Federal Judge Halts Tennessee Enforcement Against Kalshi for Now

Prediction market operator Kalshi has won another small victory in its fight for legitimacy in the US. A federal judge temporarily blocked Tennessee regulators from enforcing state gambling laws against Kalshi on Jan. 12. 

The decision provides an initial procedural victory for the prediction market operator in a jurisdictional conflict regarding event-based contracts. US District Judge Aleta Trauger issued a restraining order filed by Kalshi against the Tennessee Sports Wagering Council (TSWC) and state officials, preventing them from applying Tennessee gambling statutes to the firm pending a more comprehensive court review. 

The court found that Kalshi had shown a likelihood of success with respect to its claims, as it observed that state enforcement may have the effect of impeding federal rights.

Additionally, the court also upheld Kalshi's assertion that the company would be irreparably harmed in the absence of immediate relief and that the balance of equities favored the temporary stay of state action. 

While the order does not halt the pursuit, it freezes Tennessee sports betting enforcement until the preliminary injunction, scheduled for Jan. 26, and the company must post a $500 security bond to maintain the order. 

This litigation centers on the regulatory status of sports event contracts. Kalshi operates as a derivatives exchange overseen by the Commodity Futures Trading Commission (CFTC) and argues that its products are federally authorized financial instruments rather than wagers. 

Prediction market regulation faces multi-state challenges

The lawsuit in Tennessee is part of a broader state effort to limit the scope of prediction market apps. The TSWC sent cease-and-desist letters to Kalshi, Polymarket, and Crypto.com on Jan. 9, requiring them to stop offering sports event contracts by the end of the month.

Regulators directed the firms to terminate Tennessee-based access, void outstanding positions, and return customer funds. Officials warned that failure to comply could lead to civil penalties of as much as $25,000 per violation and potential criminal charges for gambling promotion.

The TSWC had argued that the "sports events contracts offered on Kalshi's exchange are Wagers under the Act and were being offered illegally in violation of Tennessee law and regulations."

The gaming regulator has claimed that prediction markets do not provide the necessary consumer safeguards, such as age checks and responsible gaming practices, that are essential for sports betting in Tennessee. This dispute is part of an increasing number of cases between gaming regulators and prediction market sites registered with the CFTC.

While judges in New Jersey and Nevada have previously issued rulings favorable to Kalshi, a Maryland court recently refused to block state-level enforcement. Maryland's gambling regulator has also warned sports betting operators that offering prediction market platforms could jeopardize their licenses.

 The outcome of the Tennessee case may determine whether federal commodities law preempts state gambling statutes for contracts referencing athletic outcomes. 

Polymarket and Crypto.com have not confirmed if they will also seek judicial intervention in the state.