CFTC invoked emergency powers to force Kalshi to keep running after New York sued for $36 billion in damages and sought to shut down its event contracts.
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The Commodity Futures Trading Commission used its emergency authority Tuesday to order prediction market Kalshi to keep operating despite a lawsuit by New York that seeks to shut down its event contracts. The order escalates a jurisdictional fight between federal derivatives regulators and states that view such contracts as illegal gambling.
Kalshi notified the CFTC of a market emergency stemming from a July 31 lawsuit by New York Attorney General Letitia James. The commission then issued an order directing Kalshi to continue operating under the Commodity Exchange Act's Core Principles for designated contract markets.
The intervention puts the CFTC directly between Kalshi and New York. The CFTC argues that federally regulated event contracts are derivatives subject to a single national framework. States increasingly contend that contracts based on sports and other events are gambling subject to state law.
James's lawsuit seeks a temporary restraining order barring Kalshi from offering event contracts nationwide and more than $36 billion in damages. The complaint treats Kalshi as an unlicensed gambling business and demands three times its alleged gains plus $100,000 for every sports wagering offer, according to Decrypt.
CFTC Chairman Michael Selig framed the order as necessary to prevent a state action from disrupting a national derivatives market before courts resolve the jurisdictional dispute.
"Congress did not intend for derivatives exchanges to be regulated under a patchwork of state gaming laws," Selig said in the press release. He argued that Kalshi and similar platforms are interstate financial exchanges matching bids and offers from customers in different states and clearing transactions centrally.
The order is the latest escalation in an aggressive federal-state confrontation. The CFTC has sued Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island and Wisconsin to defend what it considers its jurisdiction. The commission also filed amicus briefs in litigation before federal appeals courts and the Massachusetts Supreme Judicial Court.
The legal record so far is mixed. Decrypt reported that a federal judge denied Kalshi a preliminary injunction against New York's gaming regulator in July. The company was subsequently denied protection pending appeal. Michigan restricted Kalshi's sports markets. Washington won a preliminary injunction. Kalshi secured favorable decisions in litigation with New Jersey and Minnesota.
The New York confrontation is expanding beyond the attorney general's lawsuit. The New York City Council disclosed this week that it is investigating Kalshi, Polymarket, Coinbase and Gemini Titan over alleged deceptive marketing practices and possible targeting of minors. Council Speaker Julie Menin sent letters Aug. 11 seeking information about compliance with consumer-protection laws and gave the companies 14 days to respond, the Wall Street Journal reported.
The council's inquiry includes more than 60 questions about the companies' New York revenue, number of city users and marketing operations. The council cannot bring criminal charges, but it has subpoena power and is considering legislation involving increased enforcement, public education, health measures and the use of public funds, according to the Journal. It also plans public hearings.
The marketing inquiry differs legally from the state's challenge to Kalshi's event contracts, but it shows how prediction markets face regulatory pressure on multiple fronts.
The CFTC's emergency order raises the stakes. Rather than simply supporting prediction markets in litigation, the federal regulator is using its own statutory authority to require a regulated exchange to keep operating in the face of a state effort to stop it.
CFTC spokeswoman Brooke Nethercott told the Wall Street Journal, "The New York State Attorney General does not set the rules for national derivatives markets." The CFTC, she said, considers Kalshi's continued operation necessary to preserve "market integrity and stability."
The courts now face a clear jurisdictional choice: whether federally regulated prediction markets are national derivatives exchanges governed principally by the CFTC, or businesses whose event contracts remain subject to state gambling and consumer-protection authority.
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