Kalshi’s $40 billion valuation is suddenly raising one question: are its sports contracts financial products or gambling? A federal appeals court just sided with states, putting Kalshi’s business model under pressure. With lawsuits piling up, their biggest concern may be its own future.

In 2025, Kalshi allowed users to take a “yes” or “no” position on the outcome of games. But Ohio and Tennessee regulators viewed these contracts as sports betting and argued that Kalshi should follow their state gambling laws. But Kalshi disagreed.

Kalshi argues that what users are doing is not technically betting. Instead, it calls these products financial contracts or “swaps” that are supposed to fall under the federal CFTC.

The interesting part is that the two states did not initially get the same answer from their federal courts. In Ohio, a federal district court rejected Kalshi’s request to block state enforcement. In Tennessee, however, a federal court temporarily stopped the state from taking action against Kalshi.

However, the 6th U.S. Circuit Court of Appeals said that even if Kalshi’s sports contracts are treated as financial “swaps,” that still does not automatically stop states from enforcing their own gambling laws.

And there is plenty of money riding on how this legal battle plays out. They have already raised $2.6 billion, and reports say it has been discussing another funding round that could push its valuation to around $40 billion.

So, with the courtroom drama, their entire business is hanging on a thin thread.

On top of it, the legal concern is already making things worse for them. Kalshi has taken 14 states to federal court, including Nevada, New Jersey, Maryland, Ohio, New York, Connecticut, Illinois, Tennessee, Utah, Iowa, Arizona, Montana, Minnesota, and Rhode Island.

Now, if things don’t go in Kalshi’s favor, their entire system can get affected.

Why one ruling reshapes the whole legal picture

The main concern is Kalshi’s rulebook, which sets it apart. For example, Michigan-licensed sportsbooks must check that bettors are 21 or older, but Kalshi does not currently follow that same state-by-state setup.

So, in other words, the states believe Kalshi is competing in the same sports-betting market while playing by a different set of rules.

New York also points out that its mobile sports bettors must be 21+, while Kalshi allows people to sign up starting at 18. So, it’s a big mix-up.

If they lose the legal battle, their growth might also take a major hit. As per the American Gaming Association, legal sportsbook growth has reached its saturation point while the prediction market is exploding.

Its September 2026 estimate put NFL betting at $29.5 billion, almost the same as the $29.4 billion recorded the previous season.

If you talk about Kalshi, for them the prediction market is doing wonders. Pew found that Kalshi and Polymarket combined went from less than $5 billion in monthly volume in September 2025 to $53 billion in July 2026.

They have not completely replaced traditional sportsbooks like DraftKings or FanDuel, but a new bettor might choose Kalshi because it offers sports contracts in a different format.

But the numbers are clearly telling a different story. According to H2 Gambling Capital, prediction markets accounted for about 27% of all legal U.S. sports-betting activity during the tournament.

That was a big jump from the 9% share at the start of 2026. So, one ruling can change the entire dynamics of their business.

What all can they lose??

Kalshi’s trading volume has gone through the roof. The company recorded $5.8 billion in monthly trading volume in November 2025, up from $4.4 billion in October. By July 2026, that figure had climbed to $40.1 billion, before slipping slightly to $37.17 billion in August.

That explosive growth has also sent its valuation through the roof. Kalshi was valued at $22 billion in May 2026 after raising $1 billion in its Series F funding round. Just a few months later, The Information reported that the company was looking to raise more money at a $40 billion valuation.

So, they aren’t low on the money-making aspect.

Kalshi is also thinking about taking the company public. CEO Tarek Mansour has confirmed that an IPO is being considered, although he has not officially locked in 2027. He has said Kalshi would not go public in 2026, while reports have pointed to 2027 as a possible timeline.

Sports are a big part of that growth, not some side project sitting on the shelf. A large majority of Kalshi’s activity now comes from sports contracts. If regulators force Kalshi to change how it offers these contracts, the impact could reach much further than just one product.

And this is no longer a fight happening in one corner of the country. Twenty states are currently involved in litigation with Kalshi and/or other prediction-market platforms over how these contracts should be regulated.

What happens next?

The UFC partnered with Polymarket in November 2025. The deal made Polymarket the UFC and Zuffa Boxing’s official and exclusive prediction-market partner.

The NHL took a slightly different approach. In October 2025, it signed separate partnerships with both Kalshi and Polymarket in the U.S. Both companies became official NHL prediction-market partners.

The big question is whether sports leagues are deliberately keeping both sides open for them or not. But it could also simply mean leagues are taking advantage of a fast-growing business.

Now, losing might affect Kalshi, but it will open new doors for traditional sportsbooks. Betting sites like DraftKings, FanDuel, BetMGM, and Caesars already have relationships with sports fans, so this way they can win back their fans.

But ironically, the traditional sportsbooks are already preparing for the prediction-market business themselves. DraftKings launched DraftKings Predictions in December 2025, offering contracts tied to sports and other events. FanDuel and CME also launched FanDuel Predicts that same month, initially in five states, with plans to expand.

So the sportsbooks are not simply waiting for Kalshi to disappear. They are trying to compete in the same new market.

There may not be one clear rule for prediction markets across the entire country.

Some states could allow them, while others could restrict or ban them. That would make things complicated for sports leagues and sponsors because they would not know whether a deal they make today will work everywhere tomorrow.

So, instead of waiting for all the legal fights to end, leagues may start preparing for different rules in different states. The question is: Are leagues already planning their business deals with this uncertainty in mind?