The New York attorney general on Friday sued Kalshi, a titan in the prediction market industry, accusing the company of operating illegally and in defiance of laws aimed at curbing unregulated gambling.
The suit says the New York-based company has tried to avoid the state’s strict regulations on gambling by allowing users to place wagers that amount to betting under the “guise” of event contracts on a prediction market.
“By ignoring our laws, Kalshi is running an illegal operation and harming New Yorkers in the process,” Letitia James, the New York attorney general, said in a statement.
In response, Kalshi accused the attorney general of engaging in “political theater” and argued that states lacked the authority to shut it down.
“We love New York, we love New Yorkers, and New Yorkers love our product,” the statement read.
The suit represents the latest effort by states to crack down on an industry that critics have called predatory, amid growing scrutiny of the influence of gambling over American society and culture. At least 15 states have introduced legislation this year to regulate the markets, according to the National Conference of State Legislatures.
Those efforts have effectively pitted the states against the Trump administration. The Commodity Futures Trading Commission, which regulates specialized financial markets including online betting, has said the federal government has exclusive jurisdiction over the markets.
In March, Arizona’s attorney general filed criminal charges against Kalshi for operating an illegal gambling business. In May, Minnesota passed a law that made it a felony for most prediction markets to advertise and operate. The C.F.T.C., Kalshi and Polymarket, a rival prediction market, sued, and a federal judge this week blocked the law, days before it was set to go into effect.
Kalshi claims it is not gambling — a stance that state lawmakers contest — but rather a form of financial trading that only the federal government can regulate. Kalshi and Polymarket have found a “legal loophole,” analysts say, that has propelled the companies to staggering success, but that is now being challenged in courts across the country.
The suit on Friday, filed in State Supreme Court in Manhattan, is not the first time Kalshi and New York have clashed. Last year, the company sued the New York State Gaming Commission, accusing the agency of overreach.
The suit against Kalshi is only part of New York’s push to regulate companies operating online prediction markets in the state. In April, the office sued Coinbase and Gemini Titan, two cryptocurrency giants that have expanded into online betting.
The companies immediately pushed back, arguing that New York does not have any regulatory authority over prediction markets, which they said are federally regulated national exchanges. They asked that the lawsuits against them be moved to federal court, a measure that failed.
In response to Ms. James’s suits, the C.F.T.C. sued New York in an effort to get federal courts to stop the office’s actions.
But Ms. James’s office has contended that the online betting operated by the companies meet the legal definition of gambling “because the outcomes of the events on which its users are betting are uncertain and outside the control of the bettor or hinge on a game of chance.” Users can wager on the outcomes of sports games, election results and cultural events, among other events.
According to the suit, Kalshi reported a $22 billion valuation of its business and an annualized transaction volume of $178 billion, but is not licensed with New York’s gambling commission in any capacity.
The attorney general’s office has said all three companies are not registered with the New York State Gaming Commission and allows people under the age of 21, the legal gambling age in the state, to participate.
The office is asking the court to order Kalshi to forfeit all illegal gains, distribute restitution to consumers who were harmed and “pay fines equal to three times the gains the company made through its illegal actions.”
Lauren McCarthy contributed reporting.
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