A group of customers has filed a lawsuit against Kalshi Inc., claiming the prediction market illegally operates as a sports bookmaker and deceives users about how it conducts business.
Seven users brought the case to a New York court on Wednesday. They say the company tricks customers by calling itself a provider of “legal sports betting” even though it does not hold gambling licenses in any state.
The lawsuit also targets Kalshi Trading, which the customers say works as a market-maker that creates betting odds that work against regular users.
“When consumers place bets on Kalshi, they face off against money provided by a sophisticated market maker on the other side of the ledger,” the users bringing the lawsuit said. “Market makers make it possible for consumers to place illegal, unregulated wagers against the House.”
The legal firm Lieff Cabraser Heimann & Bernstein filed the proposed class action. This adds to Kalshi’s growing legal troubles, as state gambling officials and Native American tribal groups have already sued the company for allegedly running illegal sports betting operations.
Kalshi maintains it operates a derivatives market that falls under federal oversight from the Commodity Futures Trading Commission, not state gambling laws.
Kalshi defends its business model
Luana Lopes Lara, who co-founded Kalshi, responded to the lawsuit on social media Friday. She said the claims were “false and reveal a fundamental” misunderstanding of how the company’s markets operate.
“Like any financial exchange, we have market makers that compete openly against each other and help bootstrap liquidity,” Lopes Lara explained. She added that working with connected trading desks to create liquidity and bring in more trading was a “common and regulated practice” in prediction markets, and these partners got “no preferential treatment” on the platform.
Courts weigh in on prediction market regulation
The company recently lost an important court battle when a federal judge in Nevada decided that state regulators could oversee Kalshi’s operations. The company has asked for an emergency order to stop that ruling from taking effect.
The new class action states: “By operating unlicensed sports betting, Kalshi has violated gambling laws, engaged in illegal deceptive activity, and unjustly enriched itself at the expense of tens of thousands of consumers.” The lawsuit does not say whether the seven people who filed it lost money on sports bets, only that they did not know the company allegedly ran an unlicensed sportsbook.
Under CFTC rules, event contracts count as a type of swap where traders bet money on yes-or-no outcomes. Winners typically earn one dollar per contract, while losers get nothing. Traders can risk thousands of dollars on these bets, which could lead to big profits or total losses.
However, critics like US District Judge Andrew Gordon say Kalshi is pushing the definition too far.
“Event contracts that turn on the outcomes of sporting events are not swaps and thus do not fall within the CFTC’s exclusive jurisdiction,” Gordon wrote in his order placing the company under Nevada regulation. “Kalshi relies on a strained reading of the already convoluted Commodities Exchange Act (CEA) in an attempt to evade state regulation.”
At least five other courts nationwide are currently handling similar disputes over prediction markets and state gambling rules.
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Source: https://www.cryptopolitan.com/kalshi-new-class-action-lawsuit/