On January 21, 2026, news emerged from Massachusetts on the U.S. East Coast, where state judge Christopher Barry-Smith indicated plans to issue a preliminary injunction against the prediction market platform Kalshi, sparking controversy over the boundaries of contract innovation and gambling regulation. According to the judge's stance, Kalshi would not be allowed to offer any sports predictions or sports-related contracts to residents in Massachusetts unless it obtained a state-level gambling license. The crux of the conflict quickly focused on a core question: should sports prediction contracts be viewed as prediction market tools centered on information and probability, or are they essentially betting products indistinguishable from traditional sports gambling? This lawsuit surrounding sports contracts is seen by many observers as a typical battle in the U.S. over the demarcation between prediction markets and gambling regulation, and its outcome could significantly impact the survival space for various new prediction products in the future.
From Attorney General's Lawsuit to Judge's Action
The origin of this storm can be traced back to the previous sports season. According to public information, in September 2025, Massachusetts Attorney General Andrea Joy Campbell was the first to file a lawsuit against Kalshi, accusing it of providing "illegal and unsafe" sports gambling services to residents within Massachusetts. The core of the lawsuit did not target traditional underground bookmakers or offline betting, but rather a series of prediction contracts designed by Kalshi around sports events. From the perspective of the Attorney General's office, these "prediction contracts," which are based on outcomes, team performances, and even derived statistical data, are highly similar in function and risk structure to sports gambling but have not been included under the state's gambling licensing and regulatory framework, thus being deemed illegal operations that could pose composite risks to retail users in terms of safety and compliance.
In this context, the hearing on January 21, 2026, became a critical turning point. Judge Christopher Barry-Smith, presiding over the case, clearly stated in court that he would issue a preliminary injunction specifically targeting Kalshi's product line in the sports sector. According to the currently disclosed direction, this injunction does not outright halt all of Kalshi's business but sets clear preconditions for sports-related contracts: unless Kalshi obtains a legal gambling license in Massachusetts, it cannot offer any sports predictions or sports-related contract trading to residents in the state. In other words, the court directly linked sports prediction contracts to gambling operations, requiring the platform to either exit the sports sector or accept the reality of being incorporated into a complete gambling regulatory system. This "show of strength" action quickly moved the dispute from the realm of legal documents and debates into a judicial phase with substantial constraints on the platform's business model and product boundaries.
The Red Line Between Prediction Markets and Gambling
The classification of Kalshi's sports contracts raises a long-standing industry dilemma to the forefront: when products are based on sports events and users' profits and losses are directly tied to outcomes, regulators are more inclined to view them as gambling rather than neutral "information markets." Several design features of sports prediction contracts naturally bring them close to the sensitive area of gambling regulation. For instance, the contracts are based on sports events that have strong emotional appeal and public participation, with settlement results typically being simple binary outcomes or a limited number of discrete scenarios. Users' primary motivations often stem not from research on macroeconomics or public events but from expectations and preferences regarding teams, players, and outcomes. From a regulatory perspective, products centered on short-term results, immediate stimulation, and monetary wins and losses are more easily categorized as gambling rather than as prediction tools aimed at aggregating information and forming price signals.
When compared horizontally with traditional sports betting companies, it is evident that the two types of platforms share similarities and differences. On one hand, traditional sports betting companies typically offer odds, spreads, and other structures, allowing users to participate through betting, with settlements entirely dependent on outcomes; sports prediction market platforms express the same judgments in contract form, allowing users to enter and exit through buying and selling positions in the secondary market, seemingly closer to financial contracts. However, in terms of user participation, both allow for monetary bets based on outcomes, enabling users to participate quickly with small amounts and engage in high-frequency betting throughout the season, leading to significant short-term profit and loss fluctuations. From a regulator's perspective, this commonality of "outcomes determining wins and losses" may overshadow the differences in product form, pricing mechanisms, and trading structures, making it difficult for prediction platforms to escape the gambling label.
If sports prediction contracts are fully regulated as gambling operations, the costs and compliance pressures on similar platforms will be multifaceted. First, the licensing system itself requires capital strength, background checks, technical risk control, and compliance team configurations, which for startup prediction platforms that originally identify with financial technology or crypto derivatives logic means high fixed costs and lengthy approval cycles. Second, the gambling sector typically comes with stricter advertising restrictions, user age and KYC thresholds, and controls on transaction frequency and single transaction amounts, which will directly impact the platform's business model, user growth path, and product iteration space. Finally, the uncertainty of compliance itself can become a significant hidden cost, forcing the platform to adopt a conservative approach in product design, making it difficult to promote more complex and financially-oriented innovations in sports-related contracts.
