Meta description: Judge Martha Pacold blocked Illinois licensing enforcement against Kalshi sports contracts but kept the state fee challenge open.

Tags: Kalshi, Coinbase, CFTC, Illinois Gaming Board, Martha Pacold, Seventh Circuit

market_platform: Kalshi

category: Regulation

A federal judge in Chicago on Oct. 2, 2026 blocked Illinois from using its sports-wagering licensing regime and related criminal provisions against the Kalshi sports-event contracts at issue in three consolidated cases. U.S. District Judge Martha M. Pacold held in a memorandum opinion and order that many of the instruments are likely swaps under the Commodity Exchange Act, while leaving Illinois’ transaction-fee defenses for further argument.

The ruling grants in part and continues in part preliminary-injunction motions brought across the Coinbase, CFTC and Kalshi dockets. The moving parties include Coinbase Financial Markets, KalshiEX LLC, the United States, the Commodity Futures Trading Commission and intervenor plaintiffs Coalition for Fair Markets and North American Derivatives Exchange, Inc., doing business as OG.

Pacold’s decision gives Kalshi and its distribution partners near-term protection from Illinois licensing enforcement for core sports-related contracts, but it does not end the state’s broader fight. The court kept open whether Illinois can impose sports-related exchange-wager fees, including the 1.75% and 3.5% transaction fees added in the state’s fiscal 2027 budget.

What did Judge Pacold rule on Illinois’ sports-wagering laws?

Pacold held that the plaintiffs had shown a likelihood of success on their argument that Illinois’ licensing rules, when applied to Kalshi’s core sports-related contracts, conflict with federal derivatives law. Her analysis turned on two linked findings: Kalshi is a CFTC-designated contract market, and its title-style sports contracts are likely swaps under the Commodity Exchange Act.

The court focused on contracts tied to the winner of a title game, a category the parties had centered in their briefing. Pacold reasoned that a championship outcome can be associated with financial, economic or commercial consequences for broadcasters, arena operators, concession businesses and sponsors. That connection mattered because the CEA definition of a swap includes a contract dependent on an event or contingency associated with a potential financial, economic or commercial consequence.

Illinois argued that sports contracts are gambling products, not swaps, and that state gambling regulation protects consumers from addictive products. Pacold treated the gambling label as legally insufficient by itself. The relevant question, in her view, was whether the contracts fit the federal statutory definition and whether Illinois was trying to control trading on a federally regulated market.

The court found that Illinois’ licensure rules and related criminal provisions would regulate the market itself. Pacold wrote that Illinois was attempting to control how Kalshi’s swaps can be structured, which sporting events they can relate to, who can trade them and where those trades can occur. That, the order said, imposes conflicting regulatory demands on a federally regulated market.

Why is the Illinois prediction-market tax still unresolved?

Pacold did not decide whether Illinois’ fees are preempted. The order says the parties gave the issue less focused briefing and that further targeted argument, and potentially evidence, would help the court evaluate the effect of the fees Illinois seeks to impose.

The fee dispute is concrete. According to the Oct. 2 order, amendments to 230 ILCS 45/25-90 impose a 1.75% transaction fee on a prediction market or exchange’s first five million sports-related exchange wagers in a fiscal year and a 3.5% fee on later exchange wagers in the same fiscal year. The order also notes existing Illinois sports-wagering fees, including a 15% fee on gross sports wagering receipts and per-wager fees of either 25 cents or 50 cents.

Pacold separated a fee from a licensing regime. State charges can have indirect economic effects without necessarily regulating the operation of a federally governed market, the order said. But the court also left room for a different result if a fee is large enough to effectively restrict how the market operates. The practical question is whether Illinois is merely taking a cut of activity or using fees to achieve what it cannot impose directly through licensing rules.

That makes the tax fight the main unresolved issue in the Illinois cases. Kalshi gains protection from a licensing and criminal-enforcement threat tied to the contracts at issue, while Illinois keeps alive its argument that the state can impose costs on sports-related exchange wagers even if it cannot license the underlying federally traded instruments in the same way it licenses sportsbooks.

How did the Illinois dispute reach federal court?

The dispute began after Kalshi started listing sports event contracts and Illinois responded with enforcement threats. Pacold’s order states that, shortly after Kalshi began listing prediction contracts based on sports, Illinois sent a cease-and-desist letter alleging violations of the Illinois Sports Wagering Act and warning Kalshi and affiliated entities of potential civil and criminal consequences.

