Arguing that the Commodities Exchange Act (CEA) should preempt states’ rights, Kalshi sued Connecticut’s Department of Consumer Protection (DCP) Wednesday, one day after the agency sent it a cease-and-desist letter. The action is similar to that which Kalshi has taken in New York and other states when it has been instructed to shutter. It has now brought federal lawsuits against at least six U.S. states. The state of Massachusetts sued Kalshi in state court, and tribal groups in California and Wisconsin have also sued the prediction market.
The case was filed in the U.S. District Court for the District of Connecticut.
Kalshi is regulated by the Commodity Futures Trading Commission (CFTC), a federal agency that oversees derivatives markets. Since January, Kalshi has been offering sports event contracts on its platform, and the sports betting industry has fought back, saying the products are an unlicensed form of gambling, specifically sports betting.
States have argued that the CEA and the CFTC’s own rules prohibit gaming contracts — though Kalshi’s interpretation is that the CFTC merely has the power, rather than the obligation, to ban them — and gambling itself is a states’ rights issue. The CFTC, tasked with implementing and enforcing the CEA, has not taken any action against its licensees that are offering sports event contracts.
CFTC-licensed platforms can self-certify contracts, and the agency does have the right to question or deny them, but has not done so for any of the thousands of contracts listed by prediction markets this year.
Kalshi’s yes-or-no contracts include parlays and mimic traditional sports betting but lack controls like responsible gaming, house rules, or integrity monitoring required by state regulators. And because prediction markets are federally regulated, states do not derive any tax benefit.
Kalshi leans into NJ decision
In its letter sent Tuesday to Kalshi, the DCP wrote that it views sports event contracts as sports betting “because they allow Connecticut residents to risk something of value for gain by an electronic wagering platform through the placement of wagers on the outcome of live sporting events or portions of a live sporting event, including future events.”
Kalshi’s lawyer leaned heavily into the decision by a New Jersey district judge to allow it to continue to operate while that case plays out. That case has been elevated to the Third Circuit Court of Appeals. Kalshi lawyers do not mention that federal judges in Maryland and Nevada have sided with states and ordered Kalshi to shutter. In Maryland, the state agreed to allow Kalshi to continue to operate until the case is resolved, and Kalshi is currently operating in violation of a court order in Nevada. Crypto.com and Robinhood are no longer offering sports event contracts in Nevada.
The DCP threatened civil and criminal penalties in its letter, but Kalshi’s lawyers say that would only “subject Kalshi to the patchwork of state regulation that Congress created the CFTC to prevent, and to interfere with the CFTC’s exclusive authority to regulate derivatives trading on the exchanges it oversees,” and ultimately cause the platform “irreparable harm.”
Kalshi also argued that Connecticut’s laws would make no distinction between sports event contracts and less-controversial event contracts, such as a market on the Federal Reserve’s next decision.
“DCP’s theory is that all event contracts amount to unlawful gambling, even though the CEA clearly authorizes event contracts and subjects them to the CFTC’s exclusive jurisdiction,” it said.
Kalshi says only CFTC can block contracts
Kalshi’s lawyers also revisited arguments they have made in other lawsuits, including the argument that only the CFTC has the authority to block its contracts. They also argue that sports events can “have broad economic consequences,” therefore stakeholders like advertisers, communities, or sportsbooks could use an event contract to lay off risk.
Kalshi, as usual, avoided the question of whether sports event contracts are considered gambling. The prediction market argues that even if its products are gambling, they could still be permissible as long as the CFTC believes them to be within the public interest. It argues that Congress specifically granted the CFTC the exclusive power to determine when a gambling-related contract should be blocked.
In the Connecticut lawsuit, Kalshi’s lawyers wrote that the “statutory history of the CEA leave[s] no question that Congress sought to preempt state regulation of derivatives on exchanges overseen by the CFTC, known as ‘designated contract markets’ or ‘DCMs.'”
Elsewhere in the brief, they added: “Federal law authorizes the CFTC to ‘determine’ whether event contracts involving ‘gaming’ should be restricted as ‘contrary to the public interest,’ — authority that is completely incompatible with parallel state regulation of the same putative subject matter.”
Kalshi is a DCM, but state regulators have argued that sports event contracts aren’t truly derivatives, as they do not have a financial or economic consequence. They have also argued that while Congress may have intended to preempt states’ attempts to make their own commodity laws, there was no intention to preempt gambling laws, which have traditionally been an issue for the states.
Prediction markets advertise that their products can reveal the truth about public opinion, and have pointed to their success in predicting the 2024 presidential winner. But it’s unclear what a contract on weather patterns or sports would uncover, as public opinion does not play a role in when a storm hits or what team wins a game.
Despite that, Kalshi’s lawyers wrote that “Event contracts are a valuable means of communicating information to the public because contract prices reflect prevailing market opinions and conditions. Prediction markets thus serve as sensitive information-gathering tools that can provide insights for stakeholders — including businesses, individuals, governments, and educational institutions.”
Tribes control gaming in Connecticut
Though not directly addressed in the lawsuit, Connecticut is the first state with a heavy tribal gaming presence that Kalshi has sued. The Mohegans and Mashantucket Pequots have exclusivity for gaming in Connecticut, though when digital sports betting and iGaming were legalized, the tribes agreed to allow the lottery limited access. DraftKings (Pequots), Fanatics Sports (lottery), and FanDuel (Mohegans) are live in Connecticut.
The tribes do pay the state taxes per their agreement, but under the Indian Gaming Regulatory Act they have complete exclusivity and control over gambling on Indian land. Neither tribe has been publicly vocal about prediction markets, but are surely watching as the two other lawsuits brought by tribes move forward. A California district judge in November ruled that Kalshi can continue to operate on tribal land, but the case is not over. Wisconsin’s Ho-Chunk Tribe brought a similar lawsuit, and Kalshi has submitted a brief requesting the suit be dismissed, but no ruling has been made.
The disagreement between Indian Country and prediction markets brings into question whether or not one federal law can preempt another. IGRA gives federally recognized tribes the sole right to determine what gaming happens on their land while the CEA calls for equal access to derivatives markets. No court has ruled on which takes precedence.
