Federal Preemption vs. State Laws in Kalshi's New York Suit

KalshiEX LLC has escalated its legal battle against state regulators by filing a federal lawsuit in New York, seeking to block the state from enforcing its gaming laws against the prediction market platform's sports-event contracts. The lawsuit, filed in the U.S. District Court for the Southern District of New York, argues that federal law preempts state jurisdiction over Kalshi's offerings, which it classifies as federally regulated commodity futures contracts, according to a Decrypt report. This move follows a recent defeat for rival Crypto.com in Nevada, where a judge denied its request for an injunction, and marks New York as the eighth state to issue a cease-and-desist letter to Kalshi, as CasinoBeats reported.

The New York State Gaming Commission sent the cease-and-desist letter on October 24, accusing Kalshi of operating an unlicensed sports-wagering platform, according to Bloomberg. The commission cited examples such as contracts tied to questions like "Will [person] win the golf grand slam before [date]?" as violations of state gambling laws, per a Bloomberg Law report. Kalshi responded by suing for a preliminary injunction to halt enforcement, asserting that its contracts are governed exclusively by the U.S. Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act. The company claims that allowing states to regulate these contracts would create a "patchwork" of conflicting laws, undermining federal oversight.

Kalshi's legal strategy has previously yielded mixed results. In Nevada and New Jersey, courts granted preliminary injunctions favoring the platform, ruling that CFTC jurisdiction likely preempts state laws. However, a Maryland judge recently denied a similar request, finding it "highly unlikely" Congress intended to override state gambling regulations, according to a Bloomberg Law analysis. Despite these setbacks, Kalshi continues to expand its operations, with CEO Tarek Mansour recently announcing plans to launch in over 140 countries. The company also partners with brokers like Robinhood to offer its event contracts.

Legal experts suggest Kalshi's preemptive lawsuits are a calculated move. Daniel Wallach, a sports wagering attorney, noted that most states require advance notice before suing businesses for repeated violations, giving Kalshi an opportunity to frame its case in federal court first. By focusing on federal preemption rather than the legality of its contracts, Kalshi avoids contentious debates over whether its products constitute gambling. However, states like Arizona, Illinois, and Massachusetts have also issued warnings or lawsuits, signaling a broader regulatory pushback, as iGaming Business reported.

The outcome of these cases could redefine the regulatory landscape for prediction markets. A favorable ruling for Kalshi would allow it to operate nationwide under federal oversight, potentially inviting regulated competitors into the space. Conversely, a win for states would force prediction markets to navigate a fragmented regulatory environment, offering contracts only in states that permit sports gambling. The legal battle may eventually reach the Supreme Court, as lower courts grapple with the tension between federal and state authority over financial derivatives.

As Kalshi defends its position, the company faces practical challenges. Geo-blocking users in states like New York—where sports betting handles $2.29 billion monthly—could prove costly. Meanwhile, political figures have already embraced prediction markets as mainstream tools, with New York mayoral candidate Zohran Mamdani referencing Kalshi's odds during a campaign speech. The case underscores the growing influence of prediction markets and the regulatory uncertainty surrounding their future.