Nevada Kicked the Hornet's Nest
Kalshi received a threatening letter from the Nevada Gaming Control Board, but I would be more concerned if I were representing the state.
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On March 4, the Nevada Gaming Control Board ordered the prediction market platform Kalshi to cease-and-desist from offering event-based contracts in Nevada. On first impression, this letter is merely bizarre—Kalshi is a federally regulated entity offering these contracts legally. In unpacking the implications, however, it is clear that this could go far beyond a letter and redefine the regulation of gambling in the United States. How the parties will play it remains to be seen, but if they choose war, this letter could set up a generational battle between state and federal authority to regulate these markets.
This is a battle Nevada is bound to lose. Here’s why.
The History
I’ve written frequently in recent months on the development of legal prediction markets. Here is where we left off. Years ago, the firm Kalshi petitioned the first Trump administration to become a “Designated Contract Market” (DCM)—which would allow them to legally offer event contracts to retail traders.
By all accounts, the process of acquiring this DCM registration was arduous, involving many rounds of questions with the CFTC to confirm compliance, and substantial capital burn in the interim during which Kalshi had no revenue.
Then, in late 2020, they got it, becoming the first officially sanctioned prediction market. After this, for years, little happened. As the dog days of 2021 and 2022 came and went, Kalshi made little impact and probably continued to lose money.
During this period, the crypto-rails prediction market Polymarket first emerged and chose not to seek (or at least did not acquire) CFTC registration. Polymarket was publicly censured in 2021 by the CFTC, and signed a settlement which obligated it to “cease offering access to trading in markets displayed on Polymarket.com, unless such offering, solicitation or trading complies with the Act.” So it moved its headquarters to Panama and geofenced US users.
Then, in 2023, Kalshi made its next big move. They attempted to certify a contract that would resolve based on which party controlled congress. The process of listing a contract like this will be relevant, so the order of operations here is illustrative.
As a DCM, Kalshi is entitled to self-certify contracts. This means that they draft paperwork explaining the contract and send that paperwork to the CFTC, then 24 hours later they can list the contract. That isn’t the end of the story, though, because the CFTC then has an unlimited amount of time to review the contract and determine whether it is permissible under the rules.
In the case of these congressional control contracts, the CFTC made the determination that these contracts were impermissible and prohibited Kalshi from listing them. Kalshi sued, and this event, in some sense, was the birth of contemporary legal prediction markets.
Over the next year, Kalshi and the CFTC battled in court, eventually culminating in a ruling from Judge Jia Cobb of the United States District Court for the District of Columbia.1 In this ruling, Judge Cobb found that the enabling statute that permitted the CFTC to prohibit certain event contracts did not extend to contracts premised on elections, and so the CFTC did not have the authority to prevent Kalshi from listing the “congressional control” contracts.
By then, it was 2024, and congressional control was small potatoes compared to the big game—the 2024 presidential election. Polymarket had grown dramatically in exile, eventually becoming the largest prediction market in the world by a wide margin, and markets on the presidential election were its most significant. Kalshi—and every other registered DCM—wanted a piece of the action badly.
After Kalshi’s win in the D.D.C. the CFTC appealed quickly, and took the case to the D.C. Circuit Court of Appeals. Appeals take a long time, so the prior is that this wouldn’t substantively affect Kalshi’s now-legal markets during the election. However, the moving party has the option of seeking a stay of the lower court ruling, preventing whatever activity from occurring while the appeal pends.
The CFTC initiated this proceeding and asked the D.C. Circuit to grant the stay pending appeal. In these matters, there are a number of factors, but the two that matter are (i) likelihood of success on the merits and (ii) irreparable harm. Does the court think the moving party will win, and if they do, will the activity having occurred in the interim cause harm that the court cannot undo.
The classic case of irreparable harm is cutting down a tree. If one party wants to cut down a tree, and the other side sued to stop it, you need a PI because if they do cut down the tree, no judicial remedy can put it back. That's irreparable harm.
In the case of Kalshi, the court found that there was no irreparable harm from allowing Kalshi to list these contracts. That meant that Kalshi was allowed to list election prediction markets. It also meant that the court did not have to reach the likelihood of success on the merits question, so it is unknown whether the court tended to agree with Kalshi’s substantive arguments or not.
Either way, though, the industry was off to the races. Kalshi soon listed numerous election contracts, and other DCM’s like ForecastEx soon followed. Ultimately, these became a major story of the 2024 presidential election when they showed Donald Trump’s chances of winning as significantly greater than traditional poll aggregators, and Mr. Trump did then win.
Soon after the election, the FBI raided Polymarket CEO Shayne Coplan’s home, but it was unclear whether the CFTC under Mr. Trump would treat prediction markets more favorably. I have repeatedly heard rumors that Mr. Trump likes prediction markets because he thinks they support him, even though this misunderstands what the markets do. The incoming CFTC Chair Brian Quintenz has not been confirmed yet, so, truly, nobody knows.
