A federal judge in Illinois ruled Friday that Kalshi‘s sports event contracts are likely swaps under federal law, blocking the state from enforcing its licensing rules against the prediction market while leaving Illinois’ new transaction fees unresolved.
Though the ruling went Kalshi’s way, the opinion described the contracts in plain betting terms, using some form of the word “bet” six times in its first three paragraphs.
The ruling from Judge Martha M. Pacold covers three consolidated cases against Illinois and its officials, including Atty. Gen. Kwame Raoul. Coinbase and Kalshi each filed their own suits, and the United States and the Commodity Futures Trading Commission filed a third.
The preliminary injunction is not a final decision on the merits. Pacold also declined to rule yet on the transaction fees Illinois added in its fiscal 2027 budget, which target prediction market trades on sports, and ordered further briefing on whether they are preempted.
The ruling adds to a growing split among courts over whether states can enforce their gambling laws against CFTC-regulated prediction markets.
Judge finds contracts are likely swaps
The case largely turned on one part of the Commodity Exchange Act‘s definition of a swap, which covers contracts that pay out based on whether an event happens, as long as that event could carry financial, economic or commercial consequences.
Illinois argued the “event” in a sports contract is the game itself, not who wins it. Pacold disagreed, quoting the Sixth Circuit‘s Sept. 25 ruling in KalshiEX v. Schuler on that point, even though that court ultimately ruled against Kalshi. She also broke from the Ninth Circuit‘s Aug. 28 ruling in KalshiEX v. Assad, which went against Kalshi as well.
“Although ‘event’ and ‘contingency’ could be interpreted narrowly to refer only to the game itself, the words sit next to phrasing that broadens them,” Pacold wrote, pointing to the statute’s language covering “the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency.”
She also cited an Arizona ruling that found the phrase “the extent of the occurrence” reaches how an event resolves, not just whether it happens.
To illustrate, Pacold described two contracts made before an Aug. 28 game between the Chicago Cubs and the Cincinnati Reds. One “bets on the Cubs winning the game,” and the other “bets on the Cubs’s season-long record going up.” Both hedge against the same outcome, a Cubs loss, she wrote.
Under Raoul’s interpretation, according to the court documents, the first contract is not a swap because the win is only the result of the game, while the second is a swap because the event is the season record.
“The court finds the distinction unlikely,” she wrote. “Little separates the two contracts, and statutes do not usually draw lines so capriciously. When picking between two plausible interpretations, and one draws a consistent line, and the other does not, the court will favor consistency.”
What Illinois can and cannot enforce
For now, Illinois can’t enforce its sports wagering licensing rules or the related criminal provision against Kalshi. Pacold relied on the Seventh Circuit’s 1992 ruling in American Agriculture Movement v. Board of Trade of the City of Chicago, which held that state laws directly affecting trading on a federally regulated futures market are preempted.
Pacold found that Illinois’ licensing law regulates the market itself, controlling what events Kalshi’s contracts can cover, who can trade them and where. Compliance, she wrote, “would accordingly force Kalshi to build a market solely for Illinoisans.”
Illinois argued the CFTC already bans exchanges from listing gaming contracts. Pacold said the state “may have a case” that Kalshi is improperly listing some contracts, but noted the CFTC has never found its sports contracts impermissible, never ordered them removed and supports Kalshi in the litigation.
“It would be odd indeed, then, to adopt defendants’ theory, which essentially boils down to a claim that the CFTC and Illinois have consistent regulations,” Pacold wrote.
Illinois’ new budget charges prediction markets 1.75% on their first 5 million sports trades each year and 3.5% after that, but Pacold held off on ruling whether those fees are preempted. She said states can generally tax a business, but a fee steep enough to effectively ban Kalshi from Illinois likely wouldn’t hold up, and she ordered more briefing before deciding.
Using the word ‘bet’
Along with the Cubs example, Pacold used “bet” in another example about the World Cup.
Anyone with a Kalshi account this summer “could have bet on whether Spain or Argentina would win the World Cup,” she wrote, and by trading contracts before they settle, “users can bet on bets.”
However, that language matches her reasoning. Pacold wrote that people “may view these contracts as gambling, but little in the statutory definition turns on what people think.”
“Swaps are swaps whether they are used to gamble,” she wrote.
States are still in the lead
Despite a win for Kalshi in Illinois, the exchange is still barred from offering sports event contracts in several jurisdictions.
A Sixth Circuit decision allowed Tennessee and Ohio to exercise state gambling laws. Ohio wasted no time, sending cease-and-desist orders to 10 operators and brokers.
A Ninth Circuit ruling forced Kalshi out of Nevada and three tribal lands in California.
Kalshi is still holding onto a Third Circuit win in New Jersey, which has petitioned the U.S. Supreme Court to hear the case.
Illinois sits in the Seventh Circuit, which has yet to rule on whether sports event contracts are swaps, making it the likely next stop if the state appeals.
