TLDR
- The CFTC blocked Kalshi’s plan to unwind and refund Michigan trades, ordering the exchange to honor them under normal rules instead.
- Kalshi had filed an emergency rule change on July 12 after a Michigan court ordered trades to be voided, cancelled, and refunded.
- This is the first time the CFTC has used emergency powers to override a state court’s move to cancel already executed prediction market trades.
- Kalshi says it had already unwound the trades under the Michigan court order before the CFTC rejected the filing.
- The CFTC has also taken legal action against several other states, including Arizona, Illinois, New York, and Wisconsin.
Kalshi has found itself stuck between two different rulings this week. A federal regulator and a state court gave the exchange conflicting instructions on what to do with trades placed by Michigan residents.
The Commodity Futures Trading Commission ordered Kalshi to honor trades held by Michigan customers. The regulator told the exchange to process the contracts as usual, rather than cancel them.
This came after Kalshi tried to do the opposite just days earlier. On July 12, the exchange filed an emergency rule change that would have unwound the trades and refunded customers.
Kalshi made that move to comply with a Michigan court order. The CFTC stepped in and stayed the proposal before it could take full effect.
How the Dispute Started
The conflict began on June 29, when a Michigan court issued a temporary restraining order. That order stopped Kalshi from offering sports contracts to residents in the state.
The court did not stop there. It later ruled that trades already made by Michigan residents had to be voided, cancelled, and refunded.
Kalshi said the order only affected sports positions matched between Michigan traders and its own trading arm. The company called this a small share of its total sports trading volume.
The exchange also said it would cover any losses itself. It stated that no other market participant would be affected by the forced liquidation.
CFTC Pushes Back
CFTC Chairman Michael Selig said states cannot force exchanges to break federal rules. He said federal law does not allow an exchange to treat one state’s residents differently than others.
Selig called cancelling trades that were already completed an unprecedented step. He warned it could create problems across the wider market.
By the time the CFTC ruling came down, Kalshi said it had already unwound the trades. The exchange had followed the Michigan court’s instructions before the federal order arrived.
Robert DeNault, Kalshi’s Head of Enforcement, said the company disagreed with the CFTC’s decision. He said Kalshi felt it was being punished for actions it had already taken under a court order.
DeNault said Kalshi is caught between two conflicting sets of rules. He said the exchange is trying to follow state court orders that may clash with its federal obligations.
This is not the first fight between the CFTC and state regulators over prediction markets. The agency has taken legal action against several other states, including Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island, and Wisconsin.
However, the Michigan case is different. It is the first time a court tried to cancel trades that had already been executed, rather than just blocking future ones.
The CFTC’s order means Kalshi must now treat Michigan trades under its normal rules going forward. It is not yet clear how the exchange will handle the trades it already unwound before the ruling came through.