Coinbase sued first in the consolidated group, after partnering with Kalshi so Coinbase users could buy and sell Kalshi-listed contracts using cryptocurrency stored through Coinbase. The order says Coinbase has about 100 million users. Pacold heard argument on Coinbase’s preliminary-injunction request in February 2026.

The federal government and the CFTC later sued Illinois, and Kalshi brought its own case. Pacold resolved the preliminary-injunction requests together because the cases advanced similar positions against shared state defendants. The defendants include Illinois Attorney General Kwame Raoul and other state officials.

The CFTC’s role raises the stakes beyond one exchange. The agency has argued in related litigation that prediction-market contracts listed on federally regulated exchanges fall within the national derivatives framework. Illinois, like several other states, has argued that sports-linked contracts can still fall within state gambling authority.

How does the Illinois ruling compare with Wisconsin?

The Illinois decision conflicts with a Wisconsin ruling inside the same federal appeals circuit. On July 29, 2026, U.S. District Judge William C. Griesbach of the Eastern District of Wisconsin denied the CFTC’s request for a preliminary injunction against Wisconsin’s enforcement of gambling laws, according to the Wisconsin court’s order and subsequent docket activity described in Pacold’s opinion.

Griesbach concluded that the CFTC had not shown a likelihood of success on its argument that the sports event contracts were swaps protected from state enforcement. Pacold reached the opposite preliminary conclusion for the Illinois contracts at issue, finding that core sports-related contracts likely qualify as swaps and that much of Illinois law likely conflicts with the Commodity Exchange Act.

The Wisconsin case is now before the U.S. Court of Appeals for the Seventh Circuit. That matters because the Seventh Circuit hears appeals from both Illinois and Wisconsin federal district courts. A Seventh Circuit ruling in the Wisconsin appeal would not by itself dispose of every Illinois issue, especially the fee question Pacold continued, but it could set controlling circuit law on the swap and preemption questions now dividing district judges in the circuit.

Where does this fit in the national preemption fight?

Pacold’s order lands in a national split over whether sports event contracts listed by federally regulated prediction markets are swaps, and whether state gambling laws must yield when they target those contracts. The split is no longer limited to trial courts.

On April 6, 2026, the Third Circuit in KalshiEX LLC v. Flaherty, No. 25-1922, upheld preliminary relief against New Jersey enforcement, with the majority concluding that the sports contracts at issue likely qualified as swaps under the Commodity Exchange Act. Pacold’s reasoning is closer to that approach.

Later appellate decisions cut the other way. On Aug. 28, 2026, the Ninth Circuit in KalshiEX LLC v. Assad, No. 25-7516, affirmed in part an order dissolving Nevada-related preliminary relief as to sports event contracts. The Ninth Circuit said Kalshi’s sports-related contracts were likely not swaps under the CEA and rejected Kalshi’s broad preemption theory for those products.

On Sept. 25, 2026, the Sixth Circuit listed published decisions in KalshiEX LLC v. Matthew Schuler, No. 26-3196, and KalshiEX LLC v. William Orgel, No. 26-5235, involving Ohio and Tennessee officials. Pacold’s order cites Schuler for the proposition that the statutory text does not clearly exclude sports outcomes from the word “event,” underscoring how rapidly the doctrine is developing across circuits.

The result is a fragmented legal map. Kalshi and aligned parties have won some preliminary rulings by persuading courts that sports-event contracts fit within the CEA’s swap definition. State officials have won others by persuading courts that Congress did not convert sports betting into exclusively federal derivatives activity by adding the Dodd-Frank swap definition.

What happens next?

The next step in Illinois is targeted argument on fees. Pacold’s Oct. 2 order continues the preliminary-injunction motions in part so the court can decide whether Illinois’ transaction fees and related sports-wagering charges are preempted, or whether they remain permissible state-imposed costs.

The broader milestone is in the Seventh Circuit, where the Wisconsin appeal gives the court a direct path to address the CFTC’s preemption theory for sports event contracts. Until then, Illinois has a partial federal injunction against licensing and criminal enforcement for the contracts at issue, while the state’s prediction-market fee regime remains the live fight in Pacold’s courtroom.