The financial prediction markets platform Kalshi is experiencing a wave of consecutive setbacks within the U.S. federal judicial system; two federal appellate courts have rejected the platform's recent attempts to invalidate the application of local gambling laws in the states of Connecticut, New York, and Nevada. This comes alongside the company facing a new lawsuit filed by the Attorney General of Arkansas.
The ongoing legal dispute between Kalshi and various state governments centers on the applicability of local gambling legislation to prediction market platforms, while the company insists that its platform offers swap contracts subject exclusively to the regulation of the U.S. Commodity Futures Trading Commission (CFTC). Kalshi receives support from the current U.S. administration, as Donald Trump Jr. serves as an advisor to the company in exchange for a lucrative stock deal, while the CFTC leads counter-lawsuits to support its federal jurisdiction.
Broad Judicial Refusal to Invalidate State Laws
Arkansas Attorney General Tim Griffin, when announcing the lawsuit against Kalshi, emphasized that state laws deal with substance rather than terminology, noting that the platform allows customers to bet real money on the outcomes of various events in violation of local laws that prohibit gambling through unlicensed platforms, as well as allowing individuals under the age of 18 to participate without adhering to legal age requirements (21 years old) or paying taxes imposed on legal gambling operators.
This step came about a week after Utah Attorney General Derek Brown initiated criminal proceedings against Kalshi and its founders for violating the state's gambling ban, a direction previously supported by a federal court. In contrast, Kalshi maintains that it is a federally regulated financial exchange, arguing that markets cannot function if rules change at every state border, and affirming its defense of its legal position.
Decisions of Appellate Courts and Federal Circuits
Regarding the litigation process, the U.S. Ninth Circuit Court of Appeals rejected Kalshi's petition for reconsideration following its previous ruling that upheld Nevada's right to prevent the platform from allowing sports betting, as the circuit judges agreed that these bets do not constitute swap contracts and can be regulated under local gambling laws.
In the same context, Kalshi suffered another loss before the Second Circuit Court of Appeals after the court upheld lower court decisions refusing to issue preliminary injunctions to prevent the states of New York and Connecticut from applying their gambling laws, considering that the platform failed to prove the likelihood of success of its lawsuit. The company also suffered a similar loss in September before the Sixth Circuit Court of Appeals, which upheld the right of the states of Ohio and Tennessee to enforce gambling laws against the platform, while Kalshi's most notable victory was in the Third Circuit, which previously ruled in favor of the CFTC's jurisdiction in New Jersey.
What Changes in Practice?
This series of consecutive judicial decisions proves that the federal regulatory monopoly demanded by prediction market platforms faces fierce legal resistance from U.S. states that uphold their right to apply consumer protection and gambling legislation. The divergence in decisions by federal judicial circuits leads to a state of legal uncertainty for fintech companies, as they await the U.S. Supreme Court to ultimately resolve this complex constitutional and regulatory dispute between the states and the federal judiciary.