Will Kalshi still offer 50 state betting? Yes/No
News special: Kalshi goes to war with New Jersey and Nevada
The prediction market operator litigates against gaming regulators.
Kalshi’s argument: ‘It’s not betting, it’s financial trading.’
Culture war: CEO Tarek Mansour throws culture war shade on Nevada and New Jersey.
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Fighting talk
This means war: In extraordinary developments over the course of the past weekend, the prediction market operator Kalshi has threatened to upend years of gaming regulations and throw the post-PASPA landscape into chaos.
In launching legal actions against the regulators in New Jersey and Nevada, CEO Tarek Mansour issued a startling statement of intent:
“We have been targeted before, we have fought before and we have won before. This time will be no different.”
Kalshi responded to cease-and-desist letters from the New Jersey Department of Gaming Enforcement (NJDGE) and the Nevada Gaming Control Board by suggesting they were setting out to stifle innovation.
“Prediction markets are a critical innovation of the 21st century and, like all innovations, they are initially misunderstood,” said Mansour in the statement.
“We are proud to be the company that has pioneered this technology and stand ready to defend it once again in a court of law.”
Battle grounds: Kalshi won a legal tussle with the Commodity Futures Trading Commission (CFTC) late last year over its political betting markets. It followed that up by launching self-certified sports-based events markets in January.
At the time, Mansour said: “On the heels of our explosive growth, Kalshi takes its next big step: Sports.”
America, he said at the time, was “entering a new era,” adding “we are just getting started.”
Er, I don’t think so: The first to react to Kalshi’s push into sports-betting territory was Nevada, which initially issued a cease-and-desist letter in early March. New Jersey followed that up last week with its own letter, sent to both Kalshi and Robinhood, which offers prediction markets in association with Kalshi.
In contrast to Kalshi, Robinhood appeared to comply with the request and said it would no longer offer NCAA betting to New Jersey customers.
I’m not having that: According to Kalshi’s temporary restraining order (TRO), it complains that the NJDGE’s actions “threaten irreparable harm to Kalshi and its users.” Moreover, if allowed to stand it would result in the sort of state-by-state regulation that Congress sought to avoid.
“Kalshi is a CFTC-designated contract market that offers sports-event contracts among many others on its federally registered exchange,” the order stated.
“These event contracts are valid under federal law.”
It added that the CFTC earlier this year “unambiguously permitted Kalshi to offer sports-event contracts” and that the NJDGE’s attempt to “regulate trading on a federally regulated exchange is preempted by federal law.”
As the CFTC informed the US Court of Appeals for the DC Circuit just a few months ago, “due to federal preemption, event contracts never violate state law when they are traded on a [designated contract market]” like Kalshi.
Damned if we do, damned if we don’t: The TRO said Kalshi would “incur irreparable harm” no matter how it chooses to respond to the NJDGE’s “unconstitutional demand.”
“If Kalshi chooses not to