The Hardline Stance of Massachusetts: Safety or Conservatism?
To understand Massachusetts's attitude in this case, it is essential to place the Attorney General's accusations against Kalshi within the context of local politics and consumer protection. Attorney General Andrea Joy Campbell explicitly emphasized the "illegal and unsafe" accusations in the lawsuit, which serves as both a legal judgment and a political expression. In the eyes of many state-level law enforcers, allowing unlicensed sports prediction products to be accessible to ordinary residents in the state not only undermines regulatory authority but also creates a potential institutional vacuum regarding addiction risks, fund safety, and consumer education. If large-scale complaints or extreme cases arise, public pressure can easily point to law enforcers as "failing to regulate effectively." Therefore, through litigation to "draw a line" against new sports prediction platforms, it is both a means of protecting consumer interests in the state and a political signal from local government to voters that it has "attitude and action" in the emerging intersection of finance and gambling.
From the perspective of Massachusetts regulators, addiction risks and significant losses for retail investors are undoubtedly core concerns. Sports events themselves are characterized by high frequency, strong competition, and intense emotions; when combined with prediction contracts that can be ordered at any time, they can easily create a sort of "around-the-clock betting" experience. For ordinary users lacking professional risk control awareness, especially younger groups, this high-frequency, small-amount, instant feedback contract trading could evolve into a new form of gambling addiction. If the platform fails to design appropriate entry thresholds, risk warnings, stop-loss mechanisms, and self-exclusion tools, cases of rapid personal fund losses or even debt accumulation are not hard to imagine. For a state government that has long emphasized consumer protection and responsible gambling, adopting a regulatory approach of tightening first and reassessing later appears safer and easier to explain to the public.
Additionally, Massachusetts's hardline stance in this case also contains more pragmatic financial and institutional motivations. By incorporating sports prediction contracts into the gambling licensing system, local government can: first, achieve a more controllable revenue-sharing mechanism at the tax level, transforming transactions that originally "hovered in the gray area" into compliant businesses that can be statistically tracked and taxed; second, maintain control over compliance rhythms by determining which products and platforms can operate in the state through the pace and standards of license issuance; and third, embed requirements for technical security, data protection, and anti-money laundering into the business through licensing and regular reviews, thereby reducing systemic risks brought by new models. Thus, beneath the surface choice between "safety" and "conservatism" lies a comprehensive consideration that balances voter sentiment, fiscal revenue, and regulatory control.
Implications of Kalshi's Model Under Scrutiny for the On-Chain World
The regulatory pressure faced by Kalshi has an obvious reflective effect on the crypto industry, especially for on-chain prediction protocols. From a product logic perspective, platforms like Kalshi that build contract markets around real-world events (including sports) share several similarities with on-chain sports prediction markets. Both use objective events as the underlying, allowing users to establish positions around questions like "will it happen" or "what will the final result be" through binary or multi-variable contracts, with the result announcement serving as the clearing trigger. In terms of user experience, whether it is a fiat currency deposit platform or a token-valued on-chain prediction protocol, for ordinary participants, the essence is the same "bet on a result, win money if you win, lose money if you lose" gambling structure. Therefore, when a centralized platform that positions itself as a compliant prediction market is accused of being "illegal and unsafe gambling services" in the sports sector, the on-chain world cannot remain indifferent.
If traditional prediction platforms are systematically classified as gambling businesses for their sports product lines, crypto prediction protocols may face regulatory spillover effects. Although on-chain protocols often emphasize decentralization, globality, and code autonomy, once regulators label sports-related prediction contracts as gambling based on "product function" rather than "technical implementation," then regardless of whether these contracts operate on centralized servers or public chain smart contracts, they may fall under the same regulatory logic. For on-chain sports prediction projects that wish to directly open to U.S. users, they may have to consider the applicability of state-level gambling laws, front-end access restrictions, KYC, and blacklist filtering as traditional compliance tools, which starkly contrasts with the previous narrative that "as long as the protocol is decentralized, it can evade local regulation."
Furthermore, regulatory agencies at both the state and federal levels in the U.S. may use cases like Kalshi's to explore and test pathways for establishing unified standards among prediction markets, financial derivatives, and gambling. Massachusetts's actions provide a "precedent sample" for other regions; regardless of whether it is ultimately confirmed, amended, or overturned by higher courts, it will serve as an important reference in internal discussions among regulators. For crypto derivatives and on-chain prediction protocols, once regulatory thinking takes shape on traditional platforms, replicating it in the on-chain world is merely a matter of timing, no longer a question of "whether it will happen."
