Overview

Kalshi, an online prediction market, is currently embroiled in legal disputes with the states of Nevada and New Jersey, which assert that Kalshi’s operations breach state gambling statutes. Kalshi defends itself by claiming that its business is regulated by the Commodity Futures Trading Commission (CFTC) and should not be classified as gambling.

Key Points

• Kalshi argues that its activities fall under federal jurisdiction and should not be considered gambling.
• The resolution of Kalshi’s legal challenges may reshape the longstanding balance of power between state and federal control over gambling regulations in an increasingly digital landscape, according to crypto lawyer Aaron Brogan in an interview.

The American legal principle of federalism is facing new challenges as it adapts to online prediction markets. Central to this issue is Kalshi, which has received cease-and-desist orders from Nevada and New Jersey regarding its prediction markets for sports events. The states assert these markets run afoul of local gambling laws.

Aaron Brogan argues that Kalshi’s case should be straightforward with a favorable outcome. “I think clearly Kalshi is going to win these cases,” Brogan said. He cited the Commodity Exchange Act’s language, indicating that the CFTC has exclusive authority over any contracts it regulates, including derivative and event contracts.

Prediction markets like Kalshi differentiate themselves from traditional sportsbooks, as they serve merely as platforms for users to match orders without participating in the betting themselves.

These platforms have found significant momentum in areas such as sports, and should Kalshi succeed in its legal battles, it may prompt a seismic shift in American sports betting practices, potentially steering them away from conventional gambling enterprises towards prediction market frameworks.

As Brogan remarks, if Kalshi succeeds, state responses could lead to attempts to influence legislation or legal action against the CFTC, although he is skeptical about such efforts achieving success.

Ultimately, Kalshi’s legal endeavors with state regulators could herald new discussions on federalism: Can state control over gambling regulations persist, or will federal frameworks prevail in navigating the digital era of betting?