In a significant ruling for prediction markets, a federal court in Illinois has granted preliminary injunctions to the Commodity Futures Trading Commission (CFTC) and its registrants, including Coinbase and Kalshi. U.S. District Judge Martha Pacold delivered her decision on October 2, stating that the parties involved had submitted similar requests against Illinois Attorney General Kwame Raoul.
The order consolidates three cases: one from Coinbase, another from KalshiEX, and a third including the CFTC, with additional support from intervenors Coalition for Fair Markets and Crypto.com's OG. Judge Pacold has instructed all parties to discuss and present a proposed injunction aligned with her opinion by October 29.
While this ruling is not a definitive conclusion for the cases, it represents a notable turning point in the ongoing legal clash between prediction markets and state regulations, particularly in light of recent unfavorable outcomes for prediction markets in the Sixth and Ninth Circuit Courts of Appeal.
Judge Pacold articulated in her memorandum that Illinois cannot enforce state laws that conflict with federal law. She noted that since Kalshi’s sports event contracts are likely considered swaps, certain Illinois laws may be preempted by the Commodity Exchange Act (CEA). The judge established that contracts regarding the outcomes of championship games fall under the swap category as they have potential financial consequences.
Additionally, Pacold identified that the plaintiffs would suffer irreparable harm without the injunction and found other factors in favor of granting it. She concluded that the plaintiffs were likely to prevail in their case.
Throughout her 28-page memorandum, Pacold employed varied terminology to refer to sports event contracts. Of particular interest was her comment embraced by Kalshi co-founder Luana Lopes Lara, saying, "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."
Despite recognizing these contracts as swaps, the judge frequently referred to them as "bets," mentioning within the case's opening summary that individuals with Kalshi accounts could bet on outcomes like the World Cup between Spain and Argentina or whether LeBron James would join the Miami Heat. Alongside this, she illustrated how bets could yield very different results upon signing events, emphasizing the practical nature of these events in gambling contexts.
This ruling may contribute to a potential circuit split, particularly as it contrasts a recent ruling from the Seventh Circuit regarding a Wisconsin case. There, federal Judge William Griesbach denied the CFTC's request for a preliminary injunction, arguing that the commission failed to demonstrate that sports-event contracts likely qualified as swaps and asserting that CFTC approval does not override state gambling laws. That case is currently under appeal.
The CFTC filed against Illinois in April, accusing the state of making "aggressive and overzealous" attempts to hinder prediction markets. Kalshi followed with its own lawsuit in June after Illinois added measures concerning prediction markets to its fiscal budget, labeling sports "exchange wagers" as regulated betting and imposing licensing fees alongside a per-wager tax of at least 1.75% on all trading. Kalshi asserted that these measures were a violation of the Supremacy Clause regarding event contract regulation.
In her opinion, Judge Pacold asserted that Illinois laws impermissibly control the sale of Kalshi's swaps, with certain laws raising additional legal ambiguities. She indicated that restrictions involving age, geography, and trading would compel Kalshi to create a market exclusively for Illinois residents to avoid penalties.
Although Judge Pacold acknowledged that Illinois might have a case regarding specific violations of the CEA Special Rule, she argued that the state is attempting to exert control over federally regulated swap trading, which would not be permissible under existing legal precedents. As she noted, "The CFTC has never held that Kalshi’s contracts are impermissible gaming contracts. It has never ordered Kalshi to remove its contracts. And it also supports Kalshi’s position in this litigation." This context leaves little room to accept Illinois’s licensing laws as valid, leading her to believe they are likely preempted.
