In a significant legal victory for prediction market provider Kalshi, a US appeals court ruled that New Jersey cannot temporarily ban the company's operations, marking a crucial win against a series of state-led enforcement actions. The Third Circuit Court of Appeals decided in a 2-1 ruling that New Jersey's enforcement action is preempted by federal law, specifically the Commodity Exchange Act, which governs Kalshi's products.
The court determined that Kalshi's sports-related event contracts are subject to federal regulation, rather than state gambling laws. This ruling comes as states across the US have been filing lawsuits or issuing cease-and-desist orders against prediction market providers like Kalshi and Polymarket, alleging violations of state gambling laws. The Commodity Futures Trading Commission (CFTC) has argued that prediction markets are swaps governed by the Commodity Exchange Act, which takes precedence over state rules. The ruling has significant implications for the ongoing debate over the regulation of prediction markets, with different courts issuing conflicting decisions.
While this ruling suggests that prediction market providers may prevail in their argument that federal law preempts state regulations, other courts have reached different conclusions. The CFTC has filed a brief in support of its jurisdiction over these markets, emphasizing the importance of defending its exclusive authority.
The agency's chairman, Michael Selig, highlighted the broad definition of commodities under federal law, which encompasses events on sports, politics, and other areas, and emphasized that the regulation of event contracts should not distinguish between different types of events.