The Commodity Futures Trading Commission (CFTC) took extreme measures to keep prediction markets up and running in New York after the governor and attorney general named it in a lawsuit.
The CFTC on Tuesday used its emergency powers to demand that Kalshi, the national leader in prediction markets, continue operating under the Commodity Exchange Act (CEA) in New York. This was despite Attorney General Letitia James and Gov. Kathy Hochul (D) accusing the platform of running an illegal gambling operation on July 31.
New York can’t stop prediction markets?
According to the CFTC, New York’s officials’ attempt to secure a temporary restraining order and $36 billion in compensatory damages from Kalshi constituted a market emergency. Situations under this label allow the CFTC to command a registered entity to take any necessary steps, whether that be restoring trading, liquidating contracts, or other means of action.
If the restraining order is approved, New York would block Kalshi’s prediction markets tied to sports, elections, and other popular events. The CFTC also said that it could stop Kalshi from operating nationwide, since its headquarters is located in New York.
A statement released by the CFTC noted that the CEA required a “uniform national market in derivatives transactions.” That means that the CFTC was obligated to maintain a competitive and fair marketplace, and that attempted disruptions could jeopardize that standard.
“New York intends to make event contract derivatives waste away under its iron curtain of state gaming laws before the courts get the chance to issue final rulings,” said Chairman Michael S. Selig. “Congress did not intend for derivatives exchanges to be regulated under a patchwork of state gaming laws. These are financial exchanges that offer financial instruments and operate across state lines.
Coming to a head
One of the key arguments behind the CFTC’s use of its emergency power is the requirement to maintain an even national trading market. Operators are also required to follow this rule, or else they would have entirely different prediction markets on a state-by-state basis.
“[Prediction markets] match the bid from a resident of one state with the offer of a resident from another state and submit the trade to a clearinghouse that backstops the transactions of customers throughout the country,” Selig said. “New York has no business regulating these interstate financial markets. The Commission is required by law to ensure order in these markets, and that is what we have done today.”
The CFTC’s use of emergency power does not represent a judicial ruling. New York’s lawsuit against the Manhattan-based company and its attempt to procure $100,000 for every illegal wager placed inside state lines are still active.
In a case filed on July 7, Kalshi asked for a preliminary injunction against New York officials to prevent them from enforcing gaming regulations. A federal judge denied the request, ruling that New York gambling laws were not preempted by the CEA and could be applied to the company’s sports prediction markets.
This decision was also reached in several other states in recent weeks. A federal judge in Connecticut on Monday denied a temporary injunction filed by Kalshi for the same reason, adding to decisions reached by Maryland, Nevada, Ohio, Utah and Wisconsin.
The Trade Handle Prediction Markets Take
Kalshi previously cited its requirement to offer uniform prediction markets nationwide after Minnesota approved a statewide ban on operators, which was later overruled. The CFTC’s use of its emergency power in New York shows the regulator’s commitment to battling on behalf of licensed prediction markets, although it once again illustrates the growing divide between state and federal authorities. The recent batch of pro-state legal decisions also marks a sharp reversal in course after prediction markets spent the last year sweeping the nation seemingly without impediment.