The Commodity Futures Trading Commission invoked its emergency powers Tuesday and ordered Kalshi to continue operating normally as the prediction market exchange faces a New York lawsuit that it says could potentially shut down its operations nationwide.
The CFTC said in a press release that it acted after Kalshi notified the agency that a temporary restraining order (TRO) sought by New York Attorney General Letitia James threatened the functioning of its federally regulated designated contract market.
The action creates a new wrinkle in the increasingly contentious fight over whether states can apply gambling laws to event contracts offered through federally regulated exchanges. New York is seeking to bar Kalshi from offering various event contracts “within or from New York,” language the CFTC says could effectively prevent the New York-based exchange from offering contracts anywhere.
In a 10-page emergency order, the Commission formally found that New York’s enforcement action and TRO request constitute a “major market disturbance” under the Commodity Exchange Act and directed Kalshi to continue performing its exchange functions under its normal practices and the CEA’s Core Principles.
“New York intends to make event contract derivatives waste away under its iron curtain of state gaming laws before the courts get the chance to issue final rulings,” CFTC Chairman Michael Selig said in the release. “Congress did not intend for derivatives exchanges to be regulated under a patchwork of state gaming laws. These are financial exchanges that offer financial instruments and operate across state lines.”
New York lawsuit triggers emergency order
James filed the lawsuit on July 31 in New York state court, alleging that Kalshi’s operations violate state gambling laws.
The state also sought a TRO that would prohibit Kalshi from operating a business offering contracts related to sports, culture, elections and “other events” within or from New York or to people in the state.
The CFTC said the wording goes well beyond sports contracts. Because New York did not define or limit “other events,” the Commission interpreted the request as an attempt to prohibit Kalshi from offering all event contracts. New York is also seeking disgorgement, penalties and at least $36 billion in compensatory damages.
Kalshi removed the case to federal court the same day it was filed. The CFTC order notes that the case could be delayed by remand proceedings over whether it should return to state court, but said the possibility of a sudden shutdown still justified immediate emergency action.
Kalshi notified the Commission on Aug. 1 that a TRO could shut down the exchange completely, require refunds and disgorgement from completed trades and expose traders to losses and broader market disruptions.
Under Section 8a(9) of the Commodity Exchange Act, the CFTC can direct a registered entity to take action when the Commission believes an emergency exists and intervention is necessary to maintain or restore orderly trading.
The Commission concluded that threshold had been met.
“Put simply, New York’s lawsuit threatens to prevent a CFTC-registered DCM from offering event contracts to anyone in the world,” the order states.
The final directive orders Kalshi to “continue to perform its functions as an exchange” in accordance with its normal practices and the CEA’s Core Principles.
The order does not itself dismiss New York’s case or prevent a court from considering the state’s requested relief. But it places Kalshi in an unusual position. New York is seeking an order that could force the exchange to stop operating while its federal regulator has now formally directed it to continue.
CFTC points to risk of market disruption
The Commission’s reasoning extends beyond its familiar argument that federal law gives the CFTC exclusive jurisdiction over derivatives traded on DCMs.
It also argues that the possibility of a state shutting down an exchange could distort the markets themselves.
Kalshi is headquartered in New York, while some competing federally regulated exchanges operate elsewhere. The CFTC said traders could therefore perceive Kalshi contracts as carrying additional legal risk if New York can force the exchange to cease operations.
That risk could become reflected in contract prices, creating what the Commission called a “risk premium” on Kalshi markets and potentially producing inter-exchange arbitrage based on regulatory exposure rather than developments related to the underlying event.
The CFTC also warned that shutting Kalshi down could immediately redirect trading activity to competing exchanges and force the liquidation of existing positions.
The order gives the example of an arbitrage trader holding a position on Kalshi and an offsetting position elsewhere. If the Kalshi side were forcibly liquidated, the trader could suddenly be left with an unintended one-way exposure.
Those effects could result in significant volatility in derivatives and other markets and, according to the Commission, potentially threaten “systemic harm.”
Fight extends beyond prediction markets
The CFTC also used the order to make a broader argument about the implications of New York’s position.
If a state can use gambling laws to prohibit federally regulated event contracts, the Commission said, the same theory could logically be applied to other derivatives products, including ordinary futures contracts.
Because numerous financial firms are headquartered in New York, the CFTC said that could effectively give the state “existential control” over federally regulated derivatives businesses located there.
The order is the latest escalation in Selig’s push to defend the CFTC’s jurisdiction against state efforts to restrict prediction markets.
The agency said Tuesday it has filed lawsuits against Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island and Wisconsin, while also filing amicus briefs in other cases involving state regulation of federally regulated DCMs.
It is also not the first time this summer the CFTC has used its emergency authority in a Kalshi state dispute. The new order cites the Commission’s July action involving Michigan, when it directed Kalshi to fulfill already-executed trades after state action threatened their settlement.
Tuesday’s order goes further by directing Kalshi to keep performing its normal exchange functions amid New York’s attempted enforcement action.
“The Commission is required by law to ensure order in these markets,” Selig said, “and that is what we have done today.”
More on CFTC
