Federal judge sides with Kalshi to block new Illinois regulations on prediction markets

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Key takeaways

A federal judge blocked Illinois from enforcing state-level regulations on prediction markets.
The court ruled that prediction market trades fall under federal Commodity Futures Trading Commission jurisdiction.
The judge left open the possibility of allowing state taxes on transaction fees charged by prediction platforms.

A judge has blocked Illinois from regulating prediction markets like it does sportsbooks and other gambling options, ruling that the trades offered by the likes of Kalshi and Polymarket fall under the sole jurisdiction of federal regulators even if their offerings resemble casino-style betting.

But the injunction handed down Friday in Chicago’s federal district court by Judge Martha Pacold doesn’t shut the door on potential state taxes on the profits raked in by the booming prediction market industry.

Pacold withheld a decision on that front pending further arguments over the regulatory framework that lawmakers authorized in Springfield earlier this year to help pass a $56 billion state budget.

State regulations and federal oversight

Illinois’ law calls for the state to take a percentage of transaction fees charged by prediction market companies, which offer “yes” or “no” event contracts on whether the White Sox will advance to the World Series, to the weather in Chicago. State lawmakers also ordered the companies to block traders younger than 21, while restricting offerings on sports.

The platforms function almost exactly like traditional sports betting apps, but they’re not considered gambling because users are trading against each other as opposed to playing against the “house.” Because of that, they remain under the purview of the federal Commodity Futures Trading Commission, Pacold wrote, siding with Kalshi and its cryptocurrency partner Coinbase, which sued to block the regulations in June.

“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,” Pacold wrote. “Under the Act and precedent interpreting it, some Illinois law is likely preempted. Plaintiffs are therefore likely to succeed — at least in part.”

Potential taxes and ongoing legal battles

Pacold still signaled she’s open to upholding the state tax on transaction fees, which were originally scheduled to take effect in July. State lawmakers, anticipating the legal battle, didn’t count on revenue from the prediction market tax in their budget projections.

“The other laws Illinois seeks to enforce cause a conflict because they regulate what can be sold, as well as where it can be sold and to whom,” Pacold wrote. “Taking a cut of Kalshi and Coinbase’s profits, without more, might not pose the same conflict as regulating an entire market.”

In a social media post, Kalshi founder Luana Lopes Lara called Pacold’s ruling “beautiful.” A spokesperson for Illinois Attorney General Kwame Raoul’s office declined to comment.

Illinois Gaming Board administrator Marcus Fruchter issued cease-and-desist letters in April to Kalshi and its top competitors — Polymarket, Crypto.com and Robinhood — for engaging in “illegal gambling in violation of Illinois law.” Several other states are tussling with prediction market companies over proposed regulations, with the issue expected to eventually land before the U.S. Supreme Court.

Earlier this year, Gov. JB Pritzker signed an executive order barring state employees from using insider information to bet on prediction markets.

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