On August 13, 2026, a Washington state judge ordered Kalshi, a major prediction market, to block state residents from betting on sports, elections, and entertainment outcomes. The Judge found the company had been “willfully” running illegal gambling.
Two days earlier, the federal government had ordered Kalshi to keep operating anyway. Both orders are currently in effect. This is what happens when two governments genuinely disagree about where gambling ends and financial trading begins.
This case is a more useful case study than most because the dispute is being fought out explicitly, in writing, in real courts.
Kalshi lets users trade “Yes” or “No” contracts on whether a specific real-world event will happen. Contracts can include everything from Fed rate decisions to election results to sports outcomes. Each contract is priced between $0.01 and $0.99, and that price reflects the market’s current implied probability. A Yes contract trading at 65 cents means the market collectively estimates a 65% chance the event happens. If it does, Yes contracts settle at $1.00 and No contracts settle at $0 and vice versa if it doesn’t.
Foe example, if you buy a Yes contract at 65 cents, and if the event happens, you receive $1.00, or a 35-cent profit per contract. If it doesn’t happen, the contract settles at $0 and you lose the 65 cents you paid, nothing more. The price you pay upfront is always your maximum possible loss.
Two things make this structurally different from a sportsbook, and they’re central to why Kalshi and the CFTC argue this isn’t gambling at all.
First, you don’t have to hold a contract until the event resolves. You can buy and sell before settlement, the same way you’d trade a stock, to lock in a gain or cut a loss as new information comes in.
Second, and more fundamentally, Kalshi doesn’t set the odds or take the other side of your bet. It matches a “Yes” buyer with a “No” buyer directly. The two of them collectively pay close to $1 total between them.
Third, Kalshi earns its money through a disclosed, formula-based trading fee rather than profiting when you lose the way a casino or sportsbook does.
Fourth, per Kalshi’s published fee schedule, the standard formula is roughly 7% of the contract’s price times the probability of the opposite outcome. In practice, that means fees peak around contracts trading near 50 cents (100 contracts at 50 cents costs about $1.75 in fees) and shrink toward zero at the extremes, on a contract priced at 5 cents or 95 cents.
Fifth, the point isn’t the exact math, it’s that the fee is published, applies the same way regardless of who wins, and isn’t hidden inside the odds the way a sportsbook’s vig is.
Finally, that peer-to-peer, exchange-style structure is exactly why it’s regulated by the CFTC as a derivatives exchange rather than licensed as a gambling operator. Several states are now arguing this is a distinction without a difference when the underlying question is “will my team win.”
King County Superior Court Judge John McHale issued a final order requiring Kalshi to geofence Washington users out of contracts covering sports, elections, politics, entertainment, culture, technology, science, and so-called “mention” markets (contracts betting on whether a specific person will say a specific word or phrase during a defined event, like a press conference or earnings call, settled against the official transcript rather than what was actually said live).
A compliance date was set for September 2 with $120,000-per-day penalty for missing the deadline. McHale found Kalshi had “willfully ignored” a December 2025 notice from the Washington State Gambling Commission stating that event-based contracts weren’t authorized in the state, and ruled that consumer harm outweighed any harm to Kalshi from the injunction.
Part of what the state’s case leaned on was a Kalshi advertisement reportedly showing someone texting a friend that they’d “found a way to bet on the NFL even though we live in Washington”. This is evidence the Attorney General’s office pointed to directly as showing Kalshi understood it was working around state law, not operating in good-faith uncertainty about it.
Two days before that ruling, the Commodity Futures Trading Commission (CFTC), the federal agency that licenses Kalshi as a Designated Contract Market, invoked emergency authority under Section 8a(9) of the Commodity Exchange Act, ordering Kalshi to continue operating nationally regardless of state action. This is the third time this summer the CFTC has used this specific emergency power in a Kalshi dispute, following similar orders in Michigan and New York.
That the CFTC invoked Section 8a(9) is a genuinely extraordinary regultory move. The provision lets the CFTC, upon finding an emergency, direct a registered exchange to take whatever action the agency considers necessary to maintain orderly trading. One industry legal publication calls it the CFTC’s “nuclear option.” Notably, the CFTC’s own determination that an emergency exists is generally insulated from judicial review, meaning courts can’t easily second-guess that threshold finding.
