Prediction market exchange Kalshi filed lawsuits against the Nevada Gaming Control Board (NGCB) and the New Jersey Division of Gaming Enforcement (DGE) on Friday (28 March) following cease-and-desist letters issued by both states this month.
The lawsuits were filed in an attempt to block state-level enforcement actions against Kalshi’s controversial sports event trading markets, which the states allege are being offered illegally.
In the Nevada case, which the New Jersey case mirrors, Kalshi is seeking a temporary restraining order to prevent the NGCB from enforcing its cease-and-desist letter.
The complaint asserts that Nevada is unconstitutionally attempting to regulate trading activity that falls under federal jurisdiction.
Specifically, Kalshi argues that its trading operations are governed exclusively by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act (CEA), codified at 7 U.S.C. § 2(a)(1)(A).
The Board’s attempt to regulate trading on a federally regulated exchange is preempted by federal law. The Commodity Exchange Act explicitly and unambiguously delegates the ‘exclusive’ power to oversee, approve, and regulate futures trading on registered exchanges to a federal agency — the CFTC.
Kalshi lawsuit against the Nevada Gaming Control Board
Kalshi’s legal filing contends that Nevada’s attempt to prohibit trading on its federally regulated exchange constitutes both field preemption and conflict preemption.
The lawsuit claims that the CEA was designed to create a uniform federal regulatory framework for commodity futures trading.
It also claims that that allowing individual states to impose their own restrictions would create the type of regulatory fragmentation Congress intended to avoid.
State orders could collapse Kalshi, asserts lawsuit
Kalshi argues that immediate injunctive relief is necessary to prevent irreparable harm.
The company states that compliance with Nevada’s cease-and-desist order would lead to severe financial and reputational damage, including possible loss of its CFTC registration and disruption for users with open positions on the platform.
On the other hand, refusing to comply could expose the company and its representatives to civil and criminal liability under state law.
The NGCB initially issued its cease-and-desist letter on 4 March, warning Kalshi that its sports trading markets were in violation of Nevada’s gaming laws.
Kalshi requested and received an extension to respond, which was granted on 14 March.
Around the same time, Kalshi launched single-game betting markets for college basketball and announced a partnership with trading platform Robinhood to offer these markets to its users.
On Thursday (27 March), the NJDGE issued a similar cease-and-desist order, reportedly with a response deadline of midnight that same day.
In response, Robinhood discontinued its offering of Kalshi’s college basketball markets to New Jersey users that same day.
Kalshi only recently entered the sports event trading space in January. This move followed the company’s legal victory over the CFTC in October, which cleared the way for it to offer prediction markets on U.S. elections.
However, the expansion into sports betting — particularly peer-to-peer trading based on the outcome of sporting events — has drawn scrutiny from both state and tribal regulators.
Some tribal gaming interests have raised concerns that Kalshi’s offerings may conflict with the Indian Gaming Regulatory Act.
Others argue that event-based contracts tied to sports outcomes could be classified as gaming under both federal and state law, which may trigger additional regulatory hurdles.
Kalshi may have hurt its defence
Further complicating Kalshi’s legal defence is its prior stance on the legality of sports-based event contracts.
Legal analyst and gaming attorney Daniel Wallach pointed out that Kalshi previously argued in federal court that such contracts are inconsistent with the Commodity Exchange Act.
Wallach suggested that Nevada and New Jersey regulators are likely to use these earlier statements to challenge Kalshi’s current claims.
Under the doctrine of judicial estoppel, Kalshi could be prevented from reversing its legal position in a way that benefits its present litigation.
Per a post by Wallach on LinkedIn, “Kalshi’s complete 180 on the legality of ‘event contracts’ tied to sporting events will certainly be raised by Nevada and New Jersey gaming regulators in response to Kalshi’s just-filed motions for a preliminary injunction.
“Kalshi could be barred by the doctrine of judicial estoppel from asserting that ‘event contracts’ tied to sporting event outcomes are allowed under federal law when it previously told two different federal courts — within just the last year — that such contracts are inconsistent with the Commodity Exchange Act’s text and legislative history.”
Meanwhile, there are reports that regulators in Washington state have also begun examining Kalshi’s operations, suggesting that further regulatory challenges may lie ahead.