Kalshi's Court Fights, Regulating Prediction Markets

**SPEAKER_1** (0:02)
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This is Bloomberg Businessweek Daily, reporting from the magazine that helps global leaders stay ahead, with insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Businessweek Daily podcast with Carol Massar and Tim Stenovec on Bloomberg Radio.

**Tim Stenovec** (0:32)
Well, last week, New York state authorities sued the prediction markets company Kalshi for allegedly running an illegal unlicensed gambling operation in the state, marking another legal hurdle for an industry that's won support from the Trump administration.

**Carol Massar** (0:44)
That's right. That suit filed Friday in state court in Manhattan alleges that Kalshi's prediction market exposes state residents, including those under the legal gambling age of 21, to quote, serious personal and financial risk. This is coming from the New York Attorney General, Letitia James, putting that out in a statement.

**Tim Stenovec** (1:00)
We've got with us Robert DeNault, head of enforcement and legal counsel at Kalshi. He joins us here in the Bloomberg Businessweek studio. Bobby, welcome. I want to jump right in to this suit because Letitia James, the Attorney General says, quote, no matter what they call themselves, prediction markets like Kalshi are gambling platforms, plain and simple. By ignoring our laws, Kalshi is running an illegal operation and harming New Yorkers in the process. What is your response to this claim that Kalshi is running an illegal gambling operation?

**Robert DeNault** (1:31)
I mean, as both a New Yorker and a lawyer, I'm alarmed by the overreaching sentiment that's coming from the Attorney General's office. So Kalshi is a licensed federally regulated exchange.
By her logic, any federally regulated exchange that's operating with a federal license and overseen by a federal regulator can suddenly be subject to whims of state criminal enforcement if the Attorney General of a particular state wakes up and decides one day that these contracts actually come within New York state gambling law. That's not how any exchange in US history has ever operated, right? So we have, we're here at Bloomberg. You guys talk about the New York Stock Exchange, NASDAQ, other exchanges. All of them could be potentially affected by the breadth and scope of the New York Attorney General's approach and legal theory in terms of how she believes she can regulate and bring to heal federally licensed exchanges here in New York state.

**Carol Massar** (2:26)
Bobby, are you saying you're the exact same things as the New York Stock Exchange or the NASDAQ markets that you're saying you're the exact same thing apples to apples then?

**Robert DeNault** (2:34)
What I'm saying is that federal law dictates that that is the case. When a federal law like the Commodity Exchange Act exists and provides for a way for an entity to get licensed by something like the Commodity Futures Trading Commission or the Securities Exchange Commission, that licensure and that federal regulation is what governs that marketplace. Now, if states want to litigate with that regulator on a case by case basis about what types of contracts might implicate some state laws, that's one question and that's some of the lawsuits we've seen over the last year on sports. But this is much more far-reaching. This is claiming that that license means nothing, and if you don't hold a New York license, you're running a criminal operation and you need to be run out of the state.
I think it's important to ground this in history of disruptive new players in marketplaces.
Kalshi is new, but this license regime has existed for many decades. We've seen similar playbooks used against companies like Uber and Airbnb, where states try to throw their weight around and bring crazy cases to block what customers want as a reasonable alternative. We think that that's pretty similar playbook to what the attorney general is following here.

**Tim Stenovec** (3:42)
So why shouldn't Kalshi seek a license from the New York State Gaming Commission? Why wouldn't you do that?

**Robert DeNault** (3:47)
So it really goes to the way that the business operates. We are a federally licensed exchange that requires us to run open markets that are available nationwide. Our users set the price, traders set the price. We match traders in an open marketplace with one another. We are not on the other side of individuals trading. We don't run a casino where people can come in and drink and play card games. We don't run a sports book where we profit when people lose. What we do is run open marketplaces where users define the price point and that type of financial product, even if it touches on topics that is similar to a topic touched on by a sports book, the way that that product operates is typically what governs what regulations apply.