The Commodity Futures Trading Commission has directed Kalshi to honor trades made by Michigan residents, intensifying a legal fight over whether federally regulated prediction markets can be forced by state courts to halt sports-related event contracts and unwind completed transactions.
The agency’s directive came after a Michigan court issued a temporary restraining order seeking to compel Kalshi to suspend certain sports event contracts involving state residents and reverse trades that had already been completed. The CFTC said Michigan does not have the authority to make a federally designated contract market disregard its obligations under federal law.
The dispute has quickly become a test of jurisdiction over prediction markets, a fast-growing segment of online trading where users buy and sell contracts tied to the outcome of future events. Federal regulators view certain event contracts as products governed by the Commodity Exchange Act, while Michigan officials argue that sports-related contracts amount to unauthorized gambling under state law.
The CFTC warned that canceling settled transactions could undermine confidence in market operations and weaken the reliability of contracts. The commission said the integrity of completed trades is central to the functioning of federally regulated markets and cannot be overridden by state demands that conflict with federal requirements.
Federal agency challenges state order
Kalshi is registered with the CFTC as a federally designated contract market under the Commodity Exchange Act. That status places the platform under federal oversight and requires it to follow rules on market integrity, contract terms, clearing, surveillance, and trade settlement.
In its statement, the CFTC said state authorities and state courts cannot compel a federally regulated market to violate federal law or CFTC rules. The commission said its directive was intended to protect market structure and ensure that contracts approved or permitted under federal regulation remain enforceable.
The Michigan court order, which was set to remain in effect for 14 days, required Kalshi to stop offering certain sports-related event contracts to Michigan residents and unwind trades that had already occurred. The order also sought strict geolocation measures to prevent local users from accessing the targeted contracts.
According to the proceedings described in the dispute, Judge Aquilina’s order included a potential penalty of $120,000 per day if the platform failed to enforce the required location-based restrictions. The penalty threat raised the stakes for Kalshi and sharpened the conflict between state enforcement powers and federal market regulation.
The CFTC’s intervention signals that the agency views the Michigan action not merely as a state-level gambling dispute, but as a direct challenge to the federal framework governing designated contract markets.
Michigan argues gambling laws apply
Michigan officials have taken the position that prediction markets offering sports-related contracts are operating in a space covered by state gambling laws. State authorities argue that platforms facilitating event-based trades on sports outcomes can function similarly to betting operations if they are available to residents without state gambling authorization.
Michigan Attorney General Dana Nessel has previously emphasized that state gambling statutes are designed to prevent unlicensed operators from offering gambling products to residents. Her office has warned that violations of state gambling law can carry legal penalties.
The state’s argument centers on consumer protection, licensing, and the state’s long-standing authority to regulate gambling within its borders. From Michigan’s perspective, a product tied to a sports result can be treated as a wager if it resembles betting activity, regardless of whether it is offered through a federally regulated market structure.
The CFTC’s position is different. The agency says that when a platform is registered under the Commodity Exchange Act and must comply with the national framework for contract markets, states cannot force it to ignore federal law. The commission has framed the issue as one of federal preemption, meaning federal law may override state action when the two are in conflict.
That disagreement is now at the center of the legal fight: Michigan sees the activity as unlicensed sports gambling, while the CFTC sees state interference with federally regulated trading.
A broader fight over prediction markets
The Michigan case is not unfolding in isolation. The CFTC has also initiated legal actions involving Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island, and Wisconsin as part of a broader effort to defend what it says is jurisdiction granted by Congress.
Those actions reflect a widening clash between national regulators and state officials over emerging event-contract platforms. As prediction markets expand into topics that may include elections, economic data, weather, entertainment, and sports, regulators are being forced to decide where financial trading ends and gambling begins.
Sports contracts have become particularly contentious because many states maintain detailed licensing systems for sportsbooks and online gambling operators. State regulators argue that platforms offering sports outcome contracts may bypass those systems, including local taxes, responsible gambling rules, age restrictions, and compliance standards.
Federal regulators, however, have focused on whether event contracts fall within the scope of derivatives and commodity law. If a contract is treated as a regulated financial product, then the national framework administered by the CFTC becomes central.
The dispute therefore turns on more than one platform. It could help determine whether states can block or restrict federally regulated event contracts when those contracts resemble products that state law classifies as gambling.
Why completed trades matter
One of the most significant parts of the CFTC’s directive relates to completed trades. The agency warned that forcing Kalshi to reverse settled transactions could damage market reliability.
In regulated markets, traders need to know that once a transaction is executed and settled under applicable rules, it will not be undone because of a later dispute between regulators. If completed trades can be canceled retroactively, pricing, liquidity, clearing, and risk management may all be affected.
