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In October of last year we wrote about the ongoing dispute between prediction market operators like Kalshi and state regulators across the US. The core of those disputes was where federal regulation of financial markets ends and where state regulation of gambling begins. Then a few months later we focused in on how one defines gambling, concluding the difference between gambling and financial market activities is akin to the line between art and pornography: I know it when I see it.
This fight is now heating up. State actions are escalating and the federal government in the guise of the Commodity Futures Trading Commission (CFTC) is pushing back hard. At the end of July we saw:
- 44 state attorneys general release a public letter to the CFTC telling them to get out of the gambling regulation business.
- New York suing Kalshi for illegal gambling under state law and essentially threatening fines which would shut the business down.
- The CFTC respond to New York's lawsuit with a loud and aggressive letter to the judges which assumes the CFTC will prevail in all cases.
The attorneys general are clearly entitled to their opinions. And while 44 (of the 55-ish total depending how you count various territories) sounds like a large fraction, recall that state chief lawyers should be expected to argue in favour of the state's legal systems still mattering. So around 85% of the relevant people are not agreeing the CFTC is wrong so much as agreeing their own jobs should not contract.
And New York is also clearly entitled to try to enforce New York law against companies in New York absent some kind of clear ruling these issues are solely federal. If everyone involved can agree on anything it is that no final, binding, rulings which cover all of this controversy exist.
But the CFTC's letter is a bit different. The tone of the letter is not so much advocating for a position that increases the CFTC's power. The letter reads like this is all obvious and anyone pushing back against the CFTC is taking "unprecedented" actions. And not just that. The CFTC makes economic arguments specifically to defend Kalshi. The letter is not about general principles – it is a defense of Kalshi in particular and an objection to New York's reference to a potential fine larger than Kalshi can possibly pay.
The CFTC is not (supposed to be) in the business of defending specific private businesses. It is also not supposed to assert a clearly-controversial legal issue is so obvious that anyone opposing the CFTC's position must be acting in bad faith.
Procedural Issues
New York is trying to pursue charges against Kalshi – which is based in New York – for illegal gambling. Under New York's laws, which are not new, everyone pretty much agrees the sports contracts offered on Kalshi (and other platforms) are gambling. Everyone agrees Kalshi has no licenses. Within the New York system there is little dispute Kalshi is guilty. The dispute is whether the New York system is the relevant system.
Kalshi offers contracts linked to sports outcomes. Several state courts have found that these contracts are gambling under state law. This is not just a single state where one might argue that, for example, Massachusetts courts are wrong or one state's law is strange. At least 44 states seem to agree. And the state cases to date have pretty much all gone the same way. If these are supposed to be state cases the platforms will lose.
What Kalshi has done so far is register as an exchange under CFTC supervision and then self-certify sports-linked contracts as being swaps. The current CFTC's interpretation of the relevant laws is that the CFTC is fine to simply accept these self-certifications. Further, the CFTC believes those self-certifications in and of themselves are sufficient to escape all state laws if a company opts in to CFTC supervision.
Maybe that is right. Certainly we do not have a clear, final, binding ruling on how all of this is supposed to work. But right up until the current CFTC took this position New York was free to try to enforce New York gambling laws on companies offering contracts wagers like these.
New York can, we think should, and surely will try to press on with enforcement. Set aside how weird it is for a regulator to intervene to protect a specific private company from legal action. Just assume for a moment the CFTC is right that New York wants to fine Kalshi so much money that Kalshi goes out of business. Even if that is true, there is no reason to stop the state legal system from litigating the case while the state vs federal dispute is also litigated. If you want to argue the actual imposition of a fine which bankrupts Kalshi should be stayed until all the issues are solved: fair enough. But this stuff takes forever. If the state of New York wants to expend resources litigating this – an issue that was non-controversially the responsibility of the state until very recently – the CFTC has no business getting involved in the state-law machinations. If this was all so obvious as the CFTC argues where are the old rulings these state regimes are surplus to requirements? Of course there are no such rulings.
