The CFTC blocked Kalshi from canceling trades in Michigan on Tuesday, directly contradicting a state court order that required exactly that, and the prediction market platform is now stuck between two regulators issuing opposite commands.
Robert DeNault, Kalshi’s head of enforcement and legal counsel, called the situation “unfair” in a statement on X. “We already acted and unwound the trades, as the Michigan court order required us to do,” he wrote. “We are being put in an impossible position, looking to follow state court orders that may contradict our federal regulatory obligations. We did not have a choice.”
The timing matters here. On June 29, Ingham County Circuit Court Judge Rosemarie Aquilina ordered Kalshi to cease offering sports betting contracts to Michigan users while litigation over alleged state gambling law violations proceeds. Kalshi complied. Then, more than two weeks later, the CFTC issued its own order telling the company not to comply.
Michigan Fired First, But the CFTC Escalated
According to the CFTC’s press release, Michigan became the first state to attempt to interfere with executed derivatives transactions on a federally registered exchange. Chair Michael Selig framed the agency’s response as a line-in-the-sand moment.
“Canceling trades that have already been executed is an unprecedented step that risks a cascading effect on the entire marketplace and undermines the certainty in contracting that is a necessary component of a functioning market,” Selig said. “The Commission will not allow states or state courts to bully registered entities into violating the Commodity Exchange Act and CFTC regulations.”
That’s aggressive language for a regulatory agency. But the CFTC has been aggressive on this front all year. The agency has now sued nine states over prediction market jurisdiction, and Selig told Fox Business on Friday that “we’ll continue to sue any state that attempts to impose criminal or civil fines against CFTC-registered exchanges.”
This stance represents a significant expansion of federal preemption doctrine. The CFTC’s argument is that once an exchange registers with the federal agency and offers contracts that qualify as derivatives under the Commodity Exchange Act, state gambling laws simply don’t apply. Whether courts will agree remains an open question, and the Michigan case may force a definitive answer.
A Jurisdictional Fight With No Clean Resolution
The core dispute is deceptively simple: are prediction market contracts on sports outcomes derivatives (federal jurisdiction) or gambling (state jurisdiction)? The answer determines whether Kalshi operates under a single federal license or needs to navigate 50 different state gaming regimes.
Kalshi’s position has always been that its contracts are legally structured as event derivatives, which the CFTC approved starting in 2020. The company offers binary outcome contracts on everything from election results to economic indicators to, yes, sporting events. Users don’t bet in the traditional sense; they buy contracts that pay out based on whether an event happens.
States see this differently. From their perspective, a contract that pays $1 if the Detroit Lions win and $0 if they lose is a sports bet wearing a derivatives costume. Michigan, Kentucky, Arizona, and Wisconsin have all taken legal action against prediction market operators this year.
Kentucky’s approach is illustrative. The state added Kalshi and Polymarket to a lawsuit alleging the platforms operate illegal sports betting operations. Wisconsin similarly triggered CFTC retaliation when it sued multiple prediction market operators earlier this year.
The practical problem for platforms like Kalshi is that they can’t simultaneously comply with mutually exclusive orders. Michigan said: cancel these trades. The CFTC said: don’t cancel these trades. Kalshi already canceled the trades before the CFTC weighed in, which means technically it’s now in violation of the federal order even though it was simply following a court ruling.
What Comes Next for Prediction Markets
A Kalshi spokesperson told Reuters the company is reviewing the CFTC’s order and considering its next steps. The options aren’t great.
Kalshi could seek emergency relief from a federal court, asking a judge to clarify which order takes precedence. It could also simply wait for the CFTC’s ongoing litigation against Michigan to produce a ruling. But waiting means operating in legal limbo, potentially exposed to contempt charges in Michigan while the federal turf war plays out.
The broader industry implications extend beyond Kalshi. Polymarket, which operates from offshore but serves US users through various mechanisms, faces similar state-level challenges. Any prediction market hoping to operate legally in the United States needs resolution on whether federal registration actually preempts state gambling laws.
The CFTC’s aggressive posture suggests the agency believes it will win these fights. Nine lawsuits against states is a substantial commitment of enforcement resources, and Selig’s public statements signal confidence. But federal preemption arguments don’t always succeed, and state gambling laws have deep historical roots.
One wrinkle that hasn’t received enough attention: the CFTC itself doesn’t have unlimited enthusiasm for prediction markets. In June, CME Group sued the CFTC over the agency’s approval of Kalshi’s perpetual futures products, arguing they’re legally swaps under Dodd-Frank rather than futures. The traditional derivatives industry isn’t thrilled about prediction markets encroaching on their territory, even if the CFTC currently backs Kalshi against the states.
For traders, the immediate takeaway is uncertainty. Prediction market contracts in states with active litigation carry counterparty risk that didn’t exist two years ago. A state court ruling could theoretically force position closures at prices that don’t reflect market outcomes. The CFTC says it won’t allow that, but regulatory turf wars have a way of producing unexpected results.
The Michigan case will likely produce the first definitive judicial ruling on federal preemption for prediction markets. Kalshi’s “impossible position” may ultimately clarify the law, but that’s cold comfort for a company caught between regulators today.
