Texas lawmakers could pursue litigation or legislation against prediction markets offering sports event contracts, potentially opening another front in the nationwide fight over whether the products are federally regulated derivatives or an unlawful form of sports betting.
- A Texas Senate panel heard calls for state-court lawsuits and legislation declaring sports event contracts illegal gambling.
- Kalshi warned that a ban could send Texans to offshore platforms, urging advertising and consumer safeguards instead.
- The dispute adds a new fault line to Texas’ 2027 debate over legalizing sportsbooks and Las Vegas-style casinos.
The Senate Committee on State Affairs heard recommendations Tuesday that Texas sue prediction market operators in state court and clarify that sports event contracts are illegal under existing state gambling law. While advocating for those measures, American Gaming Association vice president Tres York said policymakers needed to act on prediction markets already accepting trades in the state.
“This legislature has made the decision to not authorize sports betting in the state for now, but whether you want it or not, prediction markets like Kalshi have defied your authority and given it to Texans anyway,” York said, speaking in a Senate hearing room alongside Kalshi’s Robert Denault.
Kalshi’s head of enforcement and legal counsel, Denault countered that federal law preempts state gambling restrictions and urged lawmakers to pursue consumer safeguards instead of prohibition.
“You can go the combative route and try to ban something that’s here in the United States and already federally regulated, but what you’ll end up with is a bunch of customers here in Texas just going offshore to an even more dangerous part,” Denault said.
Litigation could be Texas’ first move
The hearing comes ahead of the January 2027 Texas legislative session where lawmakers will likely again debate legalizing sports betting as well as brick-and-mortar casinos. Despite extensive lobbying efforts in recent years, gambling expansion efforts have garnered little traction, largely due to conservative, anti-gambling sentiment from many of the Republican legislative leaders.
Texas is the second-most populated state without legal sports betting sites, behind California, and the largest without any full-scale Las Vegas-style commercial casinos.
Prediction markets have complicated that debate by making sports event contracts available in Texas. Users can trade contracts tied to game winners, point spreads, player statistics, and combinations of multiple outcomes, which critics have argued are tantamount to sports bets.
York recommended that Texas first sue prediction market operators under existing state gambling prohibitions and seek an order requiring the platforms to geofence their services from the state. He said officials in other jurisdictions have found more success after bringing cases in their own courts instead of relying exclusively on federal regulatory proceedings.
Texas could also pass legislation expressly defining sports event contracts as illegal gambling, eliminating any perceived ambiguity in existing law. Though Texas lawmakers have opposed expanding gambling, passing a ban on prediction market trades could prove a more difficult fight.
Potential Texas legislative or legal action would add another factor to an increasingly fractured and complex national prediction market landscape.
The Third Circuit Court of Appeals ruled in Kalshi’s favor in April in a case involving New Jersey, bolstering the company’s argument that Congress has given federal officials exclusive regulatory oversight. The Ninth Circuit subsequently ruled against prediction market operators in litigation stemming from Nevada, increasing the possibility of a circuit split that could require Supreme Court review.
The conflicting decisions leave Texas with several options but no risk-free path. A state lawsuit could force operators to leave the market, but it could also trigger another federal challenge over the limits of state gambling authority, one that may already be pushed by other states onto the Supreme Court.
Kalshi warns of offshore alternatives
With no legislative action imminent, Tuesday’s informational hearing largely served as a rehashing of the legal and logistical differences between sportsbooks and prediction markets as representatives from both sides argued the merits of their respective positions and the risks posed by the other.
Denault reiterated that Kalshi operates as a federally regulated exchange rather than a sportsbook. Users trade against one another through an order book, while Kalshi charges transaction fees instead of setting odds and profiting directly from customer losses, he said.
Denault argued prohibiting federally regulated platforms would not eliminate demand. Texans could instead move to offshore prediction markets or sportsbooks that lack identity verification, market surveillance, and consumer protections.
He suggested Texas work with prediction markets on advertising restrictions, risk disclosures, and protections for younger customers. Those measures, he said, could address state concerns without creating the same federal-preemption questions as an outright ban.
“Prediction markets regulated at a federal level and operated on a peer-to-peer, less predatory framework is a safer alternative for customers and one that should be available,” Denault said.
During an ongoing back-and-forth in more than an hour of testimony and lawmakers’ questioning, York cited a range of Kalshi contracts involving Cowboys games, point spreads, Dak Prescott passing totals, and multi-outcome combinations that sportsbooks traditionally call parlays as examples of what he considers de facto sports bets.
“They offer the exact same thing except they think it’s clever and call it a ‘combo’ instead,” York said. “If you’re offering who’s going to win, the Commanders or the Cowboys, that’s a sports bet.”
Texas faces decision
Sportsbook and casino legalization proposals have traditionally centered on constitutional authorization, state licensing, taxation, and partnerships with professional teams or gaming companies. Beginning with next year’s legislative session, Texas policymakers must now decide whether prediction markets strengthen the case for a state-level regulated sports betting system or reinforce opposition to further gambling expansion.
A legal sportsbook framework, however unlikely politically, could generate tax revenue and impose state protections. But lawmakers must also now wrestle with what sports betting legalization advocates decry as an existing federal workaround already usurping state authority through Texas prediction markets.
“Prediction markets think they can mess with Texas,” York said. “I hope you prove them wrong.”
