Kalshi Gets DOJ Backing Against Arkansas Amid Prediction Markets Turf War

The United States and the Commodity Futures Trading Commission (CFTC), the federal derivatives regulator, sued the State of Arkansas and Attorney General Tim Griffin on Nov. 12, asking a federal judge to stop the state’s case against prediction market Kalshi. Department of Justice lawyers are representing the United States in the case, and CFTC lawyers the agency, the complaint’s signature block shows.

The complaint, filed in the U.S. District Court for the Eastern District of Arkansas, argues that Kalshi’s sports event contracts count as swaps under the Commodity Exchange Act (CEA), the law that gives the CFTC “exclusive jurisdiction” over swaps traded on exchanges it oversees. Kalshi is one of those venues, a designated contract market (DCM) that the agency approved in 2020. 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.

“There is value to federal governments asserting when states are going too far,” Jessi Brooks, general counsel of Ribbit Capital, said on Unchained’s DEX in the City in August, while noting that states currently hold authority over sports gambling. “So there is a legal debate here, and that should go to the Supreme Court,” she said.

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Griffin sued Kalshi Inc. and KalshiEX LLC on Nov. 4 in the Circuit Court of Independence County, bringing claims under the state’s Deceptive Trade Practices Act and for unjust enrichment. According to the federal filing, the state’s complaint says Kalshi “in large part, is a straightforward gambling platform,” and seeks an injunction, restitution, damages, unpaid taxes and civil penalties.

Arkansas law allows penalties of up to $10,000 for each violation, the federal complaint notes. It says Kalshi collects between $0.07 and $2.63 in fees per 100 contracts on most trades, and says per-violation penalties “could reach the hundreds of millions of dollars.”

The government also points to a CFTC interpretation issued Nov. 5 that gave DCMs 30 days to drop domestic geographic restrictions or explain why they can’t. Shutting Arkansas residents out, the complaint argues, would force exchanges to break that rule.

The filing lists preemption actions involving 10 other states, including Arizona, Illinois, Minnesota, New York and, as of Oct. 26, Utah. It says courts in Arizona, Illinois and Minnesota have issued preliminary injunctions favoring the federal side. The Illinois ruling, a single Oct. 2 order, resolved three related cases together, including ones brought by the U.S. government and Coinbase Financial Markets, the derivatives unit of crypto exchange Coinbase.

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

Related Listen: CME vs. Kalshi. Is Washington Picking a Winner in Prediction Markets?

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