Federal court blocks Arizona AG’s criminal case against Kalshi

A federal judge in Arizona has ruled that prediction market platform Kalshi falls under Commodity Futures Trading Commission (CFTC) oversight, blocking state prosecutors from pursuing gambling-related criminal charges against the company.

US District Judge Michael Liburdi issued the order on May 5, preventing Arizona Attorney General Kris Mayes and the Arizona Department of Gaming from continuing enforcement actions against Kalshi.

The ruling converted a temporary restraining order issued in mid-April into a preliminary injunction blocking the state’s prosecution.

Mayes filed charges against the New York-based company in March, accusing Kalshi of violating Arizona laws tied to operating an unlicensed wagering business and offering election-related bets. The case included 20 misdemeanor counts and became the first known criminal prosecution brought by a state against a prediction market operator.

Liburdi ruled that federal law preempts Arizona gambling statutes in this case because Kalshi operates under CFTC regulation as a designated contract market.

“Every time Congress has revisited the federal-state allocation of authority in this area, it has chosen to expand federal control,” Liburdi wrote. “It has done so while expressing unease about the costs of state-by-state regulation.”

Federal commodities framework

The case centered on whether contracts offered by Kalshi qualify as gambling regulated by states or federally supervised swaps under commodities law.

Liburdi wrote that the federal government was likely to succeed in its position that trades offered on Kalshi fall under exclusive CFTC jurisdiction.

The commission filed its own lawsuit against Arizona before the matter was merged with a similar action previously brought by Kalshi.

According to the ruling, swaps have been federally regulated for more than a century through laws including the Future Trading Act of 1921 and the Commodity Futures Trading Commission Act of 1974.

Liburdi stated that Congress enacted the latter statute with concern that states could attempt to intervene through differing regulatory systems.

“If states could prosecute the platforms, the operators would face the prospect of fifty different regulators, each capable of restricting which contracts may be listed on each exchange,” Liburdi wrote. “The result would be the inconsistent regulatory patchwork that Congress intended to avoid. Because Arizona’s gambling laws stand as an obstacle to federal regulation, those laws are preempted.”

Appeals court split could emerge

The Arizona decision follows a ruling issued in early April by the 3rd US Circuit Court of Appeals involving Kalshi’s sports-related event contracts in New Jersey. In that case, the appeals court sided with the CFTC and said the agency holds exclusive authority over those contracts.

Another case involving prediction markets is pending before the 9th Circuit Court of Appeals, which heard arguments in April over whether Nevada gambling regulators can enforce state laws against similar contracts.

A different ruling from the 9th Circuit could create a division among federal appeals courts and increase the likelihood of review by the US Supreme Court.

“This case does not exist in a vacuum,” Liburdi wrote. “Kalshi has filed materially identical preemptive actions against state officials in jurisdictions across the country, and the resulting decisions are divided.”

The 9th Circuit includes Arizona and other western states, and Liburdi noted that his ruling could face challenges depending on the appellate court’s decision.

Kalshi has remained at the center of disputes over prediction markets, which allow users to place trades tied to sports, elections, and geopolitical events. Prediction markets have also been accused of insider trading, with unknown individuals making large sums of money from real-world events.

In 2024, Kalshi won a federal appeals court case after the US Court of Appeals for the D.C. Circuit ruled that the CFTC could not block election-related contracts offered by the company under federal law.

CFTC Chairman Michael Selig welcomed the Arizona ruling in a social media post.

“The commission has full jurisdiction over prediction markets,” Selig wrote. “We’ll keep pursuing action against any state that infringes on our statutory authority.”

Richie Taylor, a spokesperson for Mayes, said the attorney general’s office “continues to evaluate our legal options related to the case.” The office has not stated whether it plans to appeal the injunction.