Federal Regulator Deploys Emergency Authority to Maintain Kalshi Operations Amid New York Dispute
Federal commodities regulator deployed emergency authority to ensure Kalshi's continued operations while the company confronts New York authorities over classification of event contracts under gambling regulations.
On Tuesday, the US Commodity Futures Trading Commission (CFTC) exercised its emergency authority, issuing a directive that requires prediction market platform Kalshi to maintain its operations.
According to the CFTC, New York's enforcement proceedings and petition for a temporary restraining order represented a market emergency in and of themselves, prompting the agency to order Kalshi to keep operating under its standard procedures and in compliance with the Core Principles outlined in the Commodity Exchange Act.
New York's petition for a temporary restraining order seeks to prohibit Kalshi from conducting business operations that offer contracts linked to sporting events, cultural happenings, electoral contests, and various other events either within New York, from the state, or to state residents. The CFTC noted that this order has the potential to halt Kalshi's ability to offer all event contracts across the entire country due to the company's New York headquarters. The CFTC also indicated that New York is pursuing compensatory damages of no less than $36 billion, subject to a full accounting.
According to the CFTC, the Commodity Exchange Act mandates that the commission establish a consistent national derivatives marketplace, and significant disruptions pose threats to orderly market trading and effective price discovery. CFTC Chair Michael Selig stated that Congress never intended for derivatives exchanges to navigate a "patchwork of state gaming laws."
This confrontation represents one component of a wider national debate concerning whether the Commodity Exchange Act supersedes state gambling statutes when applied to event contracts that trade on federally regulated exchange platforms.
CFTC challenges state oversight of prediction markets
In legal proceedings initiated on July 31, New York contends that Kalshi operates an illegal gambling enterprise without proper licensing through its offering of contracts connected to sporting events, elections, cultural activities, and additional events. The state seeks restitution, disgorgement of profits, monetary damages, and financial penalties, including a penalty amounting to three times Kalshi's purported gains and $100,000 for every unauthorized sports wagering offer or attempt made in New York.
Kalshi maintains that states lack the authority to shut down a federally licensed exchange platform, while the CFTC contends that the Commodity Exchange Act grants it exclusive jurisdictional authority over transactions involving swaps that trade on designated contract markets, which includes event contracts that Kalshi categorizes as swaps.
In a related New York case heard in federal court, a judge rejected Kalshi's petition for a preliminary injunction on July 7, determining at that procedural stage that New York gambling statutes were not preempted by the Commodity Exchange Act when applied to Kalshi's sports-event contract offerings.
In another federal legal proceeding, the CFTC filed suit against New York in federal court during April in an effort to prevent the state from enforcing its gambling statutes against CFTC-registered contract markets. Judge Jed Rakoff denied the agency's emergency petition for a temporary restraining order without prejudice, concluding that the CFTC had not demonstrated a substantial likelihood of prevailing on the merits or a probability of suffering irreparable harm.
The most recent CFTC order mandates that Kalshi continue its operations but does not terminate New York's lawsuit or settle the fundamental jurisdictional conflict. It does not constitute a judicial determination regarding whether federal law supersedes state gambling enforcement actions.
This jurisdictional dispute reaches beyond New York's borders. The CFTC revealed that it has initiated lawsuits against eight additional states, in addition to New York, in order to protect its congressionally authorized jurisdiction.