New York sues Kalshi as CFTC fights to keep state enforcement at bay

New York sues Kalshi in a dispute that could help decide whether prediction-market platforms answer to state gambling authorities or the federal derivatives regulator. The state’s July 31 case seeks to stop Kalshi’s operations in New York, while the Commodity Futures Trading Commission is pursuing court action intended to protect its claimed authority over the platform.

Attorney General Letitia James filed the petition in Manhattan state court, alleging Kalshi operates an illegal, unlicensed gambling business because it was not registered with the New York State Gaming Commission, Reuters and CNBC reported. The state says users can trade contracts tied to outcomes including sports, elections and other events.

Those are allegations, not a court finding. Kalshi rejects them, saying it is a federally licensed exchange and that states cannot close it down. The company is a CFTC-designated contract market, a regulated venue where standardized contracts are traded.

Why is New York suing Kalshi?

New York’s position is that Kalshi’s event contracts function as gambling under state law. Its petition also objects to the availability of the platform to users aged 18 to 20, Reuters reported, while New York requires participants in mobile sports betting to be at least 21.

The state is asking for a permanent injunction, restitution and civil penalties. Court filings put potential damages and costs, including fines and restitution, at at least $36 billion pending an accounting, according to Reuters. CNBC reported that New York also seeks a $100,000 penalty for each alleged attempt to offer sports wagering and an amount equal to three times Kalshi’s alleged gains.

What is the CFTC doing for Kalshi?

The CFTC is not providing Kalshi with financial assistance or handing it a final legal win. Its intervention is a defense of the agency’s asserted jurisdiction. The commission contends that prediction-market contracts are swaps, a type of derivative contract, and therefore fall under federal oversight rather than state gambling rules.

The CFTC sued New York in April to bar enforcement of state law against commission-registered platforms, Reuters and CNBC reported. On July 31, the agency urged federal judges to combine New York’s newly filed case with its own litigation, arguing that the state’s action could put a CFTC-regulated designated contract market out of business.

New York and the CFTC are presenting competing legal frameworks. State officials call sports-related event contracts gambling; Kalshi and the CFTC characterize them as federally regulated derivatives. The courts have not resolved that question.

Where does the case stand?

Kalshi had already challenged New York’s enforcement effort after receiving a cease-and-desist letter from the state Gaming Commission in October. A federal judge denied the company’s request for preliminary injunctive relief on July 8, CNBC reported. A Manhattan federal appeals court later declined to halt New York’s enforcement activity while Kalshi pursued its appeal, Reuters reported.

The result will matter beyond one platform. Reuters reported that the CFTC has challenged prediction-market oversight efforts in at least nine states, while several states have secured orders restricting Kalshi’s activities. For users and investors watching the sector, the immediate issue is regulatory uncertainty, not a settled rule on where prediction markets may operate.

This story draws on original reporting from Decrypt.