Arizona said it filed criminal charges against Kalshi for operating an illegal gambling business, in a significant escalation in the legal battles between the prediction market exchange and about a dozen states.

While state regulators have taken steps to crack down on what they say is unlicensed betting on Kalshi’s site, Arizona appears to be the first state to escalate to criminal charges. The charges cited in the complaint are misdemeanors, which carry less serious penalties than felonies.

“Kalshi may brand itself as a ‘prediction market,’ but what it’s actually doing is running an illegal gambling operation and taking bets on Arizona elections, both of which violate Arizona law,” Arizona Attorney General Kris Mayes said in a statement.

Prediction market exchanges like Kalshi have said they should continue to be regulated by the U.S. Commodity Futures Trading Commission despite opposition from some state officials, who argue the trading should come under state gambling laws.

“States like Arizona want to individually regulate a nationwide financial exchange, and are trying every trick in the book to do it. As other courts have recognized and the CFTC affirms, Kalshi is subject to federal jurisdiction,” said a spokesperson for Kalshi.

Arizona’s criminal complaint follows Kalshi’s move last week to block the state’s gaming department from taking enforcement action against the company.

“These are the first criminal charges of any kind filed against Kalshi in any court in the United States, but it will likely be the first of several,” said Daniel Wallach, a sports and gaming attorney.

So far, most of the state-level legal skirmishes centered on Kalshi’s event contracts have involved cease-and-desist letters, seeking preliminary injunctions, and civil enforcement. Kalshi has been at the forefront of that legal fight as the platforms barrel into states without regard to their gambling rules. Preemptively suing state officials in federal court, before they can file for enforcement in state court, has become a cornerstone of Kalshi’s strategy but it has not been alone in its efforts.

Polymarket and Crypto.com have also faced a slew of lawsuits as the fight over the prediction market industry spreads across states including Nevada, New Jersey, Maryland, Illinois and Montana. Lawsuits have ramped up as trading on the platforms surged over the past year, with the industry quickly turning into a multibillion-dollar business.

That explosive growth came after Kalshi won a lawsuit against the CFTC under then-Chair Rostin Behnam, which allowed the company to legally open trading on the 2024 election. The agency has since drastically changed its approach under Chairman Michael Selig, who has claimed the CFTC has “exclusive jurisdiction” over prediction market platforms.

Last month, the CFTC filed an amicus brief in support of Crypto.com in a key Nevada case. That suit is expected to impact how courts may approach the tug-of-war between states and the CFTC going forward.

Most lawyers watching the space say the cumulative effect of the state-level battles is the issue will be taken up by the Supreme Court within the next year or two.

Aaron Brogan, a lawyer who focuses on alternative financial assets, said the Arizona charges makes that more urgent.

“It only deepens the need for a federal appellate court, and ultimately the Supreme Court, to decide whether or not federal law preempts states’ enforcement of gambling laws,” he said. “I think it is very plausible, if some of these exchanges face criminal sanctions, that certain of the executives or certain of these exchanges stop operating in some states.”

(With assistance from Nathaniel Popper.)

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