A New York court order forcing Kalshi to stop operating would not be the end of the matter, according to the Commodity Futures Trading Commission, which said in an emergency order letter published Tuesday that it retains authority to keep the exchange running regardless of the outcome.
The letter responds to a lawsuit New York filed against Kalshi in state court last month, filed after a federal court declined to protect the company from the state’s claims.
New York is seeking a temporary restraining order that would prohibit Kalshi from “operating a business that offers contracts relating to sports, culture, elections, and other events … within or from New York or to persons in New York.”
Kalshi, which is headquartered in New York, told the CFTC that such an order would not stop at sports contracts — it would prevent the company from doing business at all.
Money is also at stake. New York’s requested order includes a $36 billion fine, calculated under a state law that allows regulators to charge illegal gambling operators three times their gains plus $100,000 for every bet placed from within the state.
That figure dwarfs Kalshi’s financial standing: the company’s total fee revenue across its history is under $2 billion, and its most recent funding round valued it at $22 billion, well short of what a full penalty would demand.
Selig casts New York as overreaching
CFTC Chair Michael Selig characterized the lawsuit as an attempt to dismantle the event contract industry before it can be tested in court.
“New York intends to make event contract derivatives waste away under its iron curtain of state gaming laws before the courts get the chance to issue final rulings,” Selig said. “Congress did not intend for derivatives exchanges to be regulated under a patchwork of state gaming laws.
“These are financial exchanges that offer financial instruments and operate across state lines. They match the bid from a resident of one state with the offer of a resident from another state and submit the trade to a clearinghouse that backstops the transactions of customers throughout the country. New York has no business regulating these interstate financial markets. The Commission is required by law to ensure order in these markets, and that is what we have done today,” Selig added.
The legal basis for intervention
The CFTC’s letter argues that shutting down Kalshi would be equivalent to closing a federally regulated designated contract market, which is why the agency says it can invoke emergency powers to keep the exchange active if New York’s order takes effect.
“The Commission finds that New York’s enforcement action and temporary restraining order (TRO) motion constitute an emergency because they constitute a ‘major market disturbance which prevents the market from accurately reflecting the forces of supply and demand’ with respect to event contracts,” the CFTC said.
“The threat of the sudden, unpredictable shutdown of a DCM poses an existential threat to the Commission’s registrants, marketplaces, and regulatory jurisdiction — as well as to the individuals and entities that trade in the Commission’s regulated marketplaces — and thus justifies exercise of the Commission’s statutory emergency power,” CFTC added.
The agency went further, warning that letting the TRO stand would hand New York outsized control over a market that spans the country.
“If New York’s lawsuit, with the extreme relief it seeks, is permitted to continue, then a single State will effectively become the nationwide regulator of event-contract swaps on DCMs,” it said. “That is the antithesis of the structure that Congress designed for federal derivatives regulation.”
Why the CFTC says the whole market is exposed
According to the agency, the mere possibility of an order like New York’s TRO is enough to unsettle pricing across the industry. It said the market would respond by attaching a “risk premium” to event contracts generally, causing prices to drift away from the probabilities they are meant to represent — a premium that could vary depending on where a given exchange is based, adding another layer of distortion.
“If Kalshi shuts down, there would be an immediate influx of trading activity from Kalshi onto other exchanges. That spike in activity would artificially impact event-contract prices for reasons having nothing to do with the events underlying the relevant contracts,” the CFTC said.
A forced, immediate shutdown in New York would also require Kalshi to liquidate its open positions, which the agency said would compound the disruption. That is the scenario the CFTC says it is prepared to prevent: if the TRO is granted, it could still direct Kalshi to keep operating.
“Under the Commission’s statutory emergency powers, it may direct Kalshi and its affiliates to continue to perform its functions as an exchange in accordance with the CEA’s Core Principles and its normal practices,” the letter said.
“This exercise of the Commission’s emergency authority will give market participants the necessary assurances that a CFTC-registered DCM cannot be shut down by a single State and that the trades they execute will be duly cleared and fulfilled,” the letter added.
Where the case stands now
For now, the state-court case is on hold while Kalshi tries to move it to federal court, an effort that has not succeeded in any of the company’s earlier state-level disputes. Clearing that hurdle requires meeting a higher bar than winning a federal injunction — one Kalshi already failed to reach in New York — so the maneuver may do little more than delay the state court’s review of the TRO.
Once the case does return to state court, it could move quickly, since New York requested a “special proceeding,” a process that calls for only one written brief from each side, with no hearing or replies.
New York is not alone in restricting Kalshi’s sports contracts; Nevada, Washington and Michigan currently do the same. Michigan produced a similar standoff, in which the CFTC ordered Kalshi to disregard a state court ruling requiring the company to unwind trades tied to its in-house market maker. Kalshi said compliance was not possible because those trades had already been liquidated.