In a significant legal development for sports prediction markets, a Connecticut judge has ruled against Kalshi and Coinbase, denying their motions for preliminary injunctions on Monday. U.S. District Judge Vernon Oliver stated in his August 10 order that Kalshi is not entitled to temporary relief from the state's efforts to halt its operations for two main reasons.
Firstly, he determined that contracts related to sports events do not fall under the Commodity Exchange Act (CEA). Secondly, even if they did, Connecticut's gambling laws would not be overridden by the CEA or the authority of the Commodity Futures Trading Commission (CFTC).
Judge Oliver articulated, "Kalshi characterizes its sports-related event contracts in various ways, but at bottom, they are sports wagers." He further asserted that the court could not conclude that these wagers qualify as swaps under the CFTC's jurisdiction or that Congress intended to strip Connecticut of its traditional rights to regulate sports wagering in favor of CFTC oversight, an agency that has not previously exercised control over Kalshi’s contracts.
The ruling comes after Kalshi initiated legal action against Connecticut Attorney General William Tong and the Department of Consumer Protection (DCP) in December, immediately following cease-and-desist orders issued by the DCP against the company along with similar actions against Crypto.com and Robinhood. These orders claimed that the platforms were providing a sports betting equivalent without appropriate licensing, violating the state's legal gambling age requirement of 21, and prohibiting betting on Connecticut college teams.
Kalshi argued that the CEA preempts state gaming laws, asserting that the CFTC holds exclusive authority over event contracts. Initially, the court allowed Kalshi to continue operations in Connecticut while reviewing its request for an injunction, following an oral arguments hearing in February. However, six months after that session, Judge Oliver ruled against the request, noting, "Kalshi has not demonstrated that it is likely to succeed on the merits on either of these issues."
He pointed out that the term “event contract” is not defined in the CEA or CFTC regulations, concluding that Kalshi’s contracts, which depend on the outcome of sporting events, cannot be classified as swaps. Additionally, he stated that these contracts do not involve potential financial consequences, a key factor for classification as swaps under the CEA.
The judge also suggested that Congress did not aim for the statute to override state regulations in this area. He observed that Kalshi could pursue a state gaming license in accordance with Connecticut law.
Drawing analogies, Oliver remarked that Kalshi had indicated it would refrain from offering casino-style contracts because of their clear classification as gaming. He applied similar reasoning to sports contracts, highlighting that Kalshi provided no substantive rationale to differentiate its contracts, such as those involving outcomes of games, from casino contracts.
Judge Oliver echoed sentiments previously articulated by judges in other states regarding the legal standing of such contracts, warning that accepting Kalshi's position could lead to conflicts with federal law, which requires swaps to be listed on designated contract markets (DCMs).
The Connecticut ruling reflects a broader trend where Kalshi has faced legal setbacks in several states since the Connecticut lawsuit was initiated. Since late June, the company has encountered court losses in multiple jurisdictions, including Michigan, Nevada, New York, Utah, and Washington, with judges there imposing restrictions on its operations. Recent decisions have mandated Kalshi to geoblock access to its sports contracts by August 12 in both Michigan and Nevada. Meanwhile, a Sixth Circuit Court of Appeals hearing on Kalshi's cases in Ohio and Tennessee underscored that there is no explicit directive within the CEA advocating for the transition of gaming regulation from state to federal authority.
