Kalshi Claims Exclusive Response to the Commodity Futures Trading Commission and Stands Firm in Resistance.
Making a Stand: Kalshi's Tussle With States Over Sports-Outcome Markets
Kalshi, the prediction market platform, is bravely facing legal challenges from five U.S. states – Nevada, New Jersey, Ohio, Illinois, and Montana – regarding its sports-outcome markets. Kalshi remains resilient, insisting it follows only the Commodity Futures Trading Commission (CFTC)'s regulations. Tarek Mansour, the company's founder, confirmed that these states' cease-and-desist letters haven't swayed Kalshi's intentions.
In an interview with TechCrunch, Mansour stated, "We're like a financial exchange, but the underlying trading is events." If the CFTC instructs otherwise, the company will comply. However, without such instructions, Kalshi won't back down.
Several states argue that Kalshi is operating unlawful sports betting markets and should possess a gaming license. Kalshi, however, maintains it's not offering gambling but instead a regulated financial platform with contracts based on public outcomes such as sports scores and elections. Mansour emphasizes that larger industries are pressuring regulators, as casino lobbyists disapprove of Kalshi's operations.
Kalshi has taken legal action against Nevada and New Jersey to safeguard its right to provide these markets nationwide. The company asserts that state laws have no jurisdiction over federally regulated exchanges, analogous to grain futures trading in Kansas, which is permitted despite conflicting state rules. "The state law doesn't really apply when you're a federally regulated exchange," Mansour added.
Kalshi's stance is rooted in the belief that these contracts operate like derivatives in traditional financial markets. Mansour explains, "We do not fall under that model." He points out that any financial derivative setup in the U.S. or elsewhere has initially been labeled gambling in the beginning.
Although the CFTC hasn't officially endorsed Kalshi's approach to sports markets, it hasn't directed the company to halt operations either. In the past, the commission barred Kalshi from running election markets, but federal judges favored the platform, allowing it to offer contracts on political events such as the 2024 presidential race.
Kalshi ventured into sports this year, offering contracts linked to Super Bowl LIX and March Madness. During the NCAA tournament's initial weekend, users traded $200 million in contracts. Kalshi also offers these sports markets through Robinhood, which has also received cease-and-desist letters from regulators.
Mansour highlights, "It has an economic utility behind the speculative activity, and that's what makes it a financial instrument and not a gambling instrument."
Nevada took the first step, accusing Kalshi of running an unregulated gaming operation. Mansour explains that the state's gaming board posted the cease-and-desist publicly before Kalshi even received it. "We had to call four times to see if they were going to send it," he adds. Legally, a cease-and-desist order cannot be delivered via Twitter.
Kalshi was granted a brief extension until mid-March before filing a lawsuit. The company claims the cease-and-desist order violates the Commodity Exchange Act, the same law that governs futures markets.
As of current, Kalshi is battling legal challenges in New Jersey, Nevada, and Maryland. The key dispute revolves around whether Kalshi's offerings constitute sports betting or federally regulated futures contracts. In New Jersey, Kalshi previously secured a victory in a federal court, allowing it to continue its operations. In Nevada, Kalshi received a temporary restraining order against the state's regulatory actions, temporarily halting the enforcement of a cease-and-desist order. Meanwhile, Kalshi is suing Maryland's gaming agency, arguing that its contracts should be regulated federally, not as state-licensed sports wagers.
- Tarek Mansour, the founder of Kalshi, stated in an interview that the company is like a financial exchange, trading events such as sports scores and elections, likening it to derivatives in traditional financial markets.
- Kalshi argues that it's not offering gambling but instead operates as a regulated financial platform with contracts based on public outcomes. However, larger industries, such as casino lobbyists, disapprove of Kalshi's operations.
- Kalshi has taken legal action against Nevada and New Jersey to safeguard its right to provide sports-outcome markets nationwide, claiming that state laws have no jurisdiction over federally regulated exchanges.
- In the past, Kalshi was barred by the CFTC from running election markets, but federal judges favored the platform, allowing it to offer contracts on political events such as the 2024 presidential race.
