The once-unparalleled momentum of prediction markets stalled again on Monday, when a federal judge in Connecticut denied a preliminary injunction filed by Kalshi.
The operator’s request, if approved, would've prevented Connecticut officials from applying gaming enforcement to sports event contracts. U.S. District Court District of Connecticut Judge Vernon D. Oliver’s decision does not mean that enforcement will be applied, but that it won’t be preemptively blocked.
Connecticut sides against prediction markets
The case did not present anything new to the argument dividing state officials and prediction markets. Kalshi argued that it maintained the right to offer event contracts nationwide, based on the guidelines established by the Commodity Exchange Act (CEA) and the U.S. Constitution's Supremacy Clause.
Oliver disagreed with the basic definition of event contracts. Whereas platforms argue they are “swaps,” a form of a derivative contract, the judge said they did not meet that definition.
“Kalshi’s sports-event contracts fail to satisfy this portion of the statutory definition of a swap because they do not depend on whether an underlying sporting event occurs, fails to occur, or occurs to a particular extent,” Oliver wrote. “Instead, Kalshi’s sports-event contracts depend on the event’s outcomes or discrete in-game occurrences. Treating those outcomes as separate ‘events’ would depart from the ordinary meaning of the term.”
Correctly labeling a “swap” greatly determines the regulatory rights of the Commodity Futures Trading Commission (CFTC) and state bodies. The CEA grants the CFTC full autonomy over commodity derivatives, including swaps.
State not preempted by federal authority
The Connecticut court’s decision dealt with more than just the definition of prediction markets and their offerings.
According to Oliver, state regulation over a platform offering swaps still would not be preempted by the CEA. He also noted that Kalshi described itself as offering “legal sports betting nationwide,” thereby turning over regulatory power to state gaming officials.
“But sports wagering has long been subject to state regulation pursuant to the states’ police powers because of the significant public interests and risks associated with gambling,” Oliver added. The Court declines to conclude either that these sports wagers are properly categorized as swaps and fall under the CFTC’s authority, or that Congress clearly displaced Connecticut’s traditional authority to regulate sports wagering and vested that authority in the CFTC, an agency that has not historically regulated sports wagering and has not exercised meaningful oversight over Kalshi’s sports event contracts.”
A growing conflict
Kalshi presented several arguments — with which Oliver disagreed — in its request for a temporary injunction.
According to the decision, Kalshi did not present enough evidence to show it was likely to succeed on the merits of:
- Contending that event contracts were swaps
- Connecticut's gambling enforcement was preempted by the CEA
- Kalshi would suffer substantial harm without an injunction
- An injunction is in the public interest
This isn’t the first run-in between Connecticut and prediction markets. Kalshi filed a lawsuit against Connecticut Department of Consumer Protection and its director, Kristofer Gilman, in federal court last December. This came after the state issued cease-and-desist orders to Kalshi, Robinhood, and Crypto.com.
Kalshi argued that prediction markets were financial tools unlike sportsbooks licensed by Connecticut and other state regulators.
“(Kalshi’s prediction markets) offer consumers the chance to invest in many types of event contracts, including, as relevant here, sports-outcome contracts,” the lawsuit read. “These contracts are subject to extensive oversight by the CFTC, and - critically - they are lawful under federal law.”
The Trade Handle Prediction Markets Take
Just as there was a time when it felt as if prediction markets were innovating their platforms or securing a legal victory daily, the tide has turned. Connecticut is one of several states to recently reach legal verdicts against prediction markets, joining New York, Wisconsin, and Utah. Courts in Maryland, Nevada, and Ohio also reached similar rulings, further plunging the nation into a state of ambivalence regarding prediction markets.