Here’s what makes its use here so significant. This power has been invoked exactly six times in the CFTC’s entire history. Four of those were between 1976 and 1980, during genuine market crises. Section 8a(9) was used when the Hunt Brothers’ attempted corner of the silver market, after a 1976 Maine potato futures default, after 1977 coffee market emergency, and during 1979 wheat market closure to stop manipulation. After that, it sat completely dormant for 46 years. It wasn’t used during 9/11. It wasn’t used during the 2008 financial crisis. Also, it was revived this year, specifically for Kalshi, twice within a single 30-day window, on July 14 and August 11, 2026.
Kalshi itself notifies the CFTC that a state lawsuit or restraining order threatens its continued operation, and the CFTC responds with an emergency order directing Kalshi to keep operating under the CEA’s (Commondity Exchange Act) normal Core Principles regardless of what the state court has ordered. In effect, Kalshi is self-reporting the emergency that then triggers the federal override of state action.
Kalshi’s position is that federal derivatives law gives the CFTC exclusive jurisdiction, and state gambling law simply doesn’t apply. Washington’s position, per the state attorney general’s office is that each Kalshi contract stakes money on a contingent event, which meets the state’s statutory definition of gambling regardless of what federal license the platform holds.
Washington is now the third state, alongside Michigan and Nevada, with active court-ordered restrictions on Kalshi. New York and Massachusetts have their own pending cases. The CFTC has separately sued nine states, including Illinois, Arizona, Connecticut, Wisconsin, and Minnesota, to assert federal jurisdiction over event contracts, in some cases within hours of a state’s restriction taking effect.
The same week as the Washington ruling, Baltimore sued both Kalshi and a separate platform, Polymarket, on the same “illegal gambling” theory. This shows this isn’t just a Kalshi-specific dispute, it’s a reckoning for the entire prediction-market category.
The Washington order didn’t ban everything Kalshi offers. It specifically exempted “economics and financial data markets”, contracts tied to things like inflation or interest rate outcomes. It banned sports, election, and entertainment contracts specifically, including mentions markets. That’s a telling detail on its own.
A contract on whether the Fed cuts rates has real hedging utility for businesses and investors managing genuine economic risk. A contract on whether a sports announcer says a specific phrase during a broadcast doesn’t. It’s structurally identical, but there’s no financial exposure being managed, just money staked on a trivial, personal outcome. That’s the first time a court has drawn this particular line explicitly.
It doesn’t say prediction markets in general are illegal gambling, it says these specific categories are, while leaving the more traditionally “financial” categories alone. Whether that distinction holds up, gets adopted elsewhere, or gets overturned on appeal is genuinely an open question, but it’s the clearest judicial attempt yet to separate “prediction market as financial instrument” from “prediction market as sports betting with extra steps.”
This dispute has a real political layer worth understanding, not because it changes the legal analysis, but because it explains why the fight has escalated the way it has. President Trump has publicly backed the CFTC’s position, referring to state officials opposing prediction markets as “SCUM.”
A law professor at Baruch College, Marc Edelman, has pointed out a notable structural irony in this. A Republican administration is using federal regulatory power to override individual states’ traditional authority over gambling. Gambling is an area the Supreme Court’s 2018 ruling in Murphy v. NCAA specifically affirmed as belonging to the states, in a case that itself struck down a federal ban on sports betting.
For crypto casinos and sportsbooks this dispute is a live demonstration of exactly the kind of jurisdictional conflict that shapes offshore gambling regulation generally. One government asserting a product is legal because of how it’s licensed, another asserting the underlying activity is illegal regardless of licensing.
The geofencing mechanism at the center of this case (IP-address and residency-based blocking) is the same basic enforcement tool used against offshore crypto casinos in jurisdictions like Australia. Watching how this resolves for Kalshi is a reasonable preview of how regulators may continue approaching crypto-adjacent betting products more broadly, prediction markets or otherwise.
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