Kentucky Attorney General Russell Coleman filed a lawsuit against Kalshi, Polymarket and VGW on June 17, accusing the companies of operating illegal gambling platforms without a Kentucky license.
The lawsuits, filed in Franklin Circuit Court, add to the growing conflict 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 allowed 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.
Nearly 89% of Calci’s trading activity was related to sports betting, generating more than $23 billion in contract trading volume in 2025, the attorney general’s office said.
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 over 60.
Kentucky also named Coinbase in the case involving Calci, alleging that the company acted as an affiliate or partner in unauthorized sports contracts, according to Spectrum News 1. The complaint says Calci used affiliate relationships to expand access to sporting event contracts while avoiding Kentucky’s sports betting 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 obtain approval to operate sports betting, with the Kentucky Horse Racing and Gaming Commission serving as regulator.
A separate state law, the Betting Consumer Protection Act, goes into effect on July 15. Licensed sportsbooks will be prohibited from contracting with prediction market operators such as Kalshi or Polymarket.
The third suit targets VGW, the operator behind Chumba Casino, Global Poker and LuckyLand Slots. Coleman’s office said VGW operates lottery casino sites that simulate slot machines and table games using virtual “lottery coins,” which users can purchase with real money and exchange for cash prizes.
CFTC turns state enforcement into federal battle
The lawsuits in Kentucky are part of the broader state-federal standoff 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 was 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 also filed criminal charges against Calci for alleged violations of the state’s gambling law. A federal court later issued a temporary restraining order preventing criminal prosecution in Arizona.
The CFTC has since expanded its legal push. On April 28, the agency sued the state of Wisconsin after the state filed civil lawsuits against Kalshi, Polymarket, Crypto.com, Robinhood, and Coinbase, alleging criminal violations. The Commission also sued New York, Minnesota, Rhode Island, and New Mexico to prevent those states from applying gambling laws to CFTC-registered contract markets.
CFTC Chairman Michael S. Selig in the Wisconsin file: “States cannot circumvent Congress’ clear direction.” “If you interfere with the operation of federal law in regulating financial markets, we will sue you.”
The CFTC argues that Congress granted it exclusive jurisdiction over event contracts traded in designated contract markets. Under this argument, state gambling laws cannot override federal regulation of CFTC-certified markets.
Industry fights Kentucky 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% tax on predictive market transaction fees. This tax is the first targeted tax of its kind in the United States, according to the Associated Press.
The Alliance for Fair Markets says the tax discriminates against federally regulated derivatives markets. The group also says the rate is higher than the 9.75% tax applied to betting on horse tracks and violates the principles of federal preemption, the dormant commerce clause, and First Amendment protections.
Kalci criticized the tax as counterproductive. “Taxing federally regulated marketplaces does not make anyone safer, but rather pushes people toward illicit platforms without oversight or protection,” 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 skirt them.
July 15 becomes the next key date
Kentucky is now attacking prediction markets on two fronts: through enforcement actions by its attorney general and through a new tax system passed by state lawmakers.
For cryptocurrency-related platforms like Polymarket, and for companies like Coinbase that have been dragged into the lawsuit, these cases raise a central question: Can states treat event contracts as illegal gambling when 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 consumer protection law goes into effect. Next, attention will turn to how the Alliance for Fair Markets continues its tax challenge and whether more states follow Kentucky’s implementation strategy.
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