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A dispute between federal regulators and state authorities over prediction markets has escalated after the U.S. Commodity Futures Trading Commission (CFTC) instructed Kalshi to continue honoring sports-related event contracts in Michigan, despite a state court order requiring the company to halt such activity.
The move places the federal derivatives regulator directly at odds with Michigan officials and marks one of the most significant developments yet in the ongoing legal battle surrounding prediction market platforms and their sports event offerings.
The controversy stems from a Michigan court ruling issued on June 29 that barred Kalshi from offering sports event contracts to residents of the state. Michigan authorities have argued that the contracts function as sports wagering products and therefore require authorization under state gaming laws. The court initially imposed a temporary restraining order and later extended it, directing Kalshi to geofence Michigan residents from accessing sports contracts by August 12.
Under the state court’s instructions, Kalshi was also required to void, cancel, and refund certain sports-related trades involving Michigan users. The court warned that failure to comply could trigger substantial financial penalties. Early orders indicated potential fines of $120,000 per day, while later directives stated that noncompliance with the geofencing requirement after August 12 could result in daily penalties of $500,000.
Federal Regulator Intervenes
Kalshi had appeared prepared to comply with the Michigan ruling. On July 12, the company submitted an emergency rule proposal to the CFTC seeking approval to unwind and liquidate open sports-related positions held by certain Michigan customers.
Instead of approving that request, the CFTC exercised its authority to halt the proposed rule change and directed Kalshi to fulfill the affected trades under its standard operating procedures.
According to the regulator, federal law requires derivatives markets to operate under a uniform national framework. The agency stated that market participants must receive impartial access to CFTC-regulated markets and that registered entities are obligated to apply access criteria without discrimination. The commission also emphasized its responsibility to maintain confidence in derivatives markets by preserving predictability and stability in transaction execution and clearing.
CFTC Chairman Michael S. Selig defended the decision in a statement. “A state cannot force a DCM to violate its obligations, and federal law does not permit a DCM to discriminate against a state’s residents,” said Selig. “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 also criticized the state court’s intervention in the matter. “The Commission will not allow states or state courts to bully registered entities into violating the Commodity Exchange Act and CFTC regulations.”
The commission’s decision represents the first known instance in which it has blocked one of its own registered entities from taking steps to comply with a state court order. Federal regulators contend that Michigan’s actions are unique because they directly affect already-executed derivatives transactions.
Broader Legal Conflict Expands
The dispute reflects a larger confrontation between federal authorities that support the legal status of prediction markets and state governments seeking to restrict sports event contracts.
According to the CFTC, states have pursued enforcement actions against federally regulated designated contract markets in courts across the country. In response, the commission has filed lawsuits against Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island, and Wisconsin.
The agency has also submitted amicus briefs in proceedings before the U.S. Courts of Appeals for the Sixth and Ninth Circuits, as well as the Supreme Judicial Court of Massachusetts. In those filings, the commission has argued that its regulatory authority over sports-related event contracts supersedes state gaming laws.
The latest action by the CFTC adds to a growing series of clashes involving prediction market operators, state regulators, and tribal gaming interests. Nearly two dozen states and Native American tribes have challenged the expansion of sports event contracts, while federal regulators have maintained that many of these products fall within the framework established by federal commodities law.
Kalshi Faces Conflicting Obligations
The regulator’s decision has left Kalshi navigating competing demands from state and federal authorities. Robert DeNault, Kalshi’s Head of Enforcement and legal counsel, publicly expressed frustration with the situation after the CFTC’s announcement.
“We are disappointed by this decision and believe it is unfair to Kalshi,” wrote DeNault on X. “We already acted and unwound the trades, as the Michigan court order required us to do. 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.”
A Kalshi spokesperson later stated that the company is reviewing the CFTC’s directive and evaluating its options.
The latest development underscores the unresolved question of how prediction markets that offer sports-related contracts should be regulated in the United States. As litigation continues across multiple jurisdictions, both state authorities and federal regulators appear prepared to continue defending their respective positions.