In a recent ruling, a federal judge has temporarily barred the state of Arizona from pursuing criminal charges against Kalshi, a prediction market provider. This decision comes in response to a motion filed by the Commodity Futures Trading Commission (CFTC). District Judge Michael Liburdi of the District of Arizona ruled that Arizona cannot proceed with an arraignment of Kalshi as planned, following the state's announcement last month to file 20 criminal charges against the company for allegedly offering betting products in violation of Arizona law.
The judge's ruling stated that the CFTC has demonstrated a strong likelihood of succeeding in its claim that Arizona's gambling laws are preempted by the Commodity Exchange Act. As a result, Arizona's pursuit of a state action could potentially violate the Supremacy Clause. The temporary restraining order will remain in effect for two weeks, with a pending motion for a preliminary injunction that could extend the order if granted. According to Paradigm senior regulatory counsel Stefan Schropp, the judge's order temporarily restrains and enjoins Arizona from enforcing its gambling laws in any criminal or civil enforcement actions related to contracts listed on CFTC-regulated markets.
CFTC Chair Michael Selig expressed appreciation for the judge's decision, stating that Arizona's use of state criminal law against companies complying with federal law sets a dangerous precedent. The CFTC has argued that prediction markets, also known as event contracts, are subject to the agency's supervision as swaps, and that its role preempts state law. The courts have yielded mixed results on this matter, with state courts often siding with states and federal courts producing different outcomes.
The Third Circuit Court of Appeals recently ruled that prediction markets are subject to CFTC rule, while the Ninth Circuit Court of Appeals declined to intervene in a Nevada state court's decision to block Kalshi. Judge Liburdi granted the CFTC's motion to block Arizona's state action against Kalshi just two days after denying Kalshi's own motion for a preliminary injunction against the state, which was argued on different grounds.