The Commodity Futures Trading Commission (CFTC) has taken one of its boldest steps yet in its conflict with states over prediction markets, telling Kalshi to continue offering its sports event contracts in Michigan despite a court order to block the state.
Two weeks ago, on June 29, a Michigan court banned Kalshi from offering its sports event contracts by issuing a temporary restraining order (TRO) to state authorities, who argue that Kalshi offers what is tantamount to sports betting without a license to do so. Initially set for 14 days, the court subsequently extended the ban and told Kalshi to geofence Michigan and block off access to its sports contracts in the state by Aug. 12.
Under that court order, Kalshi is required to void, cancel, and refund certain trades on sports made by Michigan customers. The court initially warned it would fine Kalshi $120,000 for every day that it did not comply. If the company doesn’t geofence the state by Aug. 12, it could face daily fines of $500,000 daily fine.
State courts cannot ‘bully’ Kalshi, says Selig
Kalshi seemingly intended to comply with that updated court order. On July 12, it filed a proposed emergency rule with the CFTC to notify the federal agency that it would “force-liquidate” open trades made by certain Michigan users.
However, on Tuesday, the CFTC announced that it had rejected Kalshi’s emergency rule request and would exercise its “emergency authority” to order Kalshi to fulfill those open trades, in direct conflict with the court’s ruling.
“A state cannot force a DCM [designated contract marker] to violate its obligations, and federal law does not permit a DCM to discriminate against a state’s residents,” said CFTC Chairman Michael Selig. “Canceling trades that have already been executed is an unprecedented step that risks a cascading effect on the entire marketplace and undermines the certainty in contracting that is a necessary component of a functioning market.”
Selig added that the commission will not allow state or state courts to “bully” its registrants into what he said would constitute a violation of the Commodity Exchange Act and CFTC regulations.
The latest in a string of unprecedented steps
The CFTC has intervened in existing court battles and filed legal action of its own in numerous states as it fights for prediction market platforms’ right to offer sports, including filing lawsuits against:
- Arizona
- Connecticut
- Illinois
- Kentucky
- Minnesota
- New Mexico
- New York
- Rhode Island
- Wisconsin
The commission has also filed amicus briefs in the U.S. Court of Appeals for the Sixth and Ninth Circuits, as well as in the Supreme Judicial Court of Massachusetts, maintaining that its right to regulate sports event contracts pre-empts state gaming laws.
However, this is the first time it has overruled one of its own registrants’ attempts to comply with a court order. The CFTC believes such action is necessary because, as it describes it, Michigan is the first state to attempt to interfere directly with executed derivatives transactions.
Kalshi: Conflict leaves us in ‘impossible position’
CFTC’s escalation of the conflict in Michigan has troubled even Kalshi’s own leaders.
The company’s Head of Enforcement and legal counsel, Robert DeNault, posted on social media that Kalshi is “disappointed” by the CFTC’s action because it feels it has been left “in an impossible position”.
“We are disappointed by this decision and believe it is unfair to Kalshi,” wrote DeNault on X. “We already acted and unwound the trades, as the Michigan court order required us to do.
“We are being put in an impossible position, looking to follow state court orders that may contradict our federal regulatory obligations. We did not have a choice.”
A Kalshi spokesperson told Reuters that the company is reviewing the CFTC’s order and considering its next steps.
