Kentucky sues Kalshi and Polymarket over unlicensed sports betting, deepening US prediction market war

Kentucky Attorney General Russell Coleman sued Kalshi, Polymarket, and VGW on June 17, accusing the companies of running illegal gambling platforms without a Kentucky licence.

The lawsuits, filed in Franklin Circuit Court, add to a growing fight over whether online prediction markets should be regulated as federally supervised derivatives markets or as gambling products subject to state law.

Coleman’s office alleges that Kalshi and Polymarket allow users to bet on game outcomes, betting odds, and individual player statistics while presenting those trades as “event contracts” to avoid Kentucky gambling rules, according to the Lexington Herald-Leader.

The attorney general’s office said nearly 89% of Kalshi’s trading activity was tied to sports betting, generating more than $23 billion in contract trading volume in 2025.

Kentucky targets prediction markets as illegal gambling

Kentucky’s claims are based on alleged violations of the state’s consumer protection laws, the Loss Recovery Act, and rules governing prediction markets.

Coleman’s office is asking the court to impose penalties of up to $2,000 for each violation of the Kentucky Consumer Protection Act and $10,000 for each violation involving consumers older than 60.

Kentucky also named Coinbase in the Kalshi-related case, alleging that the company acted as an affiliate or partner in unauthorized sports contracts, according to Spectrum News 1. The complaint argues that Kalshi used affiliate relationships to expand access to sports-event contracts while avoiding Kentucky’s sports-wagering licensing system.

The state also accused the companies of failing to provide gambling addiction resources required under Kentucky law. In Kentucky, only licensed horse-racing organizations can receive approval to operate sports wagering, with the Kentucky Horse Racing and Gaming Commission serving as the regulator.

A separate state law, the Wagering Consumer Protection Act, takes effect on July 15. It will prohibit licensed sportsbooks from contracting with prediction-market operators such as Kalshi or Polymarket.

The third lawsuit targets VGW, the operator behind Chumba Casino, Global Poker, and LuckyLand Slots. Coleman’s office said VGW runs sweepstakes casino sites that mimic slot machines and table games using virtual “Sweeps Coins,” which users can purchase with real money and exchange for cash prizes.

CFTC turns state enforcement into a federal fight

Kentucky’s lawsuits are part of a broader state-federal showdown over prediction markets.

Several states have moved against prediction-market operators, arguing that sports-event contracts and similar products amount to illegal gambling. The federal response has been aggressive.

In April, the Commodity Futures Trading Commission sued Arizona, Connecticut, and Illinois after those states issued cease-and-desist orders against prediction-market companies. Arizona had also filed criminal charges against Kalshi for alleged violations of state gambling law. A federal court later issued a temporary restraining order blocking Arizona’s criminal prosecution.

The CFTC has since expanded its legal campaign. On April 28, the agency sued Wisconsin after the state filed civil actions against Kalshi, Polymarket, Crypto.com, Robinhood, and Coinbase, alleging felony violations. The commission also sued New York, Minnesota, Rhode Island, and New Mexico to block those states from applying gambling laws to CFTC-registered contract markets.

“States cannot circumvent the clear directive of Congress,” CFTC Chairman Michael S. Selig said in the Wisconsin filing. “If you interfere with the operation of federal law in regulating financial markets, we will sue you.”

The CFTC argues that Congress gave it exclusive jurisdiction over event contracts traded on designated contract markets. Under that argument, state gambling laws cannot override federal regulation of CFTC-approved markets.

Industry pushes back against Kentucky’s tax

Kentucky is also facing a separate lawsuit from the prediction-market industry.

A coalition including Kalshi, Crypto.com, Polymarket, and Robinhood sued the state on June 12 over Kentucky’s 14.25% excise tax on prediction-market transaction fees. The tax is the first targeted levy of its kind in the United States, according to the Associated Press.

The Coalition for Fair Markets argues that the tax discriminates against federally regulated derivatives markets. The group also says the rate is higher than the 9.75% tax applied to horse-track betting and violates federal preemption principles, the dormant Commerce Clause, and First Amendment protections.

Kalshi criticized the tax as counterproductive. “Taxing federally regulated markets doesn’t make anyone safer, it just pushes people toward illegal platforms with no oversight and no protections,” the company said in a statement to the Associated Press.

Coleman defended the state’s approach, saying his office would protect Kentucky’s sports-betting laws from out-of-state companies seeking to bypass them.

July 15 becomes the next key date

Kentucky is now attacking prediction markets on two fronts: through enforcement actions from the attorney general and through a new tax regime passed by state lawmakers.

For crypto-linked platforms such as Polymarket, and for companies such as Coinbase that have been pulled into the litigation, the cases raise a central question: can states treat event contracts as illegal gambling when the platforms argue they fall under federal derivatives regulation?

The outcome could shape the future of prediction markets in the United States. If the CFTC’s position prevails, federally regulated platforms may be able to operate across state lines with limited interference from state gambling regulators. If states win, prediction markets could face a fragmented legal map, with different rules and enforcement risks in each jurisdiction.

The next key date is July 15, when Kentucky’s Wagering Consumer Protection Act takes effect. After that, attention will turn to how the Coalition for Fair Markets proceeds with its tax challenge and whether more states follow Kentucky’s enforcement strategy.