Arizona gaming regulators sent cease-and-desist letters to major prediction market platforms. It was the seventh state to send such a letter to platforms like Kalshi, Robinhood, and Crypto.com.
Kalshi and Crypto.com were the first CFTC-regulated prediction market platforms to offer event contracts on sports outcomes. Functionally, they’re identical to sports wagers on game winners. This conflict has led several state gaming commissions to attempt to take action against prediction market platforms and the broker that has listed sports contracts, Robinhood.
Douglas Jensen, chief law enforcement officer for the Arizona Department of Gaming, wrote:
“The Department recognizes Kalshi’s attempt to legitimize its conduct by labeling it as an ‘innovation’ regulated by the Commodity Futures Trading Commission. In fact, there is no meaningful difference between buying one of your offered contracts and placing a bet with any other sportsbook. And, Kalshi is avoiding regulatory requirements in Arizona to include licensing and background investigations, the prohibition on wagers by persons under twenty-one (21) years of age, and requirements relating to integrity monitoring and problem gambling.”
The news of Arizona’s cease-and-desist letter was first reported by InGame.
Kalshi legal victories remain temporary
Given its success against the federal government in its election contract case, it’s unsurprising to see Kalshi take the lead in countersuing state gaming regulators. Kalshi has already received preliminary injunctions in Nevada and New Jersey.
However, these are temporary legal victories. The cases still need to play all the way out before a clear picture of judicial reasoning regarding sports contracts emerges.
So far, the federal preemption argument has carried Kalshi and the prediction markets through their early victories. Nevada and New Jersey District Courts believed Kalshi was likely to succeed on the case’s merits, because the CFTC has exclusive jurisdiction over event contracts.
If state gaming regulators face lasting defeats based on the federal preemption argument, then states could look into taking action against the CFTC itself.
What does the CFTC have to enforce?
Trump CFTC Chairman nominee Brian Quintenz has argued that all events are commodities, so any event contract can be legally traded on a designated contract market (DCM). He has also argued that the definition of “gaming” is too vague and that the CFTC has the discretion to conduct a public interest review of suspect contracts or to refrain from that review.
The Dodd-Frank Act includes the Special Rule, which allows the CFTC to conduct public interest reviews of event contracts that fall under certain categories, including gaming. Quintenz is correct that the statute leaves the discretion to conduct a public interest review to the CFTC.
However, the CFTC also adopted Rule 40.11 in 2011 that prohibited all event contracts that involve event contracts in the Special Rule’s categories. While it did not define gaming, Quintnez could face a challenge to his decision not to conduct a public interest review into Kalshi’s sports contracts once he’s confirmed.
With a possible confirmation at the end of the summer, the prediction market industry could get legal clarity in state cases against Kalshi as the Trump administration’s permanent CFTC Chairman is finally put in place.
