Encourage innovation! U.S. judges ban Arizona’s regulation of prediction markets and halt the prosecution of Kalshi

A U.S. federal district court ruling temporarily blocks Arizona from suing the prediction market platform Kalshi under its gambling law. The judge said the U.S. Commodity Futures Trading Commission has exclusive jurisdiction, and the state government may not overstep.

A U.S. federal district court has recently ruled on a legal dispute between prediction market platform Kalshi and the Arizona government, temporarily barring the state from enforcing gambling-related regulations against the platform and simultaneously putting related criminal proceedings on hold. The ruling initially clarifies the priority order between the federal government and state governments regarding regulatory authority over financial derivatives.

Judges assign primary legal jurisdiction to the federal government

In the ruling, U.S. district judge Michael Liburdi said the U.S. Commodity Futures Trading Commission (CFTC) has presented sufficient evidence to show that the “Event Contracts” provided by the prediction market fall under the definition of Swaps in the Commodity Exchange Act. Under the statute, the CFTC has Exclusive Jurisdiction over products traded on a designated contract market. The judge said federal law takes priority in regulating such financial products, so Arizona’s attempt to regulate the market using state-level gambling regulations exceeded enforcement authority. After the order was issued, the criminal probable cause hearing originally scheduled for Monday was canceled, indicating that federal courts tend to protect a unified regulatory framework for national financial markets.

Kalashi maintains that event contracts are a new type of financial instrument

Arizona prosecutors previously brought 20 misdemeanor charges against Kalshi, alleging that the platform illegally accepted bets involving political election results, college sports events, and players’ individual performances, while emphasizing that the state strictly bans unlicensed gambling business. However, Kalshi insists that its operating model is not traditional gambling, but instead offers customers contracts to buy and sell “yes” or “no” positions on event outcomes. Kalshi argues that what occurs between customers is a risk swap, not a wager between players and a dealer like in traditional gambling, and is, in essence, a financial product.

Different rulings across U.S. states

Arizona is the first state in the U.S. to take action against prediction market platforms, which triggered a ripple effect. In addition to Arizona, Kalshi is also facing legal pressure in Utah and Iowa. For now, judges in different places have reached different outcomes: Nevada and Massachusetts support the state government’s ban, while New Jersey and Tennessee have issued rulings in favor of the platform.

The Trump family supports prediction markets

The Trump administration has shown support for prediction markets, even with federal agencies suing Connecticut, Arizona, and Illinois to challenge interference by local governments in federal regulatory business, arguing that using state law to go after compliant financial companies would set a dangerous precedent.

The development of prediction platforms is tightly intertwined with political forces. The eldest son of President Trump serves as an adviser to Kalshi and Polymarket and is also an investor in the latter. Truth Social, the president’s social media platform, is preparing to launch a crypto-based prediction market called Truth Predict.

Kalshi argues that if states independently enforce gambling laws, it will threaten the platform’s survival and undermine the integrity and liquidity of contracts. Kalshi believes that Arizona’s criminal prosecution is intended to interfere with existing civil litigation procedures. A spokesperson for the Arizona Attorney General’s Office, Rich Taylor, disagreed with the judge’s decision to pause the ruling against Kalshi and said it will evaluate subsequent actions.

• This article is reprinted with authorization from: 《Chain News》
• Original title: 《Judge bars Arizona from regulating prediction markets, halts prosecution of Kalshi》
• Original author: DW