A recent court ruling in New York mandating Kalshi to cease operations will not conclude the situation, according to the Commodity Futures Trading Commission (CFTC). An emergency order letter released Tuesday asserts the CFTC retains the authority to maintain the exchange’s operations regardless of the court’s decision.
This letter is a response to a lawsuit filed by New York against Kalshi in state court last month, following a federal court’s refusal to shield the company from the state’s allegations.
New York is pursuing a temporary restraining order aimed at preventing Kalshi from “conducting a business that provides contracts related to sports, culture, elections, and other events… within or from New York or to individuals in New York.”
Kalshi, based in New York, informed the CFTC that such an order would not just impact sports contracts — it would entirely halt the company’s business operations.
Financial consequences are also at play. New York’s requested injunction includes a staggering $36 billion fine, calculated under state regulations permitting regulators to fine illegal gambling operators three times their earnings plus $100,000 for each bet placed from within the state.
This penalty significantly overshadows Kalshi’s financial capacity: the company has accumulated total fee revenue of less than $2 billion in its history, and its most recent funding round pegged its valuation at $22 billion, which is far below the potential penalty.
Selig portrays New York’s actions as excessive
CFTC Chair Michael Selig described the lawsuit as an effort to dismantle the event contract industry before the judicial system has the opportunity to assess its validity.
“New York aims to suffocate event contract derivatives under a stringent layer of state gaming laws before courts can issue definitive rulings,” Selig remarked. “Congress did not envisage derivatives exchanges being governed by a convoluted mix of state gaming regulations.”
“These are financial exchanges that provide financial instruments and operate across state lines. They connect bids from residents in one state to offers from residents in another, and submit trades to a clearinghouse that supports transactions for customers nationwide. New York has no jurisdiction over these interstate financial markets. It is the Commission’s duty to uphold order in these markets, and we are fulfilling that responsibility today,” Selig elaborated.
The legal rationale for action
The CFTC’s letter contends that shutting down Kalshi would essentially equate to closing a federally regulated designated contract market, which is why the agency believes it can invoke emergency powers to keep the exchange operational should the New York order take effect.
“The Commission believes that New York’s enforcement action and request for a temporary restraining order (TRO) constitute an emergency since they represent a ‘major market disturbance that impedes the market from accurately reflecting the forces of supply and demand regarding event contracts,” the CFTC stated.
“The risk of a sudden, unpredictable closure of a DCM poses a fundamental threat to the Commission’s registrants, marketplaces, and regulatory jurisdiction — as well as to individuals and entities trading within the Commission’s regulated platforms — warranting the invocation of the Commission’s statutory emergency powers,” the CFTC added.
The agency went on to caution that allowing the TRO to proceed would grant New York disproportionate oversight over a nationwide market.
“If New York’s lawsuit, with its extreme demands, moves forward, it will place one state in the position of serving as the nationwide regulator for event-contract swaps on DCMs,” it asserted. “This is fundamentally opposed to the structure Congress envisioned for federal derivatives regulation.”
The CFTC’s concerns regarding market vulnerability
The agency noted that the probability of an order like New York’s TRO is sufficient to unsettled pricing throughout the industry. It mentioned that the market would likely respond by attaching a “risk premium” to event contracts across the board, leading to price deviations from the probabilities they are designed to represent — with premiums potentially differing based on an exchange’s location, resulting in further distortion.
“If Kalshi were to shut down, there would be an immediate transfer of trading activities from Kalshi to other exchanges. This influx of activity could artificially skew event-contract prices for reasons unrelated to the actual events tied to those contracts,” the CFTC noted.
A sudden and enforced closure in New York would also force Kalshi to liquidate its open positions, which the agency asserted would exacerbate the disruption. The CFTC indicated it is prepared to mitigate this scenario: if the TRO is granted, it could still compel Kalshi to continue operations.
“Under the Commission’s emergency powers, it may instruct Kalshi and its affiliates to persist in fulfilling its roles as an exchange in accordance with the Commodity Exchange Act’s Core Principles and standard practices,” the letter stated.
“This application of the Commission’s emergency authority will provide market players necessary assurance that a CFTC-registered DCM cannot be shut down by a single state and that the trades they execute will be correctly cleared and honored,” the letter concluded.
Current status of the case
At this stage, the state-level case is paused while Kalshi attempts to move it to federal court, an effort that has not succeeded previously in the company’s earlier state disputes. Overcoming this obstacle necessitates meeting a more stringent standard than securing a federal injunction — a challenge Kalshi has already failed to meet in New York — meaning this strategy may only delay the state court’s consideration of the TRO.
Once the matter returns to state court, it could progress swiftly, as New York has requested a “special proceeding,” which typically requires only one written submission from each party, without a hearing or responses.
Other states are also restricting Kalshi’s sports contracts; Nevada, Washington, and Michigan are implementing similar measures. Michigan experienced a comparable standoff, where the CFTC directed Kalshi to disregard a state court ruling necessitating the company to unwind trades linked to its internal market maker. Kalshi indicated compliance was infeasible as those trades had already been liquidated.