Kalshi Suffers Legal Blow In New York, Judge Rules Against Federal Preemption Argument

Kalshi suffered a legal setback in New York where a federal judge ruled the federal swaps laws don’t supersede state gaming regulations.

Last October, the yes/no exchange sued the state it calls home on the grounds that the Commodities Exchange Act (CEA) makes clear that the Commodities Futures Trading Commission (CFTC) is the regulator to which event contract platforms answer, not the states. U.S. District Judge Analisa Torres ruled Kalshi didn’t adequately display that its case could succeed on the CEA’s federal preemption provisions.

With mixed success, Kalshi has made the federal preemption argument in other states, telling courts because it’s federally regulated, it’s not beholden to state gaming laws. New York, the largest sports betting market in the U.S., doesn’t concur.

Heart of the CEA Matter

Passed by Congress in 1936, the CEA does grant the CFTC provenance over swaps or futures contracts traded on a DCM. Torres, who was appointed to the federal bench by President Obama, points out as much in her decision.

But like other judges that have heard related prediction market cases, Torres notes the CEA likely wasn’t signed into law so that certain companies could be exempt from state gaming laws and regulations.

Critics of the prediction market industry have argued that sports derivatives weren’t on the mind of Congress when it debated and passed the CEA and that the spirit of that law isn’t applicable to the world of wagering. In non-legal terms, the CEA, in the view of some judges, including Torres, doesn’t provide for gaming companies or prediction market operators to be excluded from state laws.

“Moreover, given that the power to regulate gambling is a traditional police power exercised by New York, the Court also declines to interpret the CEA’s grant of exclusive jurisdiction as leaving ‘no room for supplementary state legislation,’” wrote Torres.

New York a Tough Market for Prediction Market Operators

New York, the fourth-largest state by population, is a tough market for prediction markets. Attorney General Letitia James previously warned consumers about the risks associated with these platforms and in April, she sued Coinbase and Gemini Space Station, alleging those companies are acting as illegal sportsbooks in the state.

James and Gov. Kathy Hochul (D-NY) cheered the Torres decision on social media with the governor saying “Gamble with our laws and you’re going to lose. Just ask Kalshi.”

For her part, Torres implies Kalshi may want to consider obtaining a New York gaming license.

“There is nothing preventing Kalshi from obtaining a license pursuant to New York law and establishing a category of New York market participants that does not discriminate within that New York-resident category,” added the judge in her opinion.