The Commodity Futures Trading Commission used its emergency powers to require KalshiEX not to deviate from its core function and principles under the Commodity Exchange Act, deepening a dispute over the regulatory status of prediction markets.
Kalshi’s decision on Aug. 11 followed an Aug. 1 notice that a lawsuit by the New York Attorney General against Kalshi could create a market emergency. New York seeks at least $36 billion in damages from Kalshi, alleging that the company operates an unlicensed gambling business in the state.
The CFTC stated that the TRO New York sought would be so disruptive that it would endanger the continued operation of a federally regulated DCM. The CFTC then directed Kalshi to ensure that Kalshi maintained an orderly market for contracts listed on the designated contract market, pursuant to Section 8a(9) of the Commodity Exchange Act. Kalshi had warned a shutdown would liquidate any open positions.
CFTC Chairman Michael Selig has argued that New York does not have a right to regulate interstate financial markets, while New York says that Kalshi’s products are subject to New York’s gambling laws.
The state asked the court to prevent Kalshi from operating an unlicensed sports betting business in New York or serving New Yorkers, and to impose civil penalties of $100,000 for each illegal sports bet placed or accepted by Kalshi.
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Since Kalshi’s principal place of business is in Manhattan, the CFTC reasons that the requested relief may enjoin Kalshi from offering event contracts to customers outside New York. However, the state of New York asserts that it is engaged in enforcing its gambling laws.
Kalshi subsequently removed the lawsuit to the U.S. District Court for the Southern District of New York, where federal courts issued conflicting rulings. While a Minnesota federal judge blocked enforcement of a ban on prediction markets by that state, in July, a New York federal judge denied a request for Kalshi’s sports contracts to be enjoined.
The CFTC has named Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island and Wisconsin as defendants, asserting exclusive federal jurisdiction over derivatives traded on designated contract markets. In July, the CFTC asserted emergency authority after a Michigan state court decision affected trades for Kalshi.
The order requires Kalshi to continue to operate under the federal regulations for exchanges. It did not consider the state gambling issue, nor whether federal law preempts state law. Kalshi is appealing the July ruling to the U.S. Court of Appeals for the Second Circuit.
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The CFTC would create a prediction-market framework under which each contract would be reviewed on a case-by-case basis, including gaming and other restricted categories.
