CFTC sues Utah, its tenth state, as prediction-market fight heads for the Supreme Court

The Commodity Futures Trading Commission has sued the State of Utah and its attorney general, Derek Brown, arguing that federal law leaves no room for the state to treat event contracts as illegal gambling. The case, announced on Oct. 27, is the agency's tenth lawsuit against a state over prediction markets. It comes one week after Utah went to state court to shut Kalshi out entirely, and at a moment when three federal appeals courts have reached opposite answers on the same legal question.

What happened

The complaint was filed on Oct. 26 in the U.S. District Court for the District of Utah, under case number 2:26-cv-01055. It runs to 33 pages and rests on a single claim under the Constitution's Supremacy Clause. The CFTC's position is that the Commodity Exchange Act puts contracts traded on federally registered exchanges under its exclusive control. It offers three routes to that conclusion: Congress said so expressly, it occupied the whole field, and Utah's rules conflict with the federal scheme.

The agency asks the court to declare Utah's gambling statutes, its ban on election betting and its public-nuisance law invalid as applied to those contracts. It also wants preliminary and permanent injunctions stopping Utah from enforcing against, or even investigating, regulated exchanges, their affiliates and their partners. CFTC Chairman Michael Selig said Congress gave the agency "sole responsibility to oversee these markets," according to The Block.

The trigger was Utah's own move on Oct. 20. That day the attorney general filed a 63-page complaint in the 3rd District Court in Salt Lake City against several Kalshi entities and two Susquehanna trading firms. The state calls the platform a public nuisance and wants it barred from offering contracts on sports, elections, politics and culture to Utah residents, enforced through a court-approved geolocation provider. It also seeks restitution and the surrender of profits.

Utah's estimate of what is at stake is specific. The complaint says more than 3 billion contracts had been tied to Utah accounts as of Oct. 19, and that Kalshi's fee of one to two cents per contract yielded somewhere between about $30 million and $61 million from the state. Utah is one of only two states that prohibit every form of gambling. Kalshi has responded that it is a federally regulated exchange and that no single state should hold a veto over it.

What makes this suit unusual is the venue. Kalshi itself sued Utah officials in February. On Aug. 4, U.S. District Judge Robert Shelby ruled against the company, finding that the Commodity Exchange Act did not override Utah's anti-gambling laws as applied to its contracts. On Sept. 8, the Tenth Circuit declined to give Kalshi emergency relief while it appeals. The CFTC is now asking the same federal district to reach a different result with the government as plaintiff.

The earlier suits followed a similar template. The CFTC sued Arizona, Connecticut and Illinois in early April, with the Justice Department alongside it in Arizona, and has since added New York, Wisconsin, Minnesota, Rhode Island, New Mexico and Kentucky. It has had some success at the trial level. A federal court in Arizona issued a preliminary injunction on May 5 blocking the state from applying its gambling laws to contracts on CFTC-registered exchanges. On Oct. 2, a federal judge in Chicago partly blocked Illinois from applying certain licensing rules to some sports contracts, finding they were likely swaps under federal law.

The debate

At the appellate level the picture is far less friendly to the industry. In April, a divided Third Circuit panel sided with Kalshi against New Jersey, the first federal appeals ruling on the issue. Since then the momentum has run the other way. On Aug. 28, the Ninth Circuit ruled unanimously in a Nevada case that sports event contracts are not swaps and that federal law does not displace state gambling rules. On Sept. 25, a unanimous Sixth Circuit panel reached the same conclusion for Ohio and Tennessee, noting Kalshi's own earlier description of the contracts as lacking inherent economic significance. A Maryland appeal argued in May is still pending before the Fourth Circuit.

The states' argument is rooted in traditional police power. Gambling has always been regulated locally, and they say a product that pays out on the result of a football game is a bet, whatever it is called. They also point to consumer harm and to tax revenue that licensed sportsbooks pay and federally registered exchanges do not. Thirty-nine states and the District of Columbia, led by Ohio, filed a brief on Oct. 7 urging the Supreme Court to hear New Jersey's appeal of the Third Circuit decision, citing the high court's 2018 ruling in Murphy v. NCAA that left sports betting to the states.

The CFTC and the exchanges see it differently. In their view these are swaps listed on designated contract markets that already answer to a federal regulator, with surveillance, position limits and insider-trading rules. Letting each state impose its own ban, they argue, would recreate the patchwork that the 2010 Dodd-Frank Act was meant to end. Skeptics note that an agency's legal positions can shift with its leadership, and that in the end courts, not the regulator, will decide what counts as a swap.

What it means

The decisive forum is likely to be the Supreme Court. New Jersey's petition, Flaherty v. KalshiEX, No. 26-299, was filed in early September. Kalshi's response is due on Nov. 9 after the court granted an extension, so the justices could decide whether to take the case in the coming months. A circuit split of this kind is a classic reason to grant review. Until the court acts, the answer to whether a Kalshi sports contract is legal depends on which side of a circuit boundary a customer lives on.

The money involved is no longer marginal. Robinhood, which routes event contracts to its users, reported on Oct. 27 that prediction-market revenue reached $173 million in the third quarter, more than six times the year-earlier figure and above its $120 million in crypto revenue. Crypto-native firms are in the same fight: Coinbase joined the Illinois litigation alongside Kalshi and the CFTC, and Polymarket is again under CFTC scrutiny over whether it kept U.S. users off its offshore market.

Several dates are worth watching. The CFTC will likely seek a preliminary injunction in Utah quickly, and how Judge Shelby's earlier ruling is treated will be an early test. The Tenth Circuit has Kalshi's appeal, the Fourth Circuit's Maryland ruling could arrive at any time, and Kalshi has asked the full Sixth Circuit to rehear its loss. Then comes Nov. 9 and the Supreme Court's decision on whether to step in. Each outcome will shape whether event contracts grow as a federal product or are carved up state by state.

This article is for information only and is not investment advice.

Sources

• The Block · CFTC sues Utah as battle over prediction market regulation intensifies
• crypto.news · CFTC sues Utah as prediction-market fight reaches 10 states
• Deseret News · Utah sues Kalshi over prediction market sports betting
• The Block · Kalshi loses appeal over Ohio and Tennessee sports betting laws
• Gambling.com · 39 states urge Supreme Court to review Kalshi dispute
• Katten · Federal court blocks Arizona from enforcing gambling laws against prediction markets