Courts and CFTC clash over prediction market regulation

Prediction market firms face impossible choice as courts and CFTC collide

Mike Selig sent a letter that federal judges did not write and cannot enforce. That is the structural problem no one in this dispute has resolved cleanly, and it is sharpening by the day.

The CFTC's demand — that designated contract markets reopen geofenced states within thirty days or submit written justification for why they cannot — arrived while Kalshi was already under injunction in California tribal jurisdictions and absorbing an adverse Second Circuit ruling that reopened enforcement exposure in New York and Connecticut. The agency's position is that federal law governing derivatives exchanges preempts state gambling authority. The courts' position, increasingly, is that it does not. Kalshi sits at the intersection of both instructions and must decide which principal it disobeys.

The thirty-day clock is not a negotiating device. Firms that do not reopen and cannot satisfy the CFTC's written justification standard will be in breach of their DCM registration conditions. Firms that do reopen will be in contempt of the injunctions that ordered them closed. There is no third door. Former CFTC special counsel Peter Sanchez Guarda has argued publicly that Kalshi's habit of removing disputes from state forums into federal court may have persuaded Utah to reach for criminal charges rather than continue a civil fight it expected to lose on procedural grounds. If that read is right, the same mechanism is now operating at the federal level: the more aggressively the CFTC asserts preemption, the more states that feel displaced will escalate their response, and criminal prosecution is a form of escalation that federal preemption doctrine does not automatically reach.

Arkansas filed its civil lawsuit against Kalshi and VGW on consumer fraud grounds, joining seven other states in active litigation. Attorney General Tim Griffin is seeking restitution, civil penalties, and unpaid taxes — the standard package — but the significance is not in the remedy sought. It is in the pattern. Each new state filing adds a jurisdiction where Kalshi is simultaneously subject to a CFTC order demanding national access and a state action demanding the opposite. The CFTC can instruct Kalshi to reopen Arkansas. It cannot appear in Griffin's courtroom on Kalshi's behalf.

The consensus view in this space is that the CFTC preemption argument will eventually prevail at the Supreme Court level, and the state actions are noise that slows but does not stop the industry. That view has been losing ground with every circuit ruling. The preemption argument works when federal law occupies the field clearly. When two federal appeals courts in the same week find that state enforcement is not precluded, the field is not occupied — it is contested. A Supreme Court petition, even if granted, takes years. The CFTC's thirty-day deadline takes thirty days.

What Selig has done is force the firms to make a public choice about which authority they treat as legitimate. That choice, once made, will be cited in every subsequent proceeding. Kalshi's answer to the CFTC — whatever it is — becomes evidence in Arkansas, in Utah, and in the next state that decides criminal prosecution is the faster route.