Kalshi Faces First Major Class-Action Lawsuit As Prediction Market Tensions Escalate

Prediction markets have been under a microscope in the second half of the year. Key stakeholders have critiqued the business model. States have sued.

But this is the biggest challenge to the new industry yet. Kalshi, the leading prediction market in the US, just got hit with a class-action lawsuit. It’s a biggie because it directly challenges how Kalshi (and donating sites) operate — and whether its sports products are legal sports betting with a wrapper.

Filed in New York federal court, the lawsuit accuses Kalshi of misleading users, violating state gambling laws, and enriching itself by operating what plaintiffs say is effectively a sportsbook without a license. It’s a trifecta of charges with big-time ramifications.

The lawsuit is unique in that it’s the first consumer-led piece of legal action. They’re used to state government lawsuits, but this is a new animal for Kalshi. Keep on reading, and we’ll tell you the details of the lawsuit, which affects bettors in Ohio as we’ll get into.

“You’re Betting Against The House”

At the heart of the lawsuit is Kalshi’s long-standing claim that users trade contracts with one another, not against the company itself or the “house” as top sports betting apps would say. That distinction is everything. It’s how Kalshi argues it falls under federal commodities law, not state gambling statutes like DraftKings or BetMGM.

The plaintiffs, of course, argue that’s hogwash. According to the complaint, Kalshi frequently acts as the counterparty to user trades through affiliated entities like Kalshi Trading LLC or through institutional market makers such as Susquehanna International Group. When user bets move away from Kalshi’s internal pricing, those entities allegedly step in — meaning consumers may be trading directly against Kalshi or its partners without even realizing it.

The lawsuit argues users were led to believe they were participating in a peer-to-peer marketplace, when in reality they were often facing professional market makers with structural advantages, reduced fees, and deeper access to pricing data.

No surprise, Kalshi denies any wrongdoing. They contend the plaintiffs just don’t understand how federally regulated designated contract markets operate.

Ultimately, the only opinion that’ll matter here is the courts. The lawsuit was filed in New York, but these other states are also involved:

• New Jersey
• Illinois
• Nevada
• Ohio

Why This Case Matters More Than State Crackdowns

As mentioned, Kalshi has already been fighting battles with state regulators. New York, Nevada, Illinois, Massachusetts, and Ohio have all taken action, issuing cease-and-desist orders or filing suit to block sports event contracts. Those cases center on jurisdiction — whether states or the CFTC have authority.

This class-action lawsuit is different. It focuses on consumer deception. Instead of arguing where Kalshi can operate, the plaintiffs are asking whether users were misled about what they were actually participating in. That distinction matters. Courts often give regulators wide latitude to fight over authority. They are far less forgiving when consumers claim they had the rug pulled from under them.

The timing is also notable. The lawsuit was filed just days after a federal judge in Nevada reversed an earlier ruling that had allowed Kalshi to keep operating there. The Nevada regulator has since warned it will pursue enforcement action against companies offering sports event contracts it considers illegal. Kalshi has appealed, but momentum has clearly shifted.

Market Makers, Liquidity, And Transparency

Market makers themselves aren’t unusual. Every financial exchange relies on them, such as stock brokerages. These market makers provide “liquidity” so people can bet with size. Even traditional sportsbooks function like market makers when setting odds.

The issue raised here isn’t their existence — it’s the disclosure (or lack thereof). In sports betting, everyone understands they’re betting against the house. In prediction markets, the pitch from the get-go has been different: transparent pricing, crowd-driven probabilities, no bookmaker edge. Blah blah blah.

The lawsuit claims that distinction breaks down when users unknowingly trade against entities affiliated with the platform itself. If true, it undermines the central narrative that prediction markets offer a fundamentally fairer alternative to sportsbooks.

Kalshi has said its own affiliated market maker represents a small share of volume and that institutional liquidity providers are standard industry practice. That may be true. But the legal question isn’t whether market makers are allowed — it’s whether users were properly informed.

A Defining Moment For The Entire Industry

This lawsuit lands as prediction markets are moving rapidly into the mainstream. DraftKings and FanDuel are preparing their own prediction platforms. Fanatics has already launched in 24 different states. Polymarket is plotting a full US relaunch. Robinhood just announced a joint venture with Susquehanna to build a dedicated prediction exchange.

Kalshi, the one being attacked here, just announced a new raise of $1 billion earlier this month. This now increases its valuation to an eye-popping $11 billion. Not too shabby for a company that popped up in mid-2021, eh?

But… that valuation is being threatened here. If a court finds that Kalshi’s structure misled users or violated state gambling laws, the ripple effects will be immediate. It won’t just affect Kalshi, it will force every prediction market to rethink disclosures, structure, and how closely they resemble sportsbooks.