CFTC Blocks NY Lawsuit to Shield Prediction Market Kalshi

Woofun AI reports that the US Commodity Futures Trading Commission (CFTC) invoked its emergency authority on Tuesday, ordering prediction market Kalshi to continue operating. CFTC Chair Michael Selig directed the firm to maintain normal practices under the Commodity Exchange Act's Core Principles, declaring that New York's enforcement action and request for a temporary restraining order themselves constituted a market emergency. The regulator argued that the state's legal assault threatened orderly trading and price discovery, necessitating immediate federal intervention to preserve market stability.

The temporary restraining order sought by New York would have barred Kalshi from offering contracts tied to sports, culture, elections, and other events to people in or from the state. Because Kalshi is based in New York, the CFTC warned that such a restriction could effectively prevent the platform from offering all event contracts nationwide. The commission emphasized that the Commodity Exchange Act mandates a uniform national derivatives market, and that major disruptions caused by localized enforcement actions undermine this statutory goal. By invoking emergency powers, the CFTC aimed to neutralize what it viewed as an extraterritorial overreach that jeopardized the integrity of federally regulated markets.

Woofun AI data shows that financial stakes in the dispute are substantial, with New York seeking at least $36 billion in compensatory damages pending an accounting. In a lawsuit filed on July 31, the state alleged that Kalshi runs an illegal, unlicensed gambling business by offering contracts tied to sports, elections, culture, and other events. New York is pursuing restitution, disgorgement, damages, and penalties, including a penalty equal to three times Kalshi's alleged gains and $100,000 for each unauthorized sports wagering offer or attempt in the state. These demands reflect the state's aggressive posture toward prediction markets, framing them not as financial instruments but as illicit gambling operations subject to severe financial punishment.

The confrontation is part of a broader national fight over whether the Commodity Exchange Act preempts state gambling laws as applied to event contracts traded on federally regulated exchanges. Kalshi asserts that states cannot shut down a federally licensed exchange, while the CFTC argues that the Commodity Exchange Act grants it exclusive jurisdiction over transactions involving swaps traded on designated contract markets, including event contracts Kalshi lists as swaps. This legal positioning underscores the tension between federal regulatory authority and state-level enforcement priorities, with the CFTC insisting that its jurisdiction is paramount and non-negotiable in matters involving registered derivatives exchanges.

Legal precedents have thus far been mixed, complicating the regulatory landscape. A federal judge in a separate New York case denied Kalshi's request for a preliminary injunction on July 7, finding at that stage that New York gambling laws were not preempted by the Commodity Exchange Act as applied to Kalshi's sports-event contracts. In another federal case, the CFTC sued New York in April to block the state from applying its gambling laws to CFTC-registered contract markets. Judge Jed Rakoff denied without prejudice the agency's emergency request for a temporary restraining order, ruling that the CFTC had not established a high likelihood of success on the merits or a likelihood of irreparable harm. These judicial outcomes highlight the uncertainty surrounding the scope of federal preemption in the context of prediction markets.

The latest CFTC order directs Kalshi to continue operating but does not end New York's lawsuit or resolve the underlying jurisdictional dispute. It is not a judicial ruling on whether federal law preempts state gambling enforcement, leaving the legal question open for future litigation. The dispute extends beyond New York, as the CFTC has sued eight other states, along with New York, to defend its congressionally granted jurisdiction.