Federal judge blocks Arizona AG from prosecuting Kalshi, says it violates the Constitution

A federal judge has temporarily blocked Attorney General Kris Mayes from pursuing criminal charges against the online prediction market company Kalshi, concluding that the Trump administration is likely to succeed in its lawsuit arguing that federal law bars states from regulating the industry.

Federal Judge Michael Liburdi granted a temporary restraining order late last week in the lawsuit brought by the Commodity Futures Trading Commission, the federal agency that oversees prediction markets. The CFTC filed its lawsuit in response to Mayes filing criminal charges against Kalshi for allegedly running an illegal gambling operation and violating a state law barring wagering on elections.

The CFTC accused Arizona of infringing on the commission’s “exclusive” authority to regulate Kalshi and other companies, and it asked the court to declare that all state gambling laws in the United States “unconstitutional and invalid” if they are applied to prediction markets.

The federal regulatory agency claimed that Arizona is effectively attempting to shut down federally regulated prediction markets, which runs contrary to the regulatory scheme Congress devised that gives exclusivity to the commission. 

And the CFTC argued that applying state-by-state licensing requirements, fees, and hardware mandates to prediction markets would create the exact regulatory “patchwork” that Congress first sought to eliminate in the early 20th century when it passed laws allowing for commodity futures trading.

“The CFTC has demonstrated a reasonable chance of success in showing that the (Commodity Exchange) Act, at a minimum, field preempts Arizona law,” Liburdi wrote in an April 10 order granting the temporary restraining order. “Defendants’ enforcement of Arizona’s gambling laws therefore violates the Supremacy Clause of the United States Constitution…”

The Arizona Attorney General’s Office said it is weighing its options.

“The Attorney General’s office disagrees with the court ruling and we are evaluating next steps,” spokesman Richie Taylor said in an email.

Mayes’ 20-count criminal information filed in Maricopa County Superior Court claims Kalshi broke Arizona law prohibiting the operation of an unlicensed wagering business and similarly broke the law by allowing bets on Arizona elections. 

Some of the bets Mayes’ singled out include betting on the 2028 Presidential election results, if Republican Andy Biggs would win the Arizona gubernatorial race, if Elon Musk would attend the Super Bowl and if a Democrat would win the Arizona Secretary of State race. Mayes’ charges focused primarily on Arizona sports and election bets, though some charges include federal election bets, as well as sports contests in other states.

The New York-based company has been center stage in an ongoing battle over how to regulate prediction markets, which allow for bets on a variety of topics, from sports to politics to the war in Iran. The prediction markets have also been accused of insider trading, as unknown people have made large sums of money off bets placed shortly before real world events. 

In 2024, Kalshi won a landmark case in federal court when the U.S. Court of Appeals for the D.C. Circuit ruled that the Commodity Futures Trading Commission couldn’t block its election wagering under federal law. As a result, the company now operates as a “designated contract market” that is regulated by the CFTC.

Mayes is arguing that Kalshi’s authority to operate under federal law doesn’t preempt Arizona’s criminal laws, setting up a federalism clash that could reverberate nationwide, as more than a dozen states similarly outlaw gambling on elections.

The lawsuits are the latest development in an escalating legal battle between state gaming regulators and prediction markets that could ultimately end up being decided by the U.S. Supreme Court.