CFTC Orders Kalshi to Continue Operations in New York Amid Regulatory Clash

[By Jeong-seon Myung, Block Media] The U.S. Commodity Futures Trading Commission (CFTC) has ordered the prediction market platform Kalshi to continue providing services in New York. This comes as New York state has effectively classified sports-related prediction markets as gambling and has filed a lawsuit against Kalshi, leading to escalating tensions between federal and state regulators over the authority to regulate prediction markets.

According to major foreign media outlets like CoinDesk, the CFTC announced on the 11th (local time) that it had invoked emergency powers to order Kalshi to continue operating in New York. This action followed a request for support from Kalshi to the CFTC after New York Attorney General Letitia James filed a lawsuit against the company at the end of last month.

New York state views the sports-related prediction products offered by Kalshi as gambling rather than financial products. In contrast, the CFTC maintains that the event contracts traded in prediction markets are derivatives subject to federal regulation and should not be governed by state gambling laws.

'Financial Product or Gambling?'... Direct Clash Between CFTC and New York State

CFTC Commissioner Mike Schaefer stated in a statement that regulating derivative exchanges according to the differing gambling laws of each state contradicts the legislative intent of Congress.

Schaefer characterized prediction markets as financial markets where transactions occur across state lines. He explained that buy orders from investors in one state connect with sell orders from investors in another state, and transactions are processed through a clearinghouse that guarantees trades for customers nationwide.

He argued that based on this structure, New York state does not have the authority to regulate interstate financial markets using state gambling laws.

The crux of the matter lies in the legal nature of the event contracts traded in prediction markets. In prediction markets, contracts can be traded based on the occurrence of specific events, such as elections, economic indicators, and sports game outcomes.

The CFTC views these as financial derivatives subject to federal commodity trading laws. However, some state governments argue that contracts based on sports game outcomes are essentially no different from sports betting.

New York State: "Avoiding Gambling Licenses and Taxes"... Kalshi Sued at the End of July

New York state filed a lawsuit against Kalshi on the 31st of last month. Previously, a federal court did not accept Kalshi's request to block New York state's legal actions.

New York state claims that Kalshi has violated state gambling laws while operating its sports-related prediction markets.

According to New York state, Kalshi has not obtained the necessary licenses from the New York State Gaming Commission. Consequently, it is also not paying taxes that formal casinos and mobile sports betting operators are required to pay.

New York state argues that taxes collected from the gambling industry are used for public schools, youth sports programs for vulnerable populations, and gambling addiction prevention and treatment, and therefore, the same regulations should apply to Kalshi.

Legal battles over jurisdiction are also ongoing. Kalshi has requested to move the case brought by New York state to federal court, while New York state has applied to have the case sent back to state court. Both parties are currently awaiting the court's decision on their requests.

From Michigan to New York... Expansion of Regulatory Conflicts in Prediction Markets

This is not the first time the CFTC has clashed with state governments. Previously, the CFTC intervened to support Kalshi's continued operations after a Michigan court sided with the state government.

At that time, the Michigan court required Kalshi to cancel certain transactions. However, Robert Deno, Kalshi's Executive Vice President, stated that the company had already settled those transactions in accordance with the court's order.

The CFTC has also filed a separate lawsuit regarding New York state's regulatory policies on prediction markets.

As a result, the dispute surrounding Kalshi is expanding beyond the question of whether individual companies can operate to potentially determining the regulatory framework for the entire U.S. prediction market. If the CFTC's assertion that event contracts are recognized as federally regulated derivatives is upheld, the scope for state governments to restrict sports prediction markets based on their own gambling laws may be narrowed.

Conversely, if the court recognizes the gambling nature of sports-related event contracts and the regulatory authority of state governments, prediction market operators may be required to comply with licensing and tax regulations in each state.

Ultimately, the core of this dispute is whether to view prediction markets as a 'financial product exchange' or an 'online gambling platform.' The court's ruling on jurisdiction and regulatory authority in the New York state lawsuit is expected to serve as a key benchmark for the future operational methods and regulatory framework of the U.S. prediction market industry.

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