In a recent ruling, a federal judge has halted Arizona's attempt to file criminal charges against prediction market provider Kalshi, at least for the time being, in response to a motion filed by the Commodity Futures Trading Commission. District Judge Michael Liburdi of the District of Arizona ruled that Arizona is not permitted to proceed with an arraignment of Kalshi as previously scheduled.
This decision comes after Arizona announced plans to file 20 criminal charges against Kalshi for allegedly violating state law by offering betting products. The judge's ruling stated that the Commodity Futures Trading Commission has demonstrated a strong likelihood of succeeding in its claim that Arizona's gambling laws are preempted by federal law. As a result, Arizona's pursuit of state action could potentially violate the Supremacy Clause, prompting the judge to grant a temporary restraining order for a period of two weeks. The judge also acknowledged a pending motion for a preliminary injunction, which, if granted, would extend the temporary restraining order.
According to Paradigm senior regulatory counsel Stefan Schropp, the judge's ruling includes a temporary restraining order that prohibits Arizona from enforcing its gambling laws in any criminal or civil enforcement actions related to contracts listed on Commodity Futures Trading Commission-regulated markets. In a statement, 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 Commodity Futures Trading Commission has argued that prediction markets, also known as event contracts, are subject to its supervision as swaps, and that its role preempts state law.
This view has yielded mixed results in court, 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 Commodity Futures Trading Commission rule, while the Ninth Circuit Court of Appeals declined to intervene in a Nevada state court's decision to block Kalshi. Judge Liburdi's decision to grant the Commodity Futures Trading Commission's motion to block Arizona's state action against Kalshi came two days after denying Kalshi's own motion for a preliminary injunction against the state, albeit on different grounds.