MV Capital - CFTC Blocks Michigan Court Order, Forces Kalshi to Honor Trades

The CFTC has directed prediction market platform Kalshi not to cancel trades involving Michigan residents, creating a direct conflict with a state court ruling and escalating tensions over federal versus state authority in these markets

Background of the Dispute

The conflict began on June 29 when Ingham County Circuit Court Judge Rosemarie Aquilina issued an order requiring Kalshi to stop offering sports-related event contracts to Michigan users during ongoing litigation. The state court also directed the platform to unwind certain already executed trades, citing violations of Michigan's sports betting laws.

Michigan Attorney General Dana Nessel argued that Kalshi's offerings operated as unlicensed gambling products. The state maintained its gambling laws protect residents from such operations.

CFTC Intervention and Federal Position

On July 14, the Commodity Futures Trading Commission used its emergency authority to stay Kalshi's proposed rule that would have complied with the Michigan order by force-liquidating positions. The CFTC instructed Kalshi to continue honoring the executed trades through normal settlement procedures.

A state cannot force a designated contract market to violate its obligations. Federal law also does not permit a designated contract market to discriminate against a state’s residents.
CFTC Press Release

The CFTC described Michigan's action as unprecedented, noting it as the first state attempt to interfere with executed derivatives transactions. Selig warned that canceling such trades risks a cascading effect on the marketplace and undermines contract certainty essential for functioning markets.

Key pointsCFTC asserts exclusive jurisdiction over Kalshi as a registered designated contract market under the Commodity Exchange Act.
The agency has filed lawsuits against nine states including Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island, and Wisconsin.
Kalshi must maintain operations for Michigan trades during the CFTC's up to 90-day review period.

Kalshi's Response and Challenges

Kalshi's head of enforcement and legal counsel, Robert DeNault, stated the company had already unwound trades to comply with the Michigan court order. He described the situation as placing Kalshi in an impossible position due to conflicting directives.

We are disappointed by this decision and believe it is unfair to Kalshi. We already acted and unwound the trades, as the Michigan court order required us to do. We are being put in an impossible position, looking to follow state court orders that may contradict our federal regulatory obligations. We did not have a choice.Robert DeNault, Kalshi Head of Enforcement and Legal Counsel

The platform indicated it is reviewing the CFTC order and considering next steps.

Broader Regulatory Tensions

This case forms part of a larger jurisdictional battle. Several states view sports event contracts on platforms like Kalshi as forms of sports betting subject to state laws. The CFTC maintains these fall under federal derivatives regulation.

Similar legal actions continue in other states, with courts reaching differing conclusions in some instances. The dispute tests the balance between federal oversight of registered exchanges and state efforts to enforce local gambling regulations.

Aspect	Michigan Court Position	CFTC Position
New Contracts	Prohibited during litigation	Does not challenge the halt on new trades
Executed Trades	Require unwinding	Must be honored through settlement
Jurisdiction	State gambling laws apply	Federal authority under Commodity Exchange Act

Implications for Prediction Markets

The outcome could influence how prediction market platforms operate across state lines. Federal intervention aims to preserve market certainty and prevent fragmentation. Ongoing litigation, including potential appeals, will likely shape the regulatory environment for these platforms moving forward.