Prediction market operators received more good news this week as Kalshi won a preliminary restraining order and a temporary injunction against the New Jersey Division of Gaming Enforcement (NJDGE). Last month, the NJDGE issued cease-and-desist orders to Kalshi and Robinhood, another prediction market provider.
Key Insights:
- New Jersey is one of several states that issued cease-and-desist orders to Kalshi and/or other prediction market providers over their recently offered sports event futures contracts.
- This is the second federal court, after the U.S. District Court for the District of Nevada, that has sided with Kalshi.
- Should prediction markets maintain their asserted right to offer sporting event contracts, without state regulation or taxation, it could negatively impact state sports betting revenues.
After receiving a cease-and-desist order from the NJDGE, Kalshi filed a motion for a preliminary restraining order and a temporary injunction with the U.S District Court for the District of New Jersey. In response, the NJDGE filed an opposition to Kalshi’s motion.
The NJDGE argues that Kalshi made its sporting event contracts available to New Jersey residents in violation of New Jersey sports betting laws and regulations. Kalshi is unlicensed by the state. As a prediction market operator, however, it is federally regulated by the Commodity Futures Trading Commission (CFTC).
Kalshi argues that the state has no jurisdiction over its sporting event contracts as prediction markets are regulated by the federal government. The NJDGE countered that sporting event contracts should not fall under the CFTC’s jurisdiction as they are not financial in nature. The vast majority of regulated futures contracts are based on the future prices of commodities or other financial securities.
On both points, the judge sided with Kalshi.
“I am persuaded that Kalshi’s sports-related event contracts fall within the CFTC’s exclusive jurisdiction and am unconvinced by the defendant’s arguments to the contrary,” Judge Edward Kiel wrote. “Defendants argue that sporting events are without potential financial, economic, or commercial consequence. On the record before me, I disagree.”
The next states in Kalshi’s sights
Like Nevada and New Jersey, Maryland issued Kalshi a cease-and-desist order. And like Nevada and New Jersey, Kalshi filed a motion for a preliminary restraining order and a temporary injunction with Maryland’s U.S. District Court.
Meanwhile, Ohio expects that it might be the next recipient of a Kalshi lawsuit. Ohio issued a cease-and-desist order to Kalshi and two other prediction market companies late last month.
While Kalshi seems to have the upper hand in these preliminary legal battles, the war over sports trading regulation will likely continue. For one thing, there’s a lot of ambiguity in federal law and regulation to keep lawyers and judges busy.
The Federal Wire Act prohibits interstate sports betting, which is one reason why sports betting is legalized and regulated intrastate. Meanwhile, CFTC Rule 40.11(a)(1) prohibits any event contract “that involves, relates to, or references terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law ....”
Also, there is just too much at stake for the states to just fold. For instance, New Jersey generated $138.3 million in online sports betting tax revenues last year. Should prediction markets prevail, states stand to lose one of their newest and dependable revenue streams. Meanwhile, companies like DraftKings and FanDuel, which have made sizable investments to secure state licenses and state regulatory approvals, have a lot to lose. Afterall, it will be hard to compete with a prediction market operator that isn’t required to pay up to 50% in state taxes.
