The ongoing dispute regarding the regulation of emerging prediction markets has intensified, as Kalshi has approached a federal court to block Montana authorities from enforcing state gambling regulations on its platform.
This legal battle revolves around whether federally regulated derivatives exchanges are solely under national jurisdiction or can also be subject to state regulations. Kalshi contends that its activities, particularly the trading of event-based contracts, are exclusively regulated by the Commodity Futures Trading Commission (CFTC) as per the Commodity Exchange Act.
In contrast, Montana regulators have adopted a different stance. After conducting an investigation, the state’s Gambling Control Division determined that Kalshi’s offerings qualify as illegal gambling and issued a cease-and-desist order.
The agency indicated it had found probable cause that the activities met the legal definition of gambling, stating that participants risk money or valuable items for potential gains dependent on chance or the operations of a gambling enterprise.
In response, Kalshi has filed a lawsuit against Attorney General Austin Knudsen and other state officials, seeking to suspend enforcement actions while the courts assess whether federal law supersedes Montana’s regulations. The complaint seeks both declaratory and injunctive relief to prevent any regulatory measures.
Kalshi’s platform enables users to trade on the outcomes of real-world events by purchasing contracts linked to “yes” or “no” results. The value of these contracts varies before they are resolved, allowing users to exit their positions early based on market conditions. These contracts cover various categories, including economic indicators, elections, and sports results.
In its legal filing, Kalshi argues that these transactions do not constitute bets against a central operator but rather exchanges among market participants. The company’s attorneys noted, “Since traders do not bet against the exchange itself, their ability to hedge risk depends on having counterparties willing to take on risk in hopes of earning a return.”
The lawsuit also highlights what Kalshi describes as a breakdown in prior agreements between the company and Montana officials. According to the complaint, both parties had consented in 2025 to postpone enforcement while related litigation in Nevada was ongoing. That case is still in progress, with hearings scheduled in a federal appeals court.
Despite this earlier agreement, Montana issued a second cease-and-desist letter this month, warning of possible legal repercussions if Kalshi continued to offer contracts within the state. This action created an immediate risk of enforcement, prompting the federal filing.
Kalshi’s legal stance heavily relies on the principle of federal preemption. The complaint asserts that Congress established the CFTC to ensure consistent regulation of derivatives markets and to prevent conflicting state laws.
“One of Congress’s primary objectives in creating the CFTC was to avoid the ‘chaos’ that could arise from subjecting exchanges to a disjointed array of 50 different—and potentially conflicting—state laws,” the attorneys stated.
This case unfolds amid a series of conflicting rulings in various jurisdictions. A federal judge in Nevada has prohibited Kalshi from offering contracts related to sports events, while a recent appellate ruling determined that New Jersey lacked the authority to regulate the platform. Concurrently, the CFTC has initiated legal actions against states attempting to impose similar restrictions on prediction markets.
Montana law forbids unlicensed gambling activities and provides for enforcement measures that may include injunctions and potential prosecution. In its communications, the state indicated it was seeking voluntary compliance but cautioned that noncompliance could result in legal action.
Kalshi asserts that such enforcement would disrupt a federally supervised exchange and undermine a regulatory framework intended to function on a national level.