A federal court in Connecticut on Monday denied Kalshi’s request for a preliminary injunction against state officials seeking to restrict its prediction markets.
Key Takeaways
- Judge Vernon D. Oliver ruled that sports event contracts do not qualify as swaps.
- Even if sports contracts were swaps, the judge said they wouldn’t be preempted by the CEA.
- Kalshi has had several motions for injunctions denied in recent weeks.
District of Connecticut Judge Vernon D. Oliver's ruling does not mean that Kalshi will be the subject of regulatory enforcement - it only opens the door for state officials to pursue enforcement.
The judge reached his decision after finding that sports event contracts offered by Kalshi do not qualify as “swaps.” That’s critically important, since the Commodity Exchange Act (CEA) gives the Commodity Futures Trading Commission (CFTC) exclusive authority over commodity derivatives, including swaps.
In other words, a ruling that sports event contracts constituted “swaps” would reinforce the CFTC’s authority over prediction markets. The opposite ruling opens the door for states to assert regulatory authority that Kalshi and other prediction market platforms have routinely argued they do not possess.
“Kalshi’s sports-event contracts fail to satisfy this portion of the statutory definition of a swap because they do not depend on whether an underlying sporting event occurs, fails to occur, or occurs to a particular extent,” Oliver wrote. “Instead, Kalshi’s sports-event contracts depend on the event’s outcomes or discrete in-game occurrences. Treating those outcomes as separate ‘events’ would depart from the ordinary meaning of the term.”
Oliver also ruled that even if Kalshi’s sports event contracts were considered “swaps,” the states would still not be preempted by the CEA.
He also pointed to Kalshi’s own branding as a sports betting platform - including its claim that it “offer(s) legal sports betting nationwide” - as evidence supporting state oversight. He also noted that the CFTC has not traditionally played a role in sports betting regulation.
“But sports wagering has long been subject to state regulation pursuant to the states’ police powers because of the significant public interests and risks associated with gambling,” Oliver added.
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Kalshi fails to make its case
According to Oliver, Kalshi did not present enough evidence to show it was likely to succeed in arguing that its sports event contracts qualify as swaps or that Connecticut’s gambling laws were preempted by federal law.
He also rejected Kalshi’s arguments that it would suffer irreparable harm without an injunction and that users would be negatively affected if its sports contracts were removed.
In response to receiving a cease-and-desist order, Kalshi last December filed a lawsuit against the Connecticut Department of Consumer Protection and its director, Kristofer Gilman, in U.S. District Court. The leading prediction market operator hoped to secure a preliminary and permanent injunction to block the state from interfering with its platform.
Connecticut also issued cease-and-desists to Robinhood and Crypto.com.
“(Kalshi’s prediction markets) offer consumers the chance to invest in many types of event contracts, including, as relevant here, sports-outcome contracts,” the company’s lawsuit read. “These contracts are subject to extensive oversight by the CFTC, and - critically - they are lawful under federal law.”
Legal pressure builds
In related prediction market news, the CFTC last Friday wrote a letter to regulated prediction market platforms reminding them that they are not allowed to use American-style betting odds. The move was intended to further distinguish the platforms from state-licensed sportsbooks.
Several recent court decisions have gone against CFTC-regulated prediction market platforms. That includes cases in Wisconsin, Utah, and New York, where judges denied Kalshi’s requests for injunctions against state regulators.
