Trump regulator orders Kalshi to defy Michigan court – escalating battle over prediction markets

(CNN) — The Trump administration took an extraordinary step this week to escalate its nationwide efforts to prevent states from regulating prediction markets, where users can trade on real-world events like sports, politics and pop culture.

The Commodity Futures Trading Commission, the federal agency that regulates prediction markets, directed Kalshi not to cancel pending sports trades in Michigan, in defiance of a court order from a state judge.

The rare CFTC order cited emergency powers that haven’t been invoked since President Jimmy Carter’s grain embargo against the Soviet Union during the Cold War.

Kalshi said it had already complied with the judge’s order, and the volume of unwound trades was relatively small – which means the legal standoff might be moot for now. But this maneuver was the CFTC’s most aggressive and surprising step yet in its efforts to stop states from reigning in prediction markets.

“This hasn’t happened in 46 years,” said Robert Schwartz, the agency’s former general counsel, of the CFTC using its emergency authorities. “And it’s an assertion of federal power in financial markets like we haven’t seen so far, by countermanding a court order.”

With the backing of President Donald Trump, the CFTC has embraced prediction markets, which have exploded in popularity this year. The CFTC’s move comes after it filed lawsuits against states that tried to regulate the companies, and withdrew Biden-era proposals to ban some types of trades.

Trump and his family have financial ties to the prediction market industry. And he has reshaped the CFTC by leaving his sole appointee, Michael Selig, at the helm of the five-member commission.

While Selig has largely been in lockstep with the industry, the unorthodox intervention in Michigan created some rare daylight between the two sides. It caught many in the industry off guard, rattled seasoned traders by creating uncertainty about pending trades and drew condemnation from Kalshi.

Kalshi’s head of enforcement, Bobby DeNault, said: “We are disappointed by this decision and believe it is unfair to Kalshi,” in an X post Tuesday night.

“We are being put in an impossible position, looking to follow state court orders that may contradict our federal regulatory obligations,” DeNault wrote.

A source familiar with the CFTC’s decision-making told CNN this was done to stop what it sees as a bad precedent from influencing ongoing lawsuits in other states. The source said, “this isn’t about Kalshi and it certainly wasn’t to help them,” adding that, “it makes their life harder, in this case.”

Separately, CNN reported Thursday that the CFTC is investigating a White House teleprompter operator for potential insider trading on markets about Trump’s speeches. The White House said the employee, Gabriel Perez, is cooperating with the CFTC and was placed on unpaid administrative leave.

CNN has a partnership with Kalshi and uses its data to cover major events. But CNN editorial employees aren’t allowed to trade on prediction markets.

CFTC blasts Michigan judge

Under current US law, prediction sites aren’t considered gambling. Rather, they’re financial markets that offer “event contracts.” They’re regulated like futures trading – but instead of focusing on commodities, users speculate on the outcomes of elections, sporting events like the World Cup, awards shows, the weather and more.

But Michigan and 40 other states believe prediction sites are gambling and are operating unlawfully without state gaming licenses. That’s why Michigan Attorney General Dana Nessel, a Democrat, sued Kalshi back in March.

Ingham County Circuit Judge Rosemarie Aquilina ruled in Nessel’s favor last month, finding that Michigan residents were “being exploited by Kalshi’s sports betting operation masquerading as an investment opportunity.”

She ordered Kalshi to temporarily shut down its sports markets in Michigan and to cancel existing sports-related bets. That’s what caught the CFTC’s eye.

“Canceling trades that have already been executed is an unprecedented step that risks a cascading effect on the entire marketplace and undermines the certainty in contracting that is a necessary component of a functioning market,” CFTC chair Mike Selig said in a statement announcing the move.

He said he “will not allow states or state courts to bully” prediction markets, throwing a lifeline to Kalshi, even if they apparently weren’t asking for one.

The Tuesday order, signed by a career official, said “Kalshi shall fulfill the open trades in question as it would in the ordinary course of business.”

In an email to CNN, Nessel spokesman Danny Wimmer said the state attorney general Nessel disagrees with the CFTC’s statements and blasted the CFTC’s “attempts to undermine states’ efforts to regulate online sports betting and uphold state tax law.”

Traders rattled

The standoff between the CFTC and Michigan has created waves in the rapidly growing prediction market community. These companies now see billions of dollars in weekly trading volume, according to outside data firms.

“This is bonkers,” said Nicholas Jager, one of Kalshi’s top traders on culture markets and so-called mention markets, which try to guess what public figures say. “As traders, we just want to know the rules. It would make me nervous to trade these markets, if I was in a jurisdiction where this could happen.”

Kalshi is also currently blocked in Nevada, due to a similar ruling that the company is appealing. Meanwhile, a federal judge also rejected an attempt last week by the company to prevent New York from enforcing its state gaming laws.

Many stakeholders expect the Supreme Court will eventually settle the matter, and cases are churning through appeals courts. Members of Congress from both political parties have also endorsed legislation to set a nationwide policy.

“This move from the CFTC adds whole new layers of complications,” Maine Gambling Control Board chair Steve Silver said. “The longer this goes on, the more we’re going to see stuff like this. A patchwork of different rulings in different jurisdictions is no way to operate a multibillion-dollar industry.”

The-CNN-Wire
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