Over the course of about three months earlier this year, a derivatives trading company made more money off of sports wagers than the top two licensed sports betting platforms in Massachusetts did, the attorney general said in a lawsuit that alleges the company is illegally offering de facto sports betting.
Kalshi, among the largest prediction markets in the country with a value of approximately $2 billion, “is offering sports wagering under the guise of ‘event contracts’ to Massachusetts residents without the required licensure from the Massachusetts Gaming Commission … [exposing] residents of the Commonwealth to a plethora of harms” including “disastrous” financial loses and the public health risks associated with compulsive gambling, Attorney General Andrea Campbell alleged in a suit filed Friday.
In Suffolk Superior Court, Campbell’s office is seeking a court order that would require Kalshi to cease offering sports wagering in Massachusetts while the lawsuit is pending.
Started in 2018 by founders who met at Massachusetts Institute of Technology, Kalshi runs an online trading platform through which users 18 or older can wager on the likelihood of an occurrence by purchasing an “event contract.” Bettors purchase either “yes” that the event will resolve in a specific way or “no” that the specific outcome will not come to pass. Kalshi establishes the price of each contract at between $0.01 and $0.99 based on the total volume of “yes” and “no” wagers. The price changes based on purchase volume, which is meant to mirror the perceived likelihood of an event taking place (so if more people think something will happen, the price of a “yes” contract rises while the price for “no” falls).
Once an event is over, Kalshi settles contracts for the correct outcome at $1 and those for the wrong outcome at $0. So if someone had purchased 100 “yes” contracts for the New England Patriots to beat the Miami Dolphins on Sunday at 30 cents a piece ($30 total stake), they would have been paid out at $1 per contract, or $100 (a net win of $70).
Transactions like that “are moneyline wagers, which [state law] identifies as one of the particular types of bets defined as ‘sports wagering,'” the lawsuit claims. It makes the same argument about other types of markets Kalshi offers, similar to point spread bets, over/under bets and proposition bets. And until March, the attorney general alleges, “Kalshi referred to itself in advertisements as a ‘sports betting platform’ that offered ‘bets’ on various real-world events.”
“Sports wagering comes with significant risk of addiction and financial loss and must be strictly regulated to mitigate public health consequences,” Campbell said. “This lawsuit will ensure that if Kalsi [sic] wants to be in the sports gaming business in Massachusetts, they must obtain a license and follow our laws.”
Kalshi says it is the “first fully regulated financial exchange in the U.S. specifically for event contracts, officially designated as a Designated Contract Market (DCM) by the Commodity Futures Trading Commission” and a spokesman said its marketplace is “fair, transparent, federally-regulated, and nationwide.”
“Rather than engage in dialogue with Kalshi as many other states have done, Massachusetts is trying to block Kalshi’s innovations by relying on outdated laws and ideas,” the company’s statement said. “Prediction markets are a critical innovation of the 21st century, and all Americans should be able to access them. We are proud to be the company that has pioneered this technology and stand ready to defend it once again in a court of law.”
The Kalshi platform allows users to make predictions or bets on other things like election outcomes, pop culture or the weather, but Campbell’s office pointed to claims that sports accounts for more than three-quarters of the the company’s trading volume. The sports-related activity appears to be the sole focus of Campbell’s suit, which does not wade into the legality of the platform’s non-sports offerings.
The company launched its sports-related offering on Jan. 23, the suit says, and users put more than $1 billion on the line in the first five months. Campbell’s office claimed that sports event wagers made up about 70% of Kalshi’s trading volume between Feb. 25 and May 17, or 75% of trading volume since the platform introduced single-game March Madness markets on March 18.
During that period from late February to mid-May, “Kalshi made more from sports wagers than licensed sports wagering platforms Draftkings or Fanduel,” the suit alleges.
Licensed sports betting operators like DraftKings and FanDuel are required to pay 20% of their sports wagering revenue back to the state. For example, the state collected more than $4.8 million from DraftKings and about $2.45 million from FanDuel in July.
Legal and regulated sports betting is restricted to people 21 or older, and operators are also required to prohibit youth and self-excluded individuals from both products and advertisements, implement responsible gambling features like betting limits and more, and report suspected illegal activity or activity that compromises the integrity or betting outcome of a sporting event.
Campbell’s suit says that Kalshi has taken steps in recent months to add things like a funding cap, but that the company “does not even attempt to comply with Massachusetts’ or any other state’s sports wagering laws.”
“Prediction market companies are expanding into sports wagering while neglecting age restrictions, player protection programs, state taxes, and other consumer protections. My fellow commissioners and I appreciate the Attorney General’s efforts to enforce the law and hold these companies accountable to Massachusetts’ rigorous standards,” Gaming Commission Chairman Jordan Maynard said.
Secretary of State William Galvin, who serves as the top state securities regulator, has also taken notice of the popular emergence of prediction markets. He subpoenaed the stock trading app Robinhood earlier this year when it began allowing its users to essentially wager on sporting events.
“This is just another gimmick from a company that’s very good at gimmicks to lure investors away from sound investing,” Galvin told Reuters in March when the outlet was first to report on the subpoena.
Since March, Robinhood has partnered with Kalshi and its platform makes Kalshi wagers available to its users. Campbell’s suit said about $1 billion worth of Kalshi wagers were traded on Robinhood during the second quarter of this year, “which likely generated an estimated $10 million in revenue for Kalshi.”
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