New York-based Kalshi and the State of Rhode Island filed competing lawsuits on Thursday, May 22, 2026, marking a significant escalation in the legal battle over the future of prediction markets. Attorney General Peter Neronha sued Kalshi and Polymarket in Providence County Superior Court, alleging their sports-related event contracts function as illegal gambling under state law. S.
District Court in Rhode Island to block anticipated enforcement, claiming its operations fall under the exclusive jurisdiction of the US Commodity Futures Trading Commission (CFTC).
The legal standoff follows a May 20, 2026, meeting where Attorney General Peter Neronha and his staff informed Kalshi representatives that the company’s offerings violated regional gaming statutes. m. EST on Thursday.
The company argued that federal law, rather than a “patchwork of state-by-state regulation,” should govern its financial instruments. m. EST, seeking a permanent injunction, restitution, and the disgorgement of profits from the two platforms.
Rhode Island officials are particularly concerned with the fiscal impact of these markets on state-sanctioned gambling. The Rhode Island State Lottery (RILOT) observed an 8% decrease in bets from 2024 to 2025, which the organization attributes to the expansion of prediction markets. Because the state lottery serves as Rhode Island’s third-largest revenue stream, the government claims these platforms detrimentally affect funds used for critical public programs.
Attorney General Peter Neronha challenges legality of event contracts
The state’s lawsuit argues that “event contracts” are essentially equivalent to sports betting, which is strictly regulated by the Rhode Island State Lottery (RILOT) and Director Mark Furcolo. Attorney General Peter Neronha alleged that Kalshi and Polymarket are evading laws designed to protect residents from the devastating effects of gambling addiction. The state further claims that the platforms’ use of leaderboards and constant updates on other users’ activity encourages addictive behavior among susceptible users.
“There is no substantive difference between sports betting and ‘events contract’ in this context; Kalshi and Polymarket know that, and we know that,” Attorney General Peter Neronha said in a statement. He emphasized that Rhode Island’s constitution requires a public referendum before the state can expand the types or locations of gambling. The lawsuit highlights that Kalshi has previously described its own products as “betting” and “wagering” in marketing materials and past legal proceedings.
The outcome could have ripple effects for other high-stakes digital assets. While users often turn to platforms like these when assessing the impact of recent rejections in traditional or crypto markets, Rhode Island maintains that these transactions must occur within a licensed framework. The state seeks a court declaration that these sports contracts are illegal, arguing that private companies should not profit while state revenue streams suffer.
Kalshi claims federal preemption under CFTC oversight
Kalshi’s legal strategy hinges on the argument that its products are legitimate financial derivatives, not casino-style games. The company cited a Federal Reserve research report concluding that prediction markets provide a valuable benchmark for researchers and policymakers. By allowing users to trade on outcomes, Kalshi argues it provides informational value and hedging opportunities that distinguish its platform from traditional gambling.
In its federal filing, Kalshi asserted that the US Commodity Futures Trading Commission (CFTC) is the only body with the authority to regulate its contracts. The company warns that if states are allowed to intervene, it would contradict the intent of Congress to maintain a unified federal regulatory environment. This tension mirrors broader shifts where speculative activity returns as buyers test different financial models and resistance levels in the digital age.
But Rhode Island remains unconvinced by the “financial instrument” label. The state’s complaint notes that Kalshi once argued before the D.C. Circuit that its sports contracts were “casino gambling.” This perceived contradiction is central to the state’s push to force the platforms to “stand down” and abide by local statutes that govern all other forms of wagering within the state’s borders.
National trend as states move to ban prediction markets
Rhode Island is the latest in a growing list of states taking action against these platforms. Nevada and New Jersey previously sent cease-and-desist letters to prediction market operators, while Minnesota recently passed a bill to ban the markets entirely. Other states, including Arizona, Washington, Massachusetts, and Michigan, have also engaged in legal or regulatory hair-splitting over whether these contracts constitute illegal sports wagering.
Despite the state-level pushback, the platforms have received some high-level political support. The Trump administration backed Kalshi and Polymarket in February 2026, arguing against state-level bans. However, a panel of Ninth Circuit judges recently denied stays in cases involving similar disputes in Nevada and Washington. The legal landscape remains fractured as more states look to protect their own regulated gaming revenue from digital competitors.
Unlike some sectors where market shifts toward transparency have led to clearer guidelines, the prediction market industry is currently caught between federal acceptance and state-level rejection. The Providence County Superior Court and the U.S. District Court in Rhode Island will now weigh these conflicting views on whether a digital contract on a sports score is a sophisticated hedge or a simple bet.