Kalshi’s sports contracts will remain banned in Michigan, and the prediction market will have to geofence the state by the end of Aug. 12 or pay a $500,000 daily fine after a judge extended last month’s temporary restraining order.
Judge Rosemarie Aquilina of Michigan’s 30th Circuit Court ruled June 29 that Kalshi’s sports event contracts were illegal sports betting, and she forced the prediction market to block Michigan for at least two weeks. Initially, Kalshi was ordered to geofence the state using a licensed geolocation provider or pay a $120,000 fine for every day it did not.
However, the judge later granted an emergency motion that paused geofencing until Kalshi could make a case on its feasibility. The prediction market has repeatedly argued that geofencing would be prohibitively expensive and potentially risk non-compliance with Commodity Futures Trading Commission (CFTC) rules, though opponents of prediction markets have cast doubt on those arguments.
Right now, Kalshi uses customers’ information — provided on sign-up — to block users with Michigan addresses from accessing sports contracts. This means that residents of other states who visit Michigan are still able to trade sports contracts when in the state, while Michigan residents in other states may not be able to do so.
On Monday, Kalshi and the state presented oral arguments on whether the initial order banning sports contracts should be extended, and what kind of deadline, if any, should be set for geofencing.
Despite the large number of states that have argued sports contracts are illegal gambling, Michigan is one of only two states to successfully enforce a ban on Kalshi’s sports event contracts. The other is Nevada, where Kalshi initially used address-based blocking before switching to an in-house geolocation service, which the state argues doesn’t work properly.
Judge unconvinced on preemption
Kalshi lawyer Will Havemann argued before Aquilina that the platform was not subject to state gambling laws.
However, the judge did not appear convinced.
“But you aren’t really talking about commodities, interest rates, things like that, but gambling, which has traditionally been denied by the states,” she said. “What you’re doing is defining it in a way that works for you, but not for Michigan.”
Havemann pointed to the history of the Commodity Exchange Act (CEA) — and attempts in the first half of the 20th century to regulate grain futures trading as gambling — as proof that Congress had always intended state gambling laws to be preempted.
“It would have been clear to Congress that of course one of the things it was doing was preempting state gambling laws as to designated contract markets, while leaving state gambling laws untouched outside of that area,” he said. “Congress would have known that it was preempting state gambling laws because many states, including Michigan, were regulating corn derivatives as gambling.
“So Congress made a decision in 1974 that regardless of whether a state thought it was gambling, it was going to entrust a specific federal agency.”
Kalshi not sure of geofence timing
Regarding geofencing, Havemann said that Kalshi was working hard to be ready if it is required to implement it, and the company has been working with GeoComply. However, he said that Kalshi was not yet at a stage where it could give a timeline.
“I do really want to emphasize that we’ve gone to great lengths to comply,” he said. “But we are doing our best, including with respect to GPS and geofencing, and the work is underway.”
When asked about the time frame, he said, “The honest answer is that I don’t know yet. I think that will be clearer after our engineers talk to one another.”
Kalshi lawyer Andrew Porter later said that elements of the CFTC’s rules mean that extensive testing would be required before Kalshi could be ready to implement geofencing.
“Kalshi has taken a very serious approach to trying to get this integrated,” he said. “This takes a lot of work to get implemented. There are a lot of federal regulations about having this not go down, being available in other states.
“GeoComply has given Kalshi access to what we call a sandbox environment.”
State says Kalshi incentivized to delay
Aquilina seemed more open to the arguments of the state’s lawyer, Assistant Attorney General Lauren Fitzsimons. Fitzsimons argued that if state gambling laws were really preempted by the CEA, Congress would have been much clearer about it.
“If mere usage of the word ‘exclusive’ is enough to preempt state gambling law, then it would preempt state gambling law as well. But Kalshi says that it is subject to New York contract law,” she said.
The only question the judge asked during Fitzsimons’ initial argument was, “Swaps have never included gambling, correct?”
Fitzsimons later argued that Kalshi had a financial incentive to delay geolocation, because its volume has been so high in recent weeks.
“Part of why Kalshi is trying to drag this out is the World Cup,” she said. “Over the last 30 days, Kalshi’s volume has been $30 billion.”
The platform has been making more than $10 million in daily fee revenue during the World Cup, meaning its revenue from Michigan alone may be significantly more than the $120,000 daily fines it would have to pay for noncompliance.
“Kalshi is incentivized to drag this out and avoid geofencing for as long as possible, because it is financially beneficial to do so,” Fitzsimons said.
GeoComply exec testifies
Michigan then called a witness: GeoComply Senior Vice President of Geolocation Chad Kornett.
Kornett explained the difference between using an IP address to locate customers and using a more complete picture including GPS. He said IP-based blocking can be inaccurate, even without the use of VPNs, because it is based on where web traffic is routed from.
“I’m sat here in my house and it shows four different locations, and I could have chosen any number more with a VPN,” he said.
He then said the business can generally implement geofencing in “one to two weeks,” depending on the customer, adding that most of the wait is on the customer side rather than for GeoComply itself.
When questioned by Porter, Kornett said that GeoComply and Kalshi’s “product and engineering teams are working very collaboratively over the past three to four days.” Porter added that the two companies were in touch on the day that the initial blocking order was issued.
“I have heard very positive things about the engagement,” Kornett said.
Judge extends TRO, sets geofence deadline
The judge was resolute in her view that the temporary restraining order (TRO) that banned sports contracts needed to be extended.
“This court has jurisdiction on behalf of Michigan,” she said. “Gambling regulation is within the realm of Michigan. In regards to the TRO, it is going to continue.
“Conflict preemption does not apply because Kalshi can abide by both state and federal law and has not complied with Michigan law. I understand that it’s a burden on Kalshi, but it’s even more of a burden on the public.
“The harms suffered by Kalshi do not outweigh the question of public interest. It’s going to be expensive, but that’s the cost of doing business.”
She also saw little doubt that geolocation should be required at some stage, but said the ideal timing was less clear.
She determined that 30 days was the right balance, but stressed that Kalshi must make progress toward implementing a full geofence across the whole 30-day period, rather than waiting before taking any serious steps. If it fails to do so, it will be fined $500,000 per day. That would make the final day before geofencing is required Aug. 12, meaning that Aug. 13 is the first full day in which it would be in effect.
“I’m going to give Kalshi 30 days and I ask Kalshi to keep us updated,” she said. “If it looks like Kalshi is waiting until the 29th day, I’m going to be very upset. If you sit on it for 29 days, there will be sanctions. If after 30 days, if you don’t ask for an extension with an evidentiary hearing, the $120,000 per day will go up to $500,000 per day.
“I have quadrupled the time that the people have asked for because I do believe it’s complex. But the protections have to be there.”
Aquilina did not provide an expiration date for the extended TRO. The parties will meet again Monday for a status update.