The CFTC said this principle is fundamental to market operations. A contract market depends on participants trusting that trades will be honored and that settlement rules will be applied consistently.
Michigan’s order, by contrast, sought to address activity the state views as illegal by requiring the platform to stop the targeted contracts and unwind transactions involving Michigan residents. That approach reflects a state enforcement model focused on stopping access and reversing activity deemed unlawful under local statutes.
The conflict shows how difficult it can be to apply traditional legal categories to online markets that operate across state lines. A platform may be federally registered, but its users can be located in states with different gambling laws and different enforcement priorities.
Event contracts or prohibited wagers
At the heart of the case is a legal question with major consequences: are sports-related event contracts regulated financial products, or are they prohibited wagers when offered to residents of states that have not authorized them?
Prediction market contracts allow users to take positions on whether a specific event will occur. Prices often move according to perceived probability, and traders can buy or sell based on their expectations. Supporters of prediction markets argue that they can help aggregate information and produce useful signals about future events.
State gambling regulators, however, focus on the fact that some contracts depend on outcomes that are also common subjects of sports betting. If the economic result of a trade depends on which team wins, how a tournament unfolds, or another sports outcome, states may view the product as gambling in substance even if it is structured as a market contract.
The CFTC has its own authority to review event contracts and determine whether they are contrary to the public interest or otherwise impermissible under federal law. The agency’s assertion in the Kalshi dispute is that state courts cannot replace or override that federal framework when dealing with a federally registered market.
The outcome may influence how event contracts are designed, offered, and restricted in the future. It may also affect how platforms handle geolocation, user eligibility, and compliance with conflicting legal demands.
Trading volumes add urgency
The legal fight is unfolding as prediction market activity grows sharply. Trading activity across online prediction markets reportedly reached $59 billion during the first three months of the year, underscoring the scale of the sector and the potential impact of regulatory decisions.
A recent global soccer tournament generated nearly $9.4 billion in volume on Kalshi during June, according to figures cited in the dispute. That level of activity shows why sports-related event contracts have drawn close attention from both state gambling regulators and federal market overseers.
As volumes rise, the consequences of regulatory conflict become larger. A state order affecting a small number of contracts might once have had limited market impact. But when billions of dollars in activity are involved, rules on access, settlement, and cancellation can affect a broad range of traders and platform operations.
The rapid growth also puts pressure on regulators to clarify boundaries. State officials are concerned that online prediction markets could become large-scale substitutes for licensed sportsbooks. The CFTC is concerned that state-level restrictions could fragment federally regulated markets and create uncertainty over contract enforceability.
What traders may face
For traders, the immediate risk is uncertainty over platform access and contract availability in specific states. If courts order restrictions, platforms may be required to block users based on location, suspend certain markets, or provide notices about affected contracts.
Service interruptions may occur if a platform is forced to comply with state orders while also responding to federal directives. In situations where federal and state commands conflict, platforms may seek emergency relief from courts or guidance from regulators.
Traders should rely on official platform notices, court filings, and regulator statements rather than informal claims circulating online. Attempts to bypass location restrictions or evade state rules can create legal and account risks, especially when a court order specifically requires geolocation controls.
The CFTC’s directive may reduce the likelihood that completed trades involving Michigan residents are canceled, but it does not end the underlying litigation. Courts may still need to decide how far state gambling laws can reach when applied to a federally registered prediction market.
The next phase of the dispute will likely focus on whether Michigan’s temporary order can stand, whether federal law preempts the state’s enforcement action, and whether other states can pursue similar restrictions against event-contract platforms.
A test case for modern market regulation
The Kalshi-Michigan fight highlights a larger regulatory problem: digital markets often do not fit cleanly into older legal categories. A contract can look like a financial derivative to one regulator and like a bet to another. When the product is offered online across state borders, the conflict becomes even harder to resolve.
Federal agencies and state governments are now applying different definitions to the same activity. The CFTC is emphasizing national market regulation, contract reliability, and the authority granted by Congress. Michigan and other states are emphasizing gambling enforcement, consumer protection, and local licensing regimes.
The courts may ultimately determine how these competing powers are balanced. If federal authority prevails broadly, prediction markets may have more room to offer event contracts nationwide, subject primarily to CFTC oversight. If state authority is upheld, platforms may have to navigate a patchwork of state restrictions, licensing demands, and market-by-market prohibitions.
For now, the CFTC’s message is clear: a federally designated contract market must not be forced to abandon its federal obligations because of a state order. Michigan’s message is also clear: the state intends to enforce its gambling laws against products it believes are unauthorized wagers.
That unresolved conflict is likely to shape the next stage of prediction market regulation in the United States.
Explore how evolving regulations shape event-based trading in 2026—read why 2026 will reshape prediction markets now.
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