Federal Judge Blocks Illinois Licensing of Kalshi's Sports Contracts but Holds Off on the State's Tax

A Chicago judge has found that Kalshi's championship contracts are likely swaps and that Illinois likely cannot make the exchange take out a sports wagering licence. She has not yet ruled on the state's new 1.75% to 3.5% prediction-market fee, and her reasoning puts her at odds with a Wisconsin judge in the same circuit and with two federal appeals courts.

• US District Judge Martha M. Pacold of the Northern District of Illinois on 2 October granted in part, and continued in part, preliminary injunction motions by Coinbase, Kalshi and the United States and Commodity Futures Trading Commission (CFTC) in three cases against Illinois officials
• She found that contracts on who wins a title game, such as whether the Chicago Cubs win the 2026 World Series, are likely swaps, and that Illinois' sports wagering licence requirement and the related criminal provision likely conflict with the Commodity Exchange Act
• The challenge to Illinois' fees, including the new exchange wager tax of 1.75% and 3.5%, is held over for further briefing; she said a fee might not conflict with federal law unless it effectively regulates the market
• The parties must file a proposed injunction by 29 October and a briefing schedule on the fees by 8 October
• A Wisconsin federal judge denied the CFTC similar relief in July, finding the contracts likely are not swaps; that case is on appeal to the Seventh Circuit, and the Sixth and Ninth Circuits have also ruled against Kalshi on the swap question

A Chicago Court Sides With Kalshi on the Question Two Appeals Courts Decided the Other Way

Judge Martha M. Pacold decided three cases together in a 28-page opinion dated Friday 2 October: Coinbase Financial Markets, Inc. v. Raoul, No. 1:25-cv-15406; United States v. State of Illinois, No. 1:26-cv-03659, the CFTC's suit, joined by the Coalition for Fair Markets and North American Derivatives Exchange as intervenors; and KalshiEX LLC v. Raoul, No. 1:26-cv-07363. The defendants include Attorney General Kwame Raoul and Illinois Gaming Board officials. The motions, she wrote, "are granted in part and continued in part".

The dispute began, according to the opinion, when Illinois sent Kalshi a cease-and-desist letter and threatened action against "anyone affiliated with [Kalshi's] operations". Coinbase, which lets its customers trade Kalshi's contracts, sued in December 2025 and argued its motion in February. Illinois then used its FY2027 budget to impose a transaction fee on every "exchange wager", 1.75% on a platform's first five million in a fiscal year and 3.5% after that, on top of its existing sports wagering fees. The CFTC sued in April and Kalshi in June.

Pacold confined her decision to the contract both sides had argued about, one on who wins a title game, such as "will the Chicago Cubs win the 2026 World Series?", and said she would tailor relief accordingly.

Title Contracts Are Likely Swaps, With Limits

The case turned on the clause of the Commodity Exchange Act that defines a swap to include a contract dependent on "an event or contingency associated with a potential financial, economic, or commercial consequence". Pacold held that "event" covers who wins a game, not only the game itself, a point on which she cited the Sixth Circuit. A contract on a Cubs win and one on the Cubs' season record "pay out under exactly the same circumstances", she noted, yet on Illinois' reading only one would be a swap.

On the consequence requirement, she said the clause "reads about as broadly as it could", but that "broad does not mean unlimited". Any association with a consequence must be "concrete and articulable", and the consequence material. A title result meets that test, she found, because broadcasters, arena and concession companies and sponsors have revenue tied to it and could hedge against it. Coinbase "effectively conceded" that a contract on the colour of sports drink poured on a coach after a Chicago Bears win would not qualify.

She rejected Illinois' argument that only events with an inherently economic character qualify, a limit the Sixth Circuit adopted on 25 September, saying the definition is unambiguous and reads "more like a broad-spectrum regulatory intervention than a surgical response to the 2008 crisis". She also took issue with the Ninth Circuit's view that "Kalshi has a gambling problem". "To make the point more forcefully: swaps are swaps whether they are used to gamble," she wrote. Her conclusion: many of the instruments "are likely swaps as defined by the Commodity Exchange Act", and "they just happen to be swaps that people find entertaining and fun."

What Is Enjoined, and What Is Not

Following Seventh Circuit precedent, Pacold rejected express and field preemption and decided the case on conflict preemption. Under the circuit's 1992 decision in American Agriculture Movement v. Board of Trade, state laws that "directly affect trading on or the operation of a futures market" are preempted, while laws governing only relationships between brokers and investors are not. Registration alone does not shield a contract, she said: Illinois' laws "are not preempted just because they impact contracts traded on Kalshi's website".

Illinois' licensing regime fails that test, she found. The Sports Wagering Act would require Kalshi to hold a licence, exclude under-21s, accept wagers only from people in the state and restrict which events and data it uses, forcing it "to build a market solely for Illinoisans" under threat of criminal penalties. The CFTC "has never held that Kalshi's contracts are impermissible gaming contracts", she noted. She found irreparable harm, rejected Illinois' laches defence, and said concerns about addiction among young people were for the federal regulator: "Congress assigned those considerations to the CFTC, not the courts."

The fees are a different matter. "Regulatory uniformity, however, does not necessarily entail uniformity in cost," she wrote, drawing on the Supreme Court's 1995 Travelers decision upholding state hospital surcharges that affected ERISA plans. "Taking a cut of Kalshi and Coinbase's profits, without more, might not pose the same conflict as regulating an entire market." A fee heavy enough to restrict the market could be preempted: "What defendants cannot do overtly, they cannot do covertly." The plaintiffs have not yet carried that burden, she said. The injunction itself is still to be drafted: the parties must file a proposed order by 29 October. iGaming Times found no public statement from the Attorney General's office or the Gaming Board on the ruling by Monday.

The Seventh Circuit Now Has Two District Judges Pointing Opposite Ways

On 28 July Judge William C. Griesbach in the Eastern District of Wisconsin denied the CFTC an injunction against Wisconsin, finding it had not shown that sports contracts are likely swaps and that, even if they were, preemption was unlikely. The CFTC appealed to the Seventh Circuit, No. 26-2636, as did Kalshi and the American Gaming Association, both refused leave to intervene. Both judges applied the same circuit's law and reached opposite answers on the swap question. The Seventh Circuit will now have to choose, and an appeal by Illinois once the injunction is entered would put both cases before it. Until then, the ruling protects a narrow class of contracts in one state, and says nothing directly about others, such as player props.

The National Count Still Runs Against Kalshi

The Third Circuit ruled 2-1 for Kalshi in April; the Ninth and Sixth Circuits ruled against it in August and September, and the Sixth Circuit's ruling is the basis on which Ohio ordered ten platforms to stop offering sports contracts in letters dated the same day as Pacold's opinion. A district court ruling does not change that count, but it gives Kalshi a carefully limited theory of the swap definition at a useful moment. Kalshi's response to New Jersey's Supreme Court petition, No. 26-299, is due on 9 November, and its en banc petition in the Ninth Circuit is still pending.

The Fee Question May Matter More to the States Than the Licence

Pacold's preliminary view on the fees gives states a route that the licensing fight does not: tax the activity rather than regulate it. Illinois' exchange wager tax does exactly that, although a bill to repeal it was filed in September. If the fee survives while licensing does not, other states could follow Illinois in taxing prediction markets without trying to license them. The CFTC's proposed rule defining event contracts as swaps, sent to the White House on 28 September, would not settle that question, since it concerns what a swap is, not what a state may charge.

Pacold has given Kalshi and Coinbase a detailed district court argument that a sports contract can be a swap. She has also signalled that Illinois may still be able to collect its fee.