Kalshi itself might try to argue the cost of defending against the state is unfair or unreasonable given the parallel federal disputes. Sure, maybe. Kalshi is welcome to make that argument. But the CFTC is not (supposed to be) on Kalshi's side; the CFTC is a (supposedly) disinterested regulator. In this case it looks awfully interested in one specific company's outcome – and is also claiming a completely novel theory and structure so obviously trump state laws that hearings are not even needed. This is puzzling.
WTF is the CFTC Doing?
And that is not all the CFTC is doing which makes little sense. To start with, the CFTC is a regulator. For a long time US courts followed a principle known as Chevron deference which came from a case involving Chevron, the oil company, and roughly speaking told courts to accept regulator's interpretations of the laws within their remits absent a compelling reason to take a different position.
That ruling was overturned in 2024, in a case known as Loper Bright, with courts now taking a clean slate approach to interpretation and not deferring so much to the relevant regulators. The Trump administration likes this recent ruling – Chevron was overturned prior to the 2024 election but people associated with the current administration celebrated it at the time – and took action early on in Trump's second term which reduced the regulatory state with specific reference to Loper Bright.
How, then, is the CFTC arguing against courts settling these issues? How does the CFTC have the nerve to assert it, as a regulator, should be telling courts how to settle complex legal issues? This makes no sense. Of course the CFTC is not precisely the rest of the Trump administration. And people at the CFTC may well have opinions which lean further in the "trust the CFTC" direction than those at, say, the Justice Department. But it is still a bit weird for an agency within a generally anti-regulation administration to take the position that a regulator agency's word is law. And should be sufficient to throw out court cases.
This is all the more odd as it might risk the CFTC's entire existence on one, random, gambling matter. The legal structure behind the CFTC's power to pre-empt state regulation over commodity futures and swaps stems from the federal government's exclusive power (vis a vis the states) to regulate interstate commerce. We worked through this in a prior column. But that foundation is strange and it is not at all clear how the precedents would stand up to current conditions.
With most commerce on the internet, and everyone around the world able to buy goods and services from pretty much everyone else, does this mean states have no power anymore? Does the federal government take over everything? Or is the legal structure underneath the CFTC itself now unconstitutional? It was always a stretch to say even local commodity business was exclusively federally regulated because commodities are portable and all transactions anywhere can impact prices everywhere. Markets are surely more global now than in the 18th century. But that is true of all markets not just swaps and commodities.
And this issue cuts in two directions which undermine the CFTC's view. If in fact sports wagers and similar are swaps then all the wagers that have happened off CFTC-regulated exchanges for many years were illegal. The CFTC has exclusive jurisdiction, give or take. None of the state gambling regimes were legitimate back for a long time if the CFTC's current view is correct. Now it is certainly fair to say that the CFTC did not accept self-certifications for sports contracts before so they could not have overseen anything sports-related. That limit existed because nobody tried to ask the CFTC to regulate sports wagers before. It would be beyond absurd to suggest the CFTC can supervise anything so long as a company asks it to do so and that the moment the CFTC takes over it pre-empts whatever state laws exist. The CFTC has changed but how does that interact with everyone else?
If the CFTC's position is "we are so obviously correct the New York Attorney General's views should be discarded without a hearing" it is problematic if your position is also "and we only figured this out recently." Appealing to foundational principles like federal oversight of interstate commerce requires that your view did not recently pivot to the actions at issue being interstate commerce of the relevant type. None of the underlying legislation has changed in years. If anything recent legal developments (Loper Bright) suggest courts should disregard the CFTC's views and work the interstate commerce issues out for themselves.
The federal government has the power to regulate interstate commerce. But surely states can also dictate what businesses in each state can do. For example, it would be perfectly reasonable for the CFTC to limit what Kalshi can offer and for the state of New York to limit what Kalshi can offer both a) as a company based in the state and b) to anyone in New York regardless of where Kalshi is regulated. States can restraint what companies in that state do when facing outwards and what companies anywhere can do when facing into the state. This is just basic "it is a government and it has jurisdiction over its own territory." Stripping a power the states have exercised since the 18th century away from the states and handing it to the federal government is to completely ignore the constitution.
Imagine if a state bans some medicine or medical practice or, to pick a random politically sensitive example in the US, abortion. Does a federal regulator get to override that and allow doctors and pharmacies in that state to offer the medicine or medical practice? Can the federal government override state law and force a state to permit these things? The CFTC is saying, effectively, this doctor self-certified to us this is all good so hands off state legal system. Remember: states have regulated gambling since the 18th century.
