Swaps Being Fun, Does Not Make Them Illegal: How Significant Is Kalshi’s Legal Win In Illinois?
Image: Department of Defense
Kalshi had lost 16 consecutive federal court rulings before Friday, when a judge in Illinois bucked the trend and granted the company a preliminary injunction in part. Judge Martha Pacold said just because some swaps are “entertaining and fun” does not mean they are illegal.
“Plaintiffs have demonstrated that Kalshi is a designated contract market, that its core sports-related contracts are ‘swaps,'” wrote Pacold.
“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,” she added.
It is the first ruling to go in favor of Kalshi since July, when a judge in Minnesota blocked the state from enforcing a new law against prediction markets. On that occasion, like in Illinois, the CFTC also sued the state in defense of Kalshi.
Kalshi Applauds Decision In Illinois
Kalshi co-founder Luana Lopes Lara highlighted Pacold’s statement in a post on X, commenting, “Beautiful”.
Beautiful. https://t.co/8qFF0LGP9Q
— Luana Lopes Lara (@luanalopeslara) October 2, 2026
“Today’s decision by a federal court in Chicago – the birthplace of the American derivatives markets – speaks for itself,” said Jovy Dedaj, Kalshi’s Head of Litigation, in a post on LinkedIn.
“Judge Pacold does a great job of cutting through the noise and framing the issues in a way everyone can understand: some interest groups and industries feel a certain way about novel event contracts because ‘they just happen to be … entertaining and fun.’ But that’s not a legal basis to challenge their propriety. The CFTC gets to decide what’s a swap, not 50 different state gaming commissions. Kalshi applauds this decision,” he added.
The CFTC has moved to further clarify what counts as a swap in its proposed rules, which it recently submitted to the White House. These could further strengthen the case for sports contracts being permissible under federal law.
Judge Pacold referenced that the agency has “never held that Kalshi’s contracts are impermissible gaming contracts. It has never ordered Kalshi to remove its contracts.”
Ruling ‘Reads Map Before Judging Destination’
The ruling was also endorsed by legal expert Alper Ozgit, co-founder of Lexicon Labs, an organization that aims to “make law legible”.
“The Illinois court reads the map before judging the destination,” Ozgit told Gaming America. “It separates the statutory question from the gambling question: People may trade these contracts for fun, but that does not make them any less swaps under the broad definition Congress wrote. The question is whether they fit the statute, not whether we like where the statute takes us.”
The ruling creates an intra-circuit split with a Wisconsin district court ruling in which a judge denied the CFTC an injunction in its lawsuit against the state, now on appeal to the Seventh Circuit. Kalshi appealed the decision and will likely use the Illinois ruling to strengthen its case.
Supreme Court May Agree With Pacold
The Sixth and Ninth Circuits have already ruled against Kalshi, contrary to the Third Circuit’s ruling that found in the company’s favor. New Jersey has petitioned the Supreme Court to take the case.
It looked likely that states might eventually succeed in blocking sports prediction markets, given the flood of rulings against them. However, the latest judgment in Illinois calls that into question.
“I have always believed the Supreme Court is more likely to adopt reasoning similar to Judge Pacold’s, separating what the statute says from discomfort with its consequences,” said Ozgit.
In the rulings against Kalshi, judges have said its sports markets have all the hallmarks of sports betting. However, this ignores the fact that the markets have been authorized by the CFTC as swaps, says law professor Melinda Roth.
“The court says that sports event contracts are not swaps, but never addresses how they have been self-certified, listed, traded, and centrally cleared as swaps,” she says.
If the CFTC’s new rules are also reviewed and finalized by the White House, where Donald Trump has several ties to prediction markets, then sports markets could be here to stay.
Judge’s Example of Sports Markets Could Be Too Narrow
“A contract can be a swap and still be strongly discouraged or prohibited under federal law,” said Ozgit. “My expectation is that states and tribes would need to pursue alternative legal theories and avenues to find relief.”
In her ruling, Pacold gives the example of a sports contract as “Will the Chicago Cubs win the 2026 World Series?”
“I think relying on that example makes it much easier to side with Kalshi on the CEA’s meaning and preemptive effect: that particular contract is a clean binary option,” says Austin Martin, an associate at legal firm Massey & Gail LLP.
States may focus on more complex markets, such as parlays, which have become an increasingly significant driver of volume at Kalshi.
Over the weekend, parlays accounted for around $4.9 billion in volume, compared to $1.5 billion in single sports markets. It should be noted that parlays will always show far higher volume, with a Gambling Insider analysis noting that counting them as $1 may inflate the volume by 16-fold.
The argument that the parlays Kalshi promotes, often involving as many as 30 legs, have inherent economic value becomes harder to make. When ruling against Kalshi earlier this year, a judge in Connecticut said parlays “have no independent financial, economic, or commercial consequence at all.”
Eventually, we may see a compromise in which some sports markets are allowed on prediction markets, while things like parlays or prop bets are prohibited.
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