How Other States and Federal Regulators Might Follow Up
If Massachusetts's preliminary injunction against Kalshi is ultimately implemented and enters a substantive execution phase, other state attorneys general are likely to view this litigation path as a replicable toolbox. For those states facing an influx of new sports prediction products but lacking a clear regulatory response, Massachusetts's experience provides a ready-made template: first, the Attorney General files "illegal and unsafe" accusations, suing on the grounds of consumer protection and unlicensed operations, and then seeks a court injunction centered on "no operation of sports contracts unless a gambling license is obtained." This chain reaction will, on one hand, create cross-state pressure on prediction market platforms at the legal level, forcing them to either comply with each state's gambling requirements or voluntarily retract from the sports sector; on the other hand, it will accelerate the "co-opetition" among states regarding prediction market regulation, with some states potentially opting for a more open approach to attract innovation, while others may choose a more conservative stance to reduce political risk.
At the federal level, there is already an overlap of responsibilities between the U.S. Commodity Futures Trading Commission and gambling regulatory agencies, and this structural overlap will profoundly impact the future trajectory of prediction markets. On one hand, prediction market products share many commonalities with derivatives such as futures and options at the technical and financial engineering levels, which provides legitimacy for the involvement of commodity futures regulators; on the other hand, prediction contracts involving sensitive events such as sports and political elections touch upon regulatory areas traditionally overseen by state gambling commissions and related federal agencies. When platforms like Kalshi attempt to accept similar financial regulation under the guise of "information markets" while being sued by state governments as "gambling businesses," this overlap of authority becomes particularly acute. The future regulatory framework will likely need to establish some form of coordination mechanism at the federal level to clarify which types of prediction contracts fall under financial derivatives and which should be subject to gambling regulation, avoiding the long-term existence of gray areas.
In light of the current situation, if Kalshi chooses to apply for a gambling license or proactively adjust its product structure, it may open up new regulatory negotiation space to some extent. If it accepts the constraints of the gambling framework in Massachusetts, clearly categorizing sports-related contracts as restricted business while retaining other macroeconomic and public event prediction products, it may be able to secure the qualification to continue operations based on a "partial compromise." At the same time, the platform could use this as leverage to communicate with federal and other state-level regulators, promoting the formation of a regulatory scheme that distinguishes between high-sensitivity events like sports and other prediction subjects. Although this process is bound to be filled with uncertainty, for the entire industry, if it can force a clearer regulatory consensus through case-by-case negotiations, it may be a "costly but necessary" rite of passage compared to surviving in a long-term state of ambiguity and sudden enforcement.
The Battle Over Sports Contracts or the Rite of Passage for Prediction Markets
The legal battle surrounding Kalshi's sports prediction contracts reflects the direct clash between product innovation and the existing gambling regulatory framework. On one side are the prediction platforms and developers hoping to leverage financial engineering and technology to "contractualize" and price real-world events; on the other side are regulatory agencies that draw lines based on existing legal systems, focusing on addiction risks and public order. Sports contracts are merely the first fuse to be ignited, with the fundamental disagreement being whether prediction markets should be viewed as tools or as disguised gambling channels.
In this tug-of-war, it is difficult for various platforms to achieve a win-win situation in the short term. Whether it is centralized prediction markets like Kalshi or on-chain sports prediction protocols, they may be forced to make painful trade-offs between compliance and innovation: either abandon the highest-risk, most sensitive regulatory area of sports and political contracts, focusing instead on relatively "niche" events like macroeconomic indicators and corporate earnings reports; or accept higher compliance costs and licensing thresholds, tightening their originally flexible and iterative product lines within the bounds of regulatory acceptability to avoid facing a "one-size-fits-all" ban at the state or federal level. For the entire industry, this signifies a shift from a "first create products, then supplement regulations" wild growth phase to a new stage of "innovation constrained by regulatory boundaries."
Looking ahead to the next few years, it is almost certain that the U.S. will usher in a regulatory environment that is clearer yet more stringent in the intersection of prediction markets and crypto derivatives. Clarity means that platforms will no longer need to guess the regulators' bottom lines in the dark; they can plan their business under more explicit classification standards and licensing pathways. Stringency, however, means that any contracts touching on high-sensitivity events like sports and elections will face higher capital requirements, stronger risk control obligations, and heavier compliance responsibilities. For participants who insist on staying in this track, the real consideration is no longer just how to design smarter contracts, but how to retain sufficient innovation space within a institutionalized framework, allowing prediction markets to maintain their unique value as information aggregation tools while being "recognized by regulators."
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