US and CFTC sue Arkansas to stop its case against Kalshi

The United States and the Commodity Futures Trading Commission sued Arkansas on Nov. 12, asking a federal judge to stop the state's case against prediction-market operator Kalshi and to block similar state action against other federally regulated exchanges. The complaint was filed in the U.S. District Court for the Eastern District of Arkansas, with Department of Justice lawyers representing the United States and CFTC lawyers representing the agency, according to Unchained.

Arkansas Attorney General Tim Griffin had sued KalshiEX LLC and Kalshi Inc. on Nov. 4 in Independence County Circuit Court, claiming the platform operated unlicensed gambling while presenting itself as financial trading. The state's 57-page complaint includes three claims under the Arkansas Deceptive Trade Practices Act and a separate unjust-enrichment claim, and it seeks an injunction, restitution, unpaid taxes and civil penalties of up to $10,000 per violation, crypto.news reported. Griffin said in his Nov. 4 statement that "Arkansas law is concerned with substance, not semantics."

The federal complaint argues that Kalshi's sports event contracts are swaps under the Commodity Exchange Act, the statute that gives the CFTC "exclusive jurisdiction" over swaps traded on designated contract markets. Kalshi has been one of those venues, a designated contract market the agency approved in 2020, Unchained reported. The government wants a ruling that Arkansas law is preempted as applied to those trades, plus an injunction barring the state from investigating or taking enforcement action against CFTC-regulated firms, their affiliates and partners. Kalshi is not a defendant in the federal case.

The filing warns that per-violation penalties under Arkansas law "could reach the hundreds of millions of dollars," given that Kalshi collects between $0.07 and $2.63 in fees per 100 contracts on most trades, according to the complaint's summary in the Unchained report. The government also points to a CFTC interpretation issued Nov. 5 that gave designated contract markets 30 days to drop domestic geographic restrictions or explain why they cannot. Shutting Arkansas residents out, the complaint argues, would force exchanges to break that rule.

The Arkansas case joins a long list of federal-state clashes over who regulates prediction markets. Gaming lawyer Daniel Wallach identified Arkansas as the eleventh state the CFTC has sued over prediction-market oversight, joining Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island, Utah and Wisconsin, according to crypto.news. The federal filing lists preemption actions involving 10 other states and says courts in Arizona, Illinois and Minnesota have issued preliminary injunctions favoring the federal side, Unchained reported. The Illinois ruling, a single Oct. 2 order, resolved three related cases together, including ones brought by the United States and Coinbase Financial Markets.

Other courts have not lined up uniformly. Louisiana Attorney General Liz Murrill filed her own lawsuit on Nov. 12 against Kalshi, Polymarket and other operators, and a state judge issued a temporary restraining order that day covering event contracts offered to Louisiana residents without a gaming license. The order runs for ten days unless extended, with a hearing on preliminary relief scheduled for Nov. 30, crypto.news reported. Separately, Polymarket US and OG.com, a prediction-market business associated with Crypto.com, sued Griffin and state gaming officials on Nov. 9.

Griffin's state complaint alleges Kalshi accepted customers as young as 18 despite state rules governing licensed casino gambling, and that the company avoided licensing requirements, regulatory oversight and applicable taxes, crypto.news reported. The company collects fees on most trades and the state wants those proceeds returned to affected customers, alongside taxes and penalties.

A CFTC and SEC proposal published in the Federal Register on Oct. 19 also moved to expressly define event contracts, including those tied to sports, politics, weather and culture, as swaps, Unchained reported. If that rule becomes final, the federal complaint says, it would give an independent basis for treating the contracts Arkansas is targeting as swaps.

CFTC chairman Michael Selig said in an October announcement accompanying an earlier suit against Utah that "Congress entrusted the CFTC to be the federal regulator with sole responsibility to oversee these markets," according to crypto.news. New Jersey's dispute with Kalshi has reached the Supreme Court, where the state seeks review of a federal appeals decision favoring the exchange; a petition for review does not mean the justices have agreed to hear the case.

The judge has not yet ruled on the federal agencies' request to halt Arkansas's enforcement.