Federal Judge Halts Arizona Action Against Kalshi

A federal judge has temporarily barred Arizona from enforcing its gambling laws against prediction market operator Kalshi and paused a related criminal case filed by the state. The ruling, issued by US  District Judge Michael Liburdi, prevents further immediate prosecution and cancels a scheduled arraignment hearing in the case.  

Arizona prosecutors had previously charged Kalshi with 20 misdemeanor counts of wagering, saying that Kalshi ran an illegal gambling business by accepting bets on political outcomes, college sports, and individual player performance.  

Political betting, even through legal sportsbooks, is banned in the Arizona sports betting market.

The case followed cease-and-desist letters issued by Arizona regulators and subsequent criminal charges, which in turn led to a federal lawsuit filed by the Commodity Futures Trading Commission (CFTC) arguing that Arizona is encroaching on its authority to regulate prediction market apps.

Kalshi says it operates as a financial exchange, allowing users to trade contracts tied to event outcomes, which it says are federally regulated swaps under CFTC oversight, not subject to state gambling laws.  

“The attorney general’s office disagrees with the court’s ruling and we will evaluate our next steps,” said Richie Taylor, a spokesperson for the Arizona Attorney General’s Office. 

The dispute has been replicated in multiple states. Arizona, Utah, and Iowa have faced lawsuits from Kalshi, while court rulings have varied. Decisions in Nevada and Massachusetts favored the states, but rulings in New Jersey and Tennessee went Kalshi’s way.  

Federal regulators escalate legal challenge over prediction markets 

In addition to their action against Arizona, federal regulators have intensified efforts to assert jurisdiction over prediction markets with lawsuits against Connecticut and Illinois.  

The CFTC claims that event contracts traded on registered platforms qualify as swaps under the Commodity Exchange Act and argues that state attempts to regulate these products as gambling are an overreach that could extend to other derivatives markets. 

On April 6, the US Court of Appeals for the Third Circuit upheld a preliminary injunction preventing New Jersey regulators from enforcing gambling laws against Kalshi. The court found that the platform’s contracts fall under federal jurisdiction, citing both field and conflict preemption. 

Federal officials have warned that inconsistent state regulation could create broader risks for derivatives markets. The CFTC has also taken additional steps, including filing legal briefs in related cases and initiating a rulemaking process on prediction markets, with public comments due by the end of April. 

State authorities, meanwhile, have continued to defend their approach to the issue. Regulators in Connecticut and Illinois have argued that prediction markets lack sufficient consumer protections and should fall under existing gambling laws.  

The response of the Arizona regulators to the latest ruling remains uncertain, but many analysts feel that the issue may end up in the Supreme Court.