sports betting and regulate it as such. Arizona’s attorney general filed criminal charges against the company for allegedly operating an illegal gambling business and sanctioning betting on the 2024 election cycle.
In arguments on Monday, the Massachusetts justices grilled Kalshi on how their swaps fundamentally differ from sports bets. Grant Mainland, an attorney for Kalshi, argued the company’s offerings resemble the derivatives overseen by the CFTC.
The state says Kalshi’s offerings masquerade as swaps but constitute sports wagering under Chapter 23N of the Sports Wagering Act of 2022 because it engages in “the business of accepting wagers on sporting events,” and offers the ability to wager during games.
Kalshi argues the platform falls under the “exclusive jurisdiction” of the CFTC granted by the Commodity Exchange Act, which “expressly supersedes and limits the jurisdiction of state regulatory authorities,” therefore preempting the Commonwealth’s sports wagering law. And since the CFTC has taken no regulatory action against Kalshi, Kalshi maintains they haven’t committed any violations.
The justices wrestled with a core paradox: If Kalshi’s platform looks like a sportsbook and is treated as such by consumers, how does it differ from sports betting?
“If we just zoomed up one level,” Justice Gabrielle Wolohojian suggested to Mainland, these swaps “would not be conceptually incompatible with what we historically understand to be a bet or a wager.”
Kalshi offers swaps and trades in the form of yes-or-no questions for future events, and users purchase shares in either position as the price fluctuates until the question is answered. These questions involve weather, elections, and now sports outcomes. Sports-related event contracts based on outcomes and “player performance” are essentially sports bets, according to Campbell’s office.
Consumers can clearly treat these markets as gambling sites, justices noted. For example, Chief Justice Scott Kafker asked, if he wants to bet on if Jayson Tatum makes a three point shot, isn’t Kalshi a way to do so?
Gambling regulations are powers traditionally left to the states. States like Massachusetts and Nevada, where sports betting has become a booming business, argue that Kalshi is circumventing their gaming markets. If Kalshi’s offerings are defined by the courts as sports bets, they would be subject to the same regulations and restrictions as other sport betting products in the state.
The court noted there are some technical distinctions between sports bets and swaps. Justice Serge Georges, Jr. asked deputy state solicitor Gerard Cedrone if Kalshi resembles more of a “financial exchange, rather than a house-based system” since the platform doesn’t set the odds. Cedrone countered that horse racing is still classified as traditional sports betting, even though the race track doesn’t set the odds and functions similarly to Kalshi in that gamblers are technically betting against each other.
Justice Elizabeth Dewar questioned if it would be “unwieldy for 50 different states’ laws to be applicable” to transactions on a federally CFTC regulated market. According to the CFTC’S amicus brief, a ruling in Massachusetts’s favor could prompt other states to “characterize any derivative as prohibited gambling, thereby subjecting nationally (and internationally) traded swaps to a patchwork of state restrictions.”
Campbell and gaming safety advocates believe it’s in the public’s interest for the state to retain jurisdiction and address any associated harms from sports betting because local officials can better serve the community’s needs than the CFTC.
The AG’s office claims Kalshi deliberately uses gambling psychology to design its platform, alleging in the initial lawsuit that the platform includes features encouraging “impulsive engagement” and diminishing “perception of financial risk,” and the state’s regulation is consequential for public safety.
Even as states lean into legalized vices, embracing online sports betting and casino culture, Campbell is growing concerned about unchecked so-called “event contracts” impact on the state’s youth. The Public Health Advocacy Institute supported the state in an amicus brief that noted prediction markets are “transforming gambling into a continuous, frictionless activity,” creating a “fierce and rapidly escalating public threat.”
The SJC’s ruling, expected within the next four months, stands to determine if Massachusetts can rein in prediction markets or if the CFTC retains “exclusive jurisdiction.” Even if the high court sides with Massachusetts, the issue will still be a live one nationwide.
Prediction markets have filed suits against 11 states, which are now roiling through state and federal courts. The final word may yet fall to the US Supreme Court, which just eight years ago paved the way for sports betting to sweep across the nation.
Nicole Belcastro is a freelance journalist focusing on health care, addiction, and arts & culture. Her work has appeared in The Boston Globe, Boston Globe Magazine, and the Dorchester Reporter.