Kalshi Loses Appeal on State Authority Over Prediction Markets

Kalshi, a regulated U.S. exchange for event contracts, suffered a significant legal setback on March 18, 2024, when the U.S. Court of Appeals for the Second Circuit affirmed that states possess the authority to regulate prediction markets. This ruling directly contradicts a previous decision by the U.S. District Court for the Southern District of New York, which had sided with Kalshi and determined that the Commodity Futures Trading Commission (CFTC) had exclusive jurisdiction over such contracts. The appellate court's decision, authored by Judge Joseph F. Bianco, found that the definition of "commodity" under the Commodity Exchange Act does not encompass the event contracts offered by Kalshi, thereby leaving them open to state-level oversight. This interpretation suggests that states are not preempted from regulating these markets and can impose their own rules and restrictions.

The legal battle originated from a challenge by the New York Attorney General's office, which had ordered Kalshi to cease offering contracts on political events, arguing they constituted illegal gambling under state law. Kalshi, which is registered with the CFTC as a designated contract market, contended that its operations were exclusively under federal purview. The Second Circuit's reversal of the lower court's decision creates a direct conflict with the U.S. District Court for the District of Columbia's ruling in a separate case involving PredictIt, an Irish-based prediction market that also faced state-level scrutiny. In that instance, the D.C. court had ruled that the CFTC's authority preempted state regulation of prediction markets.

This divergence in federal court opinions significantly raises the likelihood that the U.S. Supreme Court will need to intervene to resolve the jurisdictional dispute. The implications of this ruling extend beyond Kalshi, potentially impacting the future of prediction markets across the United States. If states are indeed empowered to regulate these platforms, it could lead to a patchwork of differing laws and regulations, making it more challenging for exchanges to operate nationwide. Conversely, a Supreme Court decision affirming federal preemption could provide a clearer, more unified regulatory framework. The core of the dispute lies in whether event contracts, which allow users to bet on the outcome of future events like elections or economic indicators, are considered commodities under federal law or fall under state gambling and securities regulations. The Second Circuit's finding that they are not federal commodities opens the door for states to assert their regulatory powers, a move that could reshape the landscape of event-based trading and forecasting platforms.