Kalshi, a New York-based event-contract platform, has filed a dramatic Federal Lawsuit against the New York State Gaming Commission, following the failure of its competitor, Crypto.com, in a similar legal battle in Nevada. Kalshi’s move seeks to block the Commission from treating its sports prediction markets as illegal gambling. This marks the latest chapter in a broader legal fight over the regulatory jurisdiction of crypto-related and innovative financial services.
The Core of the Lawsuit: The Federal Preemption Argument
Kalshi filed the suit on Monday, immediately after receiving a ‘cease-and-desist’ letter from the New York State Gaming Commission demanding it stop its sports event contracts. Kalshi’s key legal argument is:
- CFTC’s Exclusive Jurisdiction: Kalshi argues that under the US federal law, the Commodity Exchange Act (CEA), its contracts are traded on exchanges (Designated Contract Markets – DCM) overseen by the Commodity Futures Trading Commission (CFTC).
- Federal Preemption: Kalshi contends that, based on the CEA’s language regarding the CFTC’s exclusive jurisdiction, the federal law preempts state gambling regulations, thus determining these contracts to be legal.
According to legal experts, Kalshi’s goal in filing the case directly in federal court, rather than responding in state court, is to focus solely on the narrow legal question of jurisdiction between federal and state law, rather than debating whether its contracts constitute gambling.
Crypto.com’s Nevada Setback and the Catalyst
A key catalyst for Kalshi’s aggressive action was the recent regulatory setback faced by its competitor, Crypto.com, in Nevada.
- Nevada Ruling: U.S. District Judge Andrew P. Gordon in Nevada denied Crypto.com’s request for an injunction. Notably, this is the same judge who had previously ruled in favor of Kalshi in a similar situation.
- Judge’s Change of Stance: In the Crypto.com case, Judge Gordon determined that contracts based on the outcome of sports events could not be considered a swap. He believed that Congress did not intend for a swap, under the CEA, to depend on the occurrence or non-occurrence of an event. In essence, the court ruled that Congressional Intent did not include bringing sports contracts under CFTC jurisdiction.
- Consequence: As a result, the Nevada Gaming Control Board has ordered Crypto.com to geofence its sports event operations in Nevada and close all open positions for state residents by November 3.
The ruling in the Crypto.com case, favoring the state, emboldened other states like New York to immediately exert their regulatory authority. Observing this defeat, Kalshi chose a preemptive defense in federal court rather than responding to New York’s threat in state court.
The Expanding Regulatory War and Future Targets
Kalshi is battling for the legal recognition of these event contract markets, along with other firms like Crypto.com and Robinhood.
- Wins and Losses: Kalshi previously won initial injunctions in New Jersey and Nevada, but a judge in Maryland ordered it to cease its sports event contracts. (However, operations there continue pending appeal).
- Upcoming Challenges: States like Arizona and Illinois have already issued ‘cease-and-desist’ letters against prediction markets. Legal experts anticipate that, given the recent court rulings favoring states, these and many other states may file lawsuits against Kalshi, Crypto.com, and Robinhood in the coming months.
This lawsuit centers on a “treatment” war (Is it regulated by commodity law, not gambling law?) in the world of Wall Street and crypto. This federal case may redefine the boundaries between federal jurisdiction over financial transactions and state jurisdiction over gambling. The final outcome of this legal battle will determine not only the future of event contract markets in the U.S. but also the regulatory environment for innovative products in the crypto and FinTech sectors.









