Prediction Markets Face Legal Onslaught: Kalshi and Coinbase Under Fire from US States

A significant legal storm is brewing across the United States as state authorities intensify their crackdown on prediction market platforms, which allow users to wager on the outcomes of future events. At the forefront of this escalating conflict are Kalshi and, to a lesser extent, Coinbase, both now entangled in high-stakes legal battles with states like Washington and Nevada over alleged violations of gambling laws.

Washington State Files Lawsuit Against Kalshi, Citing Illegal Gambling

Last Friday, the Washington State Attorney General’s Office officially filed a lawsuit against Kalshi, accusing the prediction market platform of operating in defiance of the state’s stringent gambling regulations. The complaint asserts that Kalshi’s offerings circumvent Washington’s strict controls over gambling markets, which include a categorical ban on online gambling.

In a pointed press release, the state government elaborated: “Kalshi’s website and app present consumers with various events available for betting and their corresponding odds, determining potential winnings based on these odds. This mirrors the operational model of sports betting companies and other gambling operators. While Kalshi brands itself as a ‘prediction market,’ its advertisements boldly proclaim that consumers can ‘bet on anything.'”

The lawsuit further highlights Kalshi’s use of terms like “legal betting” in its advertisements, arguing that the company’s business activities unequivocally meet multiple state law definitions for “gambling,” “professional gambling,” and “receiving bets.” Moreover, the complaint raises concerns that Kalshi’s products contribute to gambling addiction, specifically targeting vulnerable populations such as college students.

Kalshi’s Robust Defense: Federal Jurisdiction, Not Gambling

In a defiant counter-move, Kalshi has formally applied to transfer the Washington case to federal court. The company argues that it is already engaged in related litigation in other federal jurisdictions and criticizes Washington State for initiating legal action “without any warning or opportunity for dialogue.”

Elisabeth Diana, Kalshi’s Head of Communications, strongly refuted some of the state’s claims. “Had the Attorney General been willing to engage in our scheduled meeting before filing this lawsuit, he would have understood that we absolutely do not offer so-called ‘war contracts’,” Diana stated. She clarified that while the state’s press release referenced “Iran war contracts,” the actual complaint pertained to a political event contract predicting “when Iran’s former supreme leader would step down.”

Diana emphasized Kalshi’s core argument: “As recognized by other courts, Kalshi operates as a regulated, nationwide ‘real-world event trading platform’ under exclusive federal jurisdiction. This distinctly separates us from sports betting companies and casinos, which fall under state government regulation. We stand confident in the strength of our legal arguments.”

Nevada’s Parallel Action: Injunctions Against Kalshi and Coinbase

Just a week prior to Washington’s lawsuit, Nevada successfully secured a temporary restraining order against Kalshi in an appellate court. This order compelled the platform to halt the provision of sports, entertainment, and election contracts to users within the state for a minimum of two weeks. A subsequent hearing is scheduled for April 3rd, where a state judge will determine whether to extend this injunction. Intriguingly, despite the ban, Gambling Insider reported that some Nevada users reportedly found technical workarounds to continue accessing the platform.

Significantly, on March 26th, the Nevada court also issued a preliminary injunction against Coinbase, requiring the cryptocurrency exchange to suspend its prediction market-related services in the state. The court order noted that Coinbase did not deny offering “event contracts related to sports events and other activities, including college basketball games, college and professional American football games, and elections.” These products, according to the court, align with Nevada state law’s definition of a “sports pool.”

Given the operational partnership between Coinbase and Kalshi, the court extended its order to Coinbase, prohibiting the exchange from offering sports, election, or entertainment contract trading in Nevada until the broader litigation is resolved. Coinbase has been granted a 60-day period to implement “technical adjustments” to ensure compliance with the court’s directive.

The Broader Battle: Federal vs. State Jurisdiction and the Future of Prediction Markets

Both Washington State and Nevada fall within the jurisdiction of the U.S. Federal Ninth Circuit Court of Appeals, highlighting a regional pattern in this legal challenge. Prediction market operators and their proponents, including Commodity Futures Trading Commission (CFTC) Chairman Mike Selig, assert that the derivative contracts offered by these companies should be regulated exclusively by federal agencies. Conversely, state authorities contend that these platforms are merely re-packaging gambling products under a different guise and, as such, must adhere to state gambling laws.

Legal experts observe a mixed bag of outcomes for both platforms and state governments in the courts thus far. However, this profound “clash of definitions” and jurisdictional battle, which pits financial innovation against traditional gambling regulations, is widely anticipated to ultimately reach the U.S. Supreme Court for a definitive resolution.