Kalshi, a federally regulated prediction market based in Manhattan, has initiated a lawsuit against the New York State Gaming Commission (NYSGC). This action follows an order from the agency compelling the company to immediately cease its sports-event contracts within the state.
The NYSGC issued a cease-and-desist letter to Kalshi on October 24, asserting that its sports markets constitute illegal gambling under state law. The commission warned that non-compliance could lead to civil fines and criminal penalties.
The notice was issued invoking New York’s racing laws, and the Commission specifically identified 20 of Kalshi’s federally self-certified contracts as unlawful.
In its legal filing, Kalshi contends that New York lacks the authority to make such a determination. The company argues that its markets are subject to federal regulation by the U.S. Commodity Futures Trading Commission (CFTC), the agency overseeing derivatives trading.
Kalshi asserts that federal law grants the CFTC exclusive jurisdiction over derivatives and swaps trading, including event contracts, on licensed exchanges. The company is seeking a federal court order to prevent New York from enforcing its state gambling regulations against Kalshi.
The Significance of This Legal Battle
This dispute is emblematic of an ongoing conflict between state and federal regulators concerning the oversight of the rapidly expanding prediction market industry. Kalshi frames its sports contracts as financial hedging instruments, akin to derivatives tied to real-world outcomes, rather than forms of betting. Conversely, New York views these contracts as unlicensed sports wagering.
By filing its lawsuit first, Kalshi aims to steer the legal proceedings toward the issue of federal preemption—the principle that federal law supersedes state law—rather than addressing the separate question of whether the contracts qualify as gambling under New York's statutes.
Furthermore, Kalshi argues that restricting access in specific states could contravene CFTC “Core Principles,” which mandate equal nationwide access to markets. This, the company states, places it in an untenable compliance predicament.
Other States Are Observing Closely
Court rulings in various states have yielded inconsistent outcomes. Kalshi secured early protective orders in New Jersey and Nevada. However, it faced a setback in Maryland, where a judge ordered the company to discontinue offering sports contracts. Maryland has not yet enforced this order, and the platform remains operational there pending the case's resolution.
A recent ruling in Nevada went against Crypto.com, with a judge determining that sports results do not qualify as swaps under federal law. Consequently, Nevada regulators are permitted to treat these contracts as gambling. Crypto.com is required to block residents of Nevada and close open positions while it pursues an appeal. The company has been given a deadline of November 3 to implement geofencing for Nevada users.
Illinois has also begun issuing warnings to operators involved with prediction markets, suggesting that additional states may adopt a stance similar to New York's.