Federal Judge Hands Kalshi Partial Win Over Illinois Prediction Market Rules
A federal judge in Chicago has granted Kalshi, Coinbase and the Commodity Futures Trading Commission (CFTC) a partial preliminary injunction against Illinois, ruling that the state's licensing requirements for sports-related prediction markets likely conflict with federal law.
US District Judge Martha M. Pacold ruled on October 2 that sports event contracts traded on Kalshi and Coinbase likely qualify as swaps under the Commodity Exchange Act, placing them under the CFTC's exclusive oversight rather than Illinois' state gambling framework.
The decision blocks Illinois from enforcing its licensing rules and related criminal provisions against the platforms while the case continues, though Pacold reserved judgment on whether the state can still collect its new wagering fees on the same contracts, according to the Chicago Sun-Times.
What The Ruling Covers
Pacold's order applies to "championship" style sports contracts, such as bets on whether the Chicago Cubs would win the 2026 World Series. The judge found that outcomes of major sporting events carry real economic consequences for businesses linked to sports, including broadcasters, arena operators, sponsors, and concession providers, which supported classifying the contracts as swaps, according to The Defiant.
She wrote that Illinois' licensing requirements, which include age restrictions, geographic limits, and trading rules, would have effectively forced Kalshi to build a separate market for Illinois users, which would have conflicted with the CFTC's requirement that designated contract markets offer products nationwide on a non-discriminatory basis.
“Many of the financial instruments at issue are likely swaps as defined by the Commodity Exchange Act, they just happen to be swaps that people find entertaining and fun. Under the Act and precedent interpreting it, some Illinois law is likely preempted. Plaintiffs are therefore likely to succeed, at least in part.”
The judge did not adopt an unlimited definition of a protected swap. During oral arguments, Coinbase itself acknowledged that a novelty contract on the color of a sports drink poured on a winning coach would lack the commercial stakes needed to qualify, per Crain's Chicago Business.
Transaction Fees Still Undecided
Pacold stopped short of ruling on Illinois' new wagering fee structure, which was built into the state's fiscal 2027 budget. The law charges a 1.75% fee on an exchange's first five million sports-related wagers in a fiscal year, rising to 3.5% on volume above that threshold, on top of existing gross-receipts and per-wager charges.
“Regulatory uniformity, however, does not necessarily entail uniformity in cost,” Pacold wrote, leaving open the possibility that a fee could still violate federal law if it became burdensome enough to restrict the market, according to Crain's Chicago Business.
The court ordered the parties to work together on the precise terms of the injunction and submit a proposed version by October 29, with further briefing on the fee question to follow.
How The Illinois Case Began
The Illinois Gaming Board issued a cease-and-desist letter to Kalshi in April, alleging the exchange was offering unlicensed sports wagering under state law. Coinbase joined the fight after a December 2025 partnership enabled users to trade Kalshi-listed contracts using cryptocurrency, and later sought its own injunction.
The CFTC then sued Illinois directly on April 2, arguing the state's enforcement conflicted with the federal derivatives framework, in cases that were later consolidated before Pacold.
Illinois Gaming Board Administrator Marcus Fruchter had issued cease-and-desist letters to Kalshi and competitors, including Polymarket, Crypto.com, and Robinhood, for what the board called illegal gambling.
A spokesperson for Illinois Attorney General Kwame Raoul's office declined to comment on the ruling, the Sun-Times reported.
Ruling Deepens A Growing Circuit Split
The Illinois decision adds to a patchwork of conflicting rulings on whether sports-event contracts count as federally regulated derivatives or as state-regulated gambling.
A Wisconsin federal judge recently reached the opposite conclusion, allowing that state to keep regulating sports prediction markets as gambling, a ruling now before the Seventh Circuit Court of Appeals.
The Sixth Circuit has upheld a denial of an injunction in Ohio and vacated one in Tennessee, while the Third Circuit upheld an injunction protecting Kalshi in New Jersey and the Ninth Circuit upheld the dissolution of Kalshi's Nevada injunction. The Illinois ruling creates what derivatives lawyer Gary Kalbaugh described as an "intracircuit split" within the Seventh Circuit itself, given the opposing Wisconsin decision.
The Supreme Court has already been asked to resolve the underlying question of whether these contracts are betting products or swaps trading. Coinbase chief legal officer Paul Grewal said the disagreement between courts makes that review more urgent.
“The lower courts aren't buying what each other is selling. This is precisely why we have a Supreme Court. Time for SCOTUS to step up,” Grewal wrote, per Bloomberg Law.
Reaction From The Platforms
Kalshi founder Luana Lopes Lara called the ruling “beautiful” in a social media post.
Coinbase general counsel Molly Abraham said in a statement that the decision was “an important step toward preserving the CFTC's role in overseeing these national markets and ensuring Illinois consumers can continue to access them."
Even if the Supreme Court takes up the broader dispute soon, court watchers told Bloomberg Law a decision may not arrive until 2028, meaning the current state-by-state patchwork is likely to persist for some time.
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