Is that really what the federal government is arguing here? That abstract structure is at odds with not only decades of Republican policies but also many of the Trump administration's own policy positions. There would be an amusing irony to the CFTC's attempt to force "gambling" onto states actually gambling away the CFTC's powers.
A court might look at the way markets work today and conclude the CEA, the federal government's exclusive control over interstate commerce and the 10th amendment reserving to the states all powers not explicitly granted to the federal government are inconsistent. A court might say those three things cannot live together anymore. Only the first of those three is a law passed by Congress. The second comes from Article 1 of the constitution. The third is the 10th amendment. So any court is going to throw out, or severely curtail, the CEA. A court cannot ignore Article 1 or part of the Bill of Rights. It absolutely can just toss the CEA. Of course no court is going to want to do that. But given the relatively little wiggle room available around the other two bits of law it is clear the CEA will bear the brunt of any decision.
Where We Go From Here
New York is going to try to press their illegal gambling case. Other states will also continue to try. At least 44 attorneys general have this on their radar screen. We should expect at least 44 cases. When considering the "how will courts rule on the balance between state and federal power?" you have to remember that dozens and dozens of states are taking aggressive, public, positions that they do not want their power eroded. States have regulated gambling for a long time and quite a few states have a meaningful bureaucracy to regulate gambling. Courts are going to notice that.
The CFTC, Kalshi and similar platforms are going to keep loosing in the vast majority of state cases. Under state law these platforms are often illegal gambling and the state courts are not going to hand off state power to the federal government. It is an easy prediction that the states are going to keep winning in state court. The CFTC will try to intervene and, for the most part, nobody will listen.
As an aside we have some advice for the CFTC: stop intervening on your own. This is not helping your own cause. If the CFTC, or lobbyists that are influencing the CFTC, really wants to move the needle here they should go hire local lawyers in these states to intervene and lobby on their behalf. Nevada courts do not want DC-based regulators telling them how to run Nevada. The CFTC is making this harder for itself by employing a dumb, ham-handed and frankly arrogant approach.
We also expect the district court-level federal cases to generally go against the CFTC. Under Loper Bright the courts are free to disregard the CFTC's opinion of its own area of competence and consider fresh whether the contracts at issue belong under CEA jurisdiction. A lot of judges are going to find that sports gambling is not commodity trading. We hope some judge somewhere quotes the "I know it when I see it" line about pornography as well. That is a real possibility.
Appeals courts are another matter. We really have no idea and no predictions for what is going to happen there beyond that it will be a mess. Different circuits will come to different conclusions and eventually the supreme court will look at this. "I know it when I see it" comes from a supreme court justice. If the situation is similar to pornography we should expect an outcome similar to pornography. Note that state pornography laws still vary widely and that quote is from 1964. The key difference for pornography, and some related issues, in the US relative to gambling is that the content is generally legal for adults and it is instead the definition of adult which varies from state to state. Exactly how you verify someone is an adult, and what you do and who is responsible when they are not, are handled by state law. Courts reaching a similar patchwork scheme feels likely. The shape of that scheme is hard to predict however as there are a wider range of bets available in the world than types of pornography.
We also think the appeals and supreme court outcomes will be largely irrelevant to the business outcomes. If a state secures a large judgement against Kalshi or similar, the state will be able to demand a bond on appeal. Everyone knows this. If the CFTC is right that New York is going to seek a fine large enough to destroy Kalshi, and Kalshi knows this, and Kalshi knows New York is likely to win in New York court.. Kalshi will be forced to settle.
Even if the CFTC somehow prevails in the end through the court system we just do not see how Kalshi et al can survive long enough to reap all the rewards of that outcome. Also remember the states do not want these companies to go away. The states want them to submit to gambling regulations and keep operating. Fines will be paid, licenses will be issued, and the CFTC will not become the single gambling regulator for the entire country. We think there is a real chance appeals in these cases eventually result in a significantly reduced CFTC with a lot of the CEA mandate stripped away. Bet on the CFTC remaining noisy and eventually losing.
Blockhead
