Lawyers Say CFTC Overstepped by Ordering Kalshi to Keep Operating Amid State Gambling Fights

Meta description: Attorneys criticized the CFTC’s August 11 Kalshi order as courts split over whether states can enforce gambling laws.

Tags: Kalshi, CFTC, Letitia James, New York, Connecticut, Arizona, Robinhood

market_platform: Kalshi

category: Regulation

Two attorneys are accusing the Commodity Futures Trading Commission of pushing beyond its authority after the agency ordered Kalshi to keep offering event contracts nationwide on August 11. Their criticism centers on a growing conflict between the CFTC’s view of federal preemption and state efforts to apply gambling laws to sports and event contracts.

Speaking during an Indian Gaming Association webinar, Hobbs Straus partner Joe Webster said the CFTC “doesn’t get to usurp” the judicial function. Arizona tribal-law attorney Scott Crowell called the agency’s posture the most “blatant contemptuous disregard” he has seen in 50 years of practice. Their comments came as courts in Connecticut and Arizona have reached different conclusions about how far state gambling enforcement can reach into CFTC-regulated prediction markets.

What did the CFTC order Kalshi to do?

On August 11, CFTC Chairman Mike Selig invoked Section 8a(9) of the Commodity Exchange Act and directed Kalshi to continue offering its event contracts nationwide. The order followed New York Attorney General Letitia James’s July 31 civil enforcement action against KalshiEX, which seeks to block the exchange from offering event contracts in New York and demands more than $36 billion in damages, penalties, and disgorgement.

Selig framed a sudden shutdown as an “existential threat” to CFTC registrants and to the Commission’s jurisdiction. The agency’s position is that a CFTC-regulated exchange should not be forced out of a state market by state gambling enforcement while the federal preemption fight is still being litigated.

The legal backdrop in New York is narrower than the political fight makes it sound. Kalshi previously sought federal court protection against New York gaming regulators and did not secure the injunction it wanted. James’s July 31 action is a separate enforcement push by the New York attorney general. The lawyers criticizing the CFTC argue that the agency’s August 11 order still puts Kalshi in the middle of conflicting commands from regulators, state enforcers, and courts.

Why do Webster and Crowell say the order crosses a line?

Webster’s argument is institutional. During the IGA’s “New Normal” webinar, he said the CFTC’s order effectively tells regulated companies to keep operating even where courts or state authorities have not accepted the agency’s preemption theory. In his view, deciding whether federal law overrides state gambling law belongs to judges, not to the agency through an emergency directive.

“The federal agency doesn’t get to usurp that judicial function,” Webster said. His concern is not limited to New York. The same question is moving through multiple state and federal proceedings: if a CFTC order points one way and a court or state enforcement action points another, which instruction governs a federally regulated exchange?

Crowell, of the Crowell Law Office Tribal Advocacy Group, went further. He said Kalshi’s failure to obtain the preliminary relief it sought in New York made the CFTC’s national directive especially aggressive. Crowell described the agency’s position as a federal regulator telling a registered exchange to proceed despite unresolved court fights over whether the contracts are protected by federal commodities law.

Has a court rejected Kalshi’s use of the CFTC order?

Yes. In Connecticut, U.S. District Judge Vernon D. Oliver ruled that Kalshi’s sports contracts are not swaps and therefore do not fall within the CFTC’s exclusive jurisdiction. Oliver denied Kalshi’s bid to block Connecticut from applying its gaming statutes and rejected the company’s attempt to use the CFTC’s New York emergency order as a shield.

“Nothing in the CEA takes statutory interpretation away from courts,” Oliver wrote.

Oliver also found that the Commodity Exchange Act’s “text, structure, and targeted preemption provisions demonstrate that Congress did not intend the statute to occupy the field of state regulation at issue here.” That holding cuts directly against the broad version of the industry’s preemption argument, which treats CFTC registration as enough to block state gambling enforcement against listed event contracts.

Kalshi has asked an appeals court to block Connecticut’s enforcement while the litigation continues. For prediction-market operators, the Connecticut ruling is important because it separates the label of a CFTC-regulated exchange from the status of a particular product. Oliver’s order says the sports contracts at issue do not become federally protected swaps merely because they trade on Kalshi.

Where has the CFTC pushed back against states?

The CFTC has not retreated from the preemption fight. In its August 11 release, the agency listed actions involving nine states: Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island, and Wisconsin. The agency is seeking to stop state authorities from enforcing gambling laws against CFTC-regulated prediction-market activity, including activity tied to platforms such as Kalshi and Robinhood.

Arizona is the strongest example for the CFTC’s side so far. The state brought a criminal action against Kalshi in March over event contracts it viewed as illegal wagering. The CFTC sued Arizona, and the dispute moved into federal court. U.S. District Judge Michael Liburdi issued a temporary restraining order on April 10 and granted a preliminary injunction on May 5, blocking Arizona from moving forward while the case proceeded.

In granting preliminary relief, Liburdi concluded that “federal law preempts state gambling laws insofar as they seek to regulate derivatives exchanged on markets regulated by the CFTC.” That ruling gave Kalshi and the CFTC a significant win, but it did not end the national dispute. Connecticut later went the other way, and other state cases continue to test whether event contracts tied to sports, elections, and other real-world outcomes are federally regulated derivatives or gambling products subject to state law.

Why does this matter for prediction markets?

The central issue is whether CFTC registration can insulate event-contract exchanges from state gambling enforcement. If the CFTC’s position prevails, states would have limited ability to use gambling statutes against contracts listed on federally regulated exchanges. If Connecticut’s reasoning spreads, states could retain authority over at least some sports and event contracts even when they trade on CFTC-registered markets.

That split matters beyond Kalshi. Robinhood, sportsbook incumbents, tribal gaming interests, state regulators, and exchange operators are all watching the same line-drawing exercise. The commercial prize is national distribution for event contracts. The legal risk is that products available in one state may be restricted, litigated, or prosecuted in another.

For Kalshi, the stakes are immediate. James’s New York action seeks more than $36 billion, while the Connecticut litigation threatens the company’s ability to rely on federal preemption for sports contracts. The next concrete markers are the appellate response to Kalshi’s Connecticut request and the rulings still to come in the CFTC’s state-by-state preemption cases.