On the Other Side of the Nevada Line
Into this void stepped Crypto.com, who took the aggressive step of seeking to self-certify sports contracts in December 2024. The idea was, hey, the CFTC lost on election contracts, maybe that reasoning will also apply to prohibitions on event contracts relating to sports. This was not Judge Cobb’s reading of the law, however, whether it is a faithful reading we may never know.
After Crypto.com self-certified these contracts, Kalshi soon followed, and while the Biden CFTC attempted to stop this process on the way out the door, it failed. That left these contracts in a weird limbo, where, as of today, they still appear to be offered legally under the CEA.
This is where Nevada comes in. States haven’t had much to say about election prediction markets so far, because they tend not to overlap with legal state-regulated betting markets in those locations. Sports is another story, though. Nevada had a quasi-monopoly on legal sports betting for many years, and the Nevada Gaming Commission is famously territorial and aggressive. These states make a lot of money from legal sports-betting and they presumably have no interest in competitors entering the scene.
As I’ve written before, prediction markets are likely to be to far better products than traditional sports-betting—they are cheaper, available everywhere, and most importantly, they have no incentive to engage in the shady tactics to limit winners that sports books have been accused of. If these things take off, they should dominate sports books.
This would be very bad for states that rely on those revenues, and first among these is Nevada. It’s no surprise, then, that Nevada is going after Kalshi.
Nonetheless, the March 4 letter is remarkable. Without any reference whatsoever to the fact that Kalshi is a federally regulated DCM, Nevada states that “offering event-based contracts in Nevada is illegal”, that offering these contracts is a “class-B felony” and that “even if Kalshi were to possess a nonrestricted Nevada gaming license with sports pool approval, the company’s offering of event-based contracts on election outcomes would still violate Nevada public policy.” Nevada then attempted to order Kalshi to “cease and desist offering any event-based contracts in Nevada”
It’s hard to say just exactly what Nevada’s strategy is here, but if it is “get blown off the face of the earth in federal court”, I think they are likely to succeed.
Here is the thing, when the federal government regulates something, the states really are not allowed to contradict them. This comes down to a complex doctrine called “preemption.” This doctrine comes from Article VI, Clause 2 of the U.S. Constitution, known as the “Supremacy Clause” which states:
This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made... shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.
Over the years, the Supreme Court has refined this language into a number of different categories, field preemption, conflict preemption, and express preemption. In field preemption, the federal government occupies a field so completely that states are implicitly prevented from regulating it. In conflict preemption, state law is invalid where it conflicts with federal law. Finally, in express preemption, Congress writes preemption directly into the law itself.
Field preemption and conflict preemption can both be a little complicated, but luckily for Kalshi, neither is required to evaluate the merits of this situation. That is because, with respect to regulated derivatives like event contracts, the Commodities Exchange Act expressly preempts state regulation. 7 USC § 2(a)(1)(A) gives the CFTC “exclusive jurisdiction… with respect to accounts, agreements and transactions involving [contracts] traded or executed on a contract market designated pursuant to [Section 7 of the CEA].”
Kalshi is explicitly authorized and regulated by 7 USC § 7, despite its conflict with the CFTC in the past, there is no doubt that it remains a DCM in good standing subject to the CEA. The contracts it has promulgated referenced in Nevada’s letter are offered according to 7 U.S.C. § 7a–2 and 17 CFR § 40.2.
It is possible to imagine a scenario wherein the CFTC rejected a contract, and an entity continued to offer it anyway, where a state might argue that the preemption protection from the CEA was compromised, however this is totally disanalogous to Kalshi’s current situation. Kalshi’s election contracts are explicitly legal and regulated by the CFTC pursuant to Judge Cobb’s ruling. Kalshi’s sports contracts are under review, but also currently being offered legally under the CEA.
Nevada must have lawyers with a pulse, so surely it know this. The specific invocation of election contracts in their letter to Kalshi is particularly bizarre and galling, as there is currently no ambiguity about the legality of these contracts. Indeed, sending this letter “under the color of state law” is arguably a violation of Kalshi’s rights.
While there has been minimal reporting on this matter, and it is unclear what Kalshi will do next, here is what I expect. Kalshi should file an action for declaratory relief under 28 U.S.C. § 2201, seeking to clarify that it is legally permitted to offer event contracts under the CEA anywhere in the country, and that states are prohibited from prosecuting state law actions against them for contracts promulgated under the federal regime.
Kalshi should also bring claims under 42 U.S.C. § 1983, arguing that Nevada is improperly seeking to deny it from exercising its “rights, privileges, or immunities secured by the Constitution and laws.” Kalshi is plainly exercising a privilege under the CEA, and Nevada’s letter is attempting to chill that exercise by threatening Kalshi and its executives with felony prosecution.
Practically, adding the § 1983 claim will probably not change the remedy—Nevada will be prohibited from sending letters like this and Kalshi will be allowed to continue operating there—but it will make fee shifting available to Kalshi. This means that if Kalshi brings this claim against Nevada and wins, Nevada will have to pay Kalshi’s reasonable attorneys fees under 42 U.S.C. §1988.2
Now, there is some complexity to this. The sport contracts that Kalshi is currently listing rely on an ambiguous application of law—even the CFTC has not yet decided whether these are appropriate under the regs or not. If Kalshi brings a declaratory action, it is plausible that the question of whether these contracts are legal or not will be implicated in the action. Personally, I don’t think this is very relevant to the determination at hand, but Nevada will certainly argue the other side, and it is impossible to predict whether the Judge will choose to address it or not.
Moreover, Kalshi will almost certainly have to bring this case in the District of Nevada. If they can get it into the District of Columbia or District of Delaware, where they are based, they obviously should, but venue under 28 U.S.C. § 1391 clearly favors Nevada.
While not as prejudicial as fighting in a state court might be, D. Nev. is roughly the last place Kalshi would want to have a fight over the fundamental legality of offering sports-based prediction markets. The particular history of that state with gambling could be a major issue. On appeal, they will find themselves in the 9th Circuit, which is probably also among the last circuits they would choose.
Nonetheless, the Nevada Gaming Commission is clearly in the wrong here. While the Trump administration favors enterprise, the States may still prove a battleground to the advancement of novel financial products. It remains to be seen what Kalshi will do, but I think they should tolerate no half measures. As Bloomberg noted recently, if Nevada can do this, then so can many other states.
Better to nip it in the bud.
Other Considerations
The picture is not so rosy for any non-DCM prediction market. While this is definitely not legal advice, it is sage for any entity at all adjacent to gaming to either seek licensure or avoid Nevada completely. This letter cements that reputation. Operators of prediction market products relying on novel interpretations of law should strongly consider avoiding Nevada at all costs. The gauntlets have been thrown, and if they can’t feed Kalshi through the thresher, they will come for you next.
However, there is another tricky little eccentricity of law that should be addressed before we break for the week. While preemption almost certainly prohibits Nevada from regulating Kalshi’s federal derivative contracts, it may, just maybe, also prohibit Nevada from maintaining its own sports-betting regime.
See, we talked about express preemption above, but the other two thornier sub-doctrines may also apply, and not in the states’ favor. If it is the case that Kalshi and other DCMs are able to promulgate event contracts premised on sports, then it is entirely conceivable that the CEA “occupies the field” of regulating binary options premised on the outcome of sporting events.
You don’t have to take my word for it, you can refer directly to Nevada’s own statements in its letter.
“A sports pool is a person in 'the business of accepting wagers on sporting events or other events by any system or method of wagering.' NRS 463.0193. A 'sporting event' is 'an individual race, game, match or contest, and any group, series or part thereof.' Nev. Gam'g Comm'n Reg. 26B.020(12). Sporting events include collegiate, Olympic, and other amateur sporting events. See Nev. Gam'g Comm'n Reg. 22.010(2). An 'other event' is any event that is not a horse race, greyhound race, or athletic sporting event. Accordingly, other events include elections. Finally, Nevada law defines a wager as 'a sum of money or representative of value that is risked on an occurrence for which the outcome is uncertain.' NRS 463.01962.
…
Kalshi is in the business of offering event-based contracts which constitute a system or method of wagering on sporting events and other events. Therefore, by offering event-based contracts in Nevada, Kalshi is operating as an unlicensed sports pool in violation of NRS 463.160(1)(a) and NRS 463.245(2).”
By Nevada’s own account, this federally regulated product is identical to the product that it regulates through state law. Per the Congressional Research Service, “Field preemption occurs when a pervasive scheme of federal regulation implicitly precludes supplementary state regulation or when states attempt to regulate a field where there is a sufficiently dominant federal interest.”
In this case, the statutory scheme expressly precludes state jurisdiction over this type of contract. If the CFTC chose to bring enforcement actions against state-licensed gambling operations for offering unregistered binary option contracts, it almost certainly could. If that happened, without a doubt, the state laws permitting such contracts would be in explicit conflict with the CEA and so be preempted.
But just because it hasn’t happened yet, should that mean that the preemption is not there? Personally, I think not. An equilibrium that relies solely on the lack of action by a federal agency implies no right or privilege, and so if these state regimes were ever challenged on this basis, I believe there would be a robust, sound argument that they are preempted.
Of course, there are other considerations to take into account. Judges, as a rule, do not want to upend whole industries with rulings that could be seen as controversial. If this issue ever came to bar, it is more likely the courts would engage in sophistry to avoid it than declare state licensed betting regimes illegal, particularly after Murphy v. NCAA declared state gambling regimes legal less than a decade ago.
Still, this argument floats out tantalizingly in the aether. If I was Kalshi, I would bring it to Nevada.
Until next week.
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By all rights, this name should be the United States District Court for the District of the District of Columbia. It really bothers me that it is not.
Mr. Mansour and Mr. Mishory, if you’re reading this—I know Jones Day is great, but feel free to call me anytime at (207)749-6534.
Super interesting post as a former CME board member. I was on the board in 1999-2001 when the current CFMA was debated and introduced. Now I am a Nevada resident....