A federal judge in Arizona has determined that the prediction market platform Kalshi is under the supervision of the Commodity Futures Trading Commission (CFTC), which prevents state prosecutors from initiating gambling-related criminal cases against the company.
On May 5, US District Judge Michael Liburdi issued a ruling that stops Arizona Attorney General Kris Mayes and the Arizona Department of Gaming from enforcing any actions against Kalshi.
This ruling transformed a temporary restraining order from mid-April into a preliminary injunction that halts the state’s prosecution efforts.
Mayes initiated charges against the New York-based company back in March, alleging that Kalshi breached Arizona laws regarding the operation of an unlicensed betting business and the offering of bets related to elections. The case included 20 misdemeanor counts and marked the first known criminal prosecution by a state against a prediction market operator.
Liburdi concluded that federal law supersedes Arizona’s gambling regulations in this instance, as Kalshi is regulated by the CFTC as a designated contract market.
“Throughout congressional revisions of state-federal governance in this domain, there has been a consistent trend toward augmenting federal oversight,” Liburdi remarked. “Legislators have expressed concerns regarding the pitfalls of a fragmented state-by-state regulation.”
Federal Commodities Framework
The core issue was whether contracts available on Kalshi should be classified as gambling governed by state law or as federally-regulated swaps under commodities legislation.
Liburdi noted that the federal agency is likely to prevail in asserting that the transactions on Kalshi fall exclusively under CFTC authority.
The CFTC also filed a lawsuit against Arizona before it was combined with a similar case previously initiated by Kalshi.
As per the judgment, swaps have been under federal regulation for over a century, governed by various laws such as the Futures Trading Act of 1921 and the Commodity Futures Trading Commission Act of 1974.
Liburdi emphasized that Congress enacted the latter statute out of concerns that states might try to interfere using disparate regulatory frameworks.
“If states were allowed to prosecute these platforms, operators would potentially contend with fifty different regulators, each potentially limiting which contracts can be offered on any given exchange,” Liburdi explained. “This would lead to the inconsistent regulatory environment that Congress sought to prevent. Because Arizona’s gambling regulations impede federal regulation, they are overridden.”
Potential Appeal Split in Courts
This ruling in Arizona follows an early April decision from the 3rd US Circuit Court of Appeals pertaining to Kalshi’s sports-related contracts in New Jersey. In that case, the appeals court ruled in favor of the CFTC, affirming the agency’s exclusive authority over those contracts.
Another pertinent case concerning prediction markets is currently pending before the 9th Circuit Court of Appeals, where arguments were heard in April regarding whether Nevada gambling authorities can enforce state regulations against similar contracts.
A contrasting ruling from the 9th Circuit could establish a discrepancy between federal appellate courts and elevate the possibility of review by the US Supreme Court.
“This situation does not occur in isolation,” Liburdi remarked. “Kalshi has initiated materially similar preemptive suits against state officials across various jurisdictions, leading to divided outcomes.”
The 9th Circuit encompasses Arizona and additional western states, with Liburdi indicating that his ruling may face scrutiny based on the appellate court’s final decision.
Kalshi remains a focal point in the ongoing debates surrounding prediction markets, enabling users to place trades linked to sports, elections, and global events. The platform has faced allegations of insider trading, with unidentified individuals profiting significantly from real-world happenings.
In 2024, Kalshi successfully contested a case in federal appeals court, leading the US Court of Appeals for the D.C. Circuit to decree that the CFTC could not obstruct election-related contracts presented by the platform under federal law.
CFTC Chairman Michael Selig expressed his approval regarding the Arizona ruling via social media.
“The commission possesses complete authority over prediction markets,” Selig stated. “We will persist in taking action against any state that encroaches upon our statutory powers.”
According to Richie Taylor, a spokesperson for Mayes, the attorney general’s office is “continuously assessing our legal options regarding the case.” However, the office has not clarified whether it plans to pursue an appeal against the injunction.