An unprecedented legal conflict is unfolding in the U.S. prediction market between a federal regulator and the authorities of an individual state. The Commodity Futures Trading Commission (CFTC) has demanded that the platform Kalshi complete settlements for Michigan residents' transactions in the standard manner, effectively blocking a state district court ruling that annulled these operations.
Conflict Over Sports Contracts
In March, the Michigan Attorney General filed a lawsuit against Kalshi, alleging that the platform offers residents unlicensed sports betting disguised as event outcome contracts. On June 29, a judge of the Ingham County District Court temporarily prohibited the platform from offering, matching, and executing sports contracts for users in Michigan. Furthermore, Kalshi was required to integrate a third-party geolocation system, with a fine of $120,000 per day set for violations. This ban was later extended until August 12, and from August 13, the fine was set to increase to $500,000 per day.
Emergency Rule and CFTC Intervention
Faced with the state court's demand to annul the transactions, Kalshi filed an emergency rule with the CFTC on July 12, providing for the forced liquidation of affected positions. However, on July 14, the regulator suspended this rule and ordered settlements on positions to be completed in the usual manner. According to the CFTC, Kalshi's contracts fall under the federal regulatory framework, and an individual state cannot dictate special conditions for its residents to the platform.
Positions of the Parties and Consequences
CFTC Chairman Michael Selig called the cancellation of already executed trades "an unprecedented step that threatens a cascading effect on the entire market." Kalshi's legal counsel, Robert Deno, in turn, stated that the company had already canceled trades before the regulator's order was issued, finding itself "in an impossible position" between the demands of the state court and federal obligations.
The CFTC suspended the emergency rule for 90 days, after which a 30-day public comment period will follow, and the regulator must make a final decision. This precedent could have far-reaching consequences for the entire prediction market industry, especially amid similar lawsuits from Kentucky authorities against Kalshi and Polymarket.
Analytical Commentary: This conflict highlights a fundamental problem in regulating prediction markets in the U.S.—the lack of a clear delineation of authority between federal and local governments. If the CFTC manages to assert its jurisdiction, it will create an important precedent protecting platforms from "regulatory arbitrage" at the state level. However, if the courts side with Michigan, we could see market fragmentation, where each platform is forced to adapt to 50 different legal regimes—which would effectively paralyze the industry.