Key Takeaways
- Kalshi has filed a lawsuit against the New York Gaming Commission, alleging regulatory overreach in its cease-and-desist order regarding sports-related event contracts.
- The prediction marketplace claims its operations are governed by federal CFTC regulations, which preempt state authority.
- The lawsuit follows similar actions against Kalshi in other states and a recent loss for Crypto.com in a related Nevada case.
- Legal experts suggest Kalshi’s preemptive legal action aims to control the jurisdiction and legal arguments in its favor.
- The regulatory landscape for prediction markets remains complex, with varying court outcomes influencing operational legality across different states.
Kalshi Sues New York Gaming Commission Over Regulatory Authority
Kalshi has initiated legal action against the New York Gaming Commission, suing the state regulator for alleged overreach. This move comes shortly after Crypto.com faced a similar setback in Nevada. The Manhattan-based company responded to a cease-and-desist order it received, which accused Kalshi of illegally operating sports betting activities within the state.
KalshiEX LLC, with legal representation from Millbank LLP, has formally accused the New York Gaming Commission of exceeding its jurisdiction. The prediction market operator argues that the Commission is encroaching upon the federal government’s established regulatory authority over derivatives trading. Kalshi seeks to prevent any enforcement actions by the Commission, which has reportedly threatened the company with fines and penalties for offering what it deems unauthorized sports-related event contracts.
This situation is not isolated to New York. Reports from late September indicated that authorities in New Jersey, Nevada, and Maryland had also previously ordered Kalshi to cease its sports wagering operations. Massachusetts took a more aggressive stance, filing a lawsuit against the platform for allegedly conducting illegal and unsafe sports betting, and seeking judicial intervention to block user access to its sports prediction events.
Kalshi’s Defense: Federal Preemption and Legal Standing
The platform’s legal team asserts that its operations in New York are lawful, citing regulations set forth by the U.S. Commodity Futures Trading Commission (CFTC). Kalshi contends that these federal regulations preempt state laws, creating a unified regulatory framework. They highlight that the CFTC was established by Congress precisely to avoid the complexities and potential conflicts arising from 51 different state laws governing exchanges.
Conversely, the New York Gaming Commission, in its cease-and-desist letter, stated that Kalshi is not licensed to offer sports betting services within the state, whether through a casino or as a mobile operator. The Commission has demanded an immediate halt to any illegal operations, advertising, promotion, or management of sports betting activities in New York. Furthermore, the regulator has reserved its right to conduct further investigations and impose civil penalties on Kalshi for its current and future sports wagering activities in the state.
Kalshi argues that these threats pose a significant risk to the exchange, its users, and its business partners. The platform is appealing to the court to affirm the supremacy of federal rules over state-level regulations, seeking to establish a clear and consistent legal environment.
Strategic Legal Maneuvers: The Impact of Filing First
Daniel Wallach, founder and principal of Wallach Legal LLC, explained the strategic advantage Kalshi gains by filing its lawsuit first. This preemptive action allows Kalshi to choose the venue, potentially avoiding state courts where the primary focus would be on the legality of the contracts themselves, rather than jurisdictional disputes. Wallach noted that Kalshi has initiated legal proceedings in five out of six similar cases, a strategy likely influenced by the advance notice requirements in many states before filing lawsuits against businesses for repeated violations.
✅ Wallach observed that Kalshi has successfully persuaded two courts, at a preliminary stage, that the CFTC holds exclusive authority over contracts traded on exchanges designated by the commission. U.S. District Judge Andrew Gordon in Nevada acknowledged this argument in Kalshi’s favor, although he ultimately denied Crypto.com’s request for an injunction in a separate matter.
The outcomes of Kalshi’s legal battles across different states have been varied. The company secured preliminary injunctions in Nevada and New Jersey. However, a judge in Maryland ordered Kalshi to cease offering sports event contracts, though operations were permitted to continue during the resolution of that case.
Regarding the Crypto.com case, Wallach elaborated that the court examined the lawsuit through the lens of Congressional intent. The Nevada court concluded that Congress did not intend for the CFTC’s exclusive jurisdiction over swaps to encompass sports betting, referencing legislative history and comments from lawmakers. A notice from the Nevada Gaming Control Board indicated that Crypto.com must implement geofencing for Nevada and close open sports-event positions for state residents by November 3, pending its appeal.
⚡ Legal experts anticipate that Illinois and Arizona may be the next states to engage in litigation with Kalshi. Moreover, the prediction is that more states will file cases against platforms like Kalshi, Crypto.com, and Robinhood in the coming months, influenced by recent court decisions that have generally favored state regulatory authority.
Final Thoughts
The legal challenges faced by prediction market platforms like Kalshi and Crypto.com highlight the ongoing tension between federal and state regulatory authority. The differing outcomes in court underscore the complexity of navigating this evolving landscape. Future legal battles are expected as states seek to enforce their regulations on these novel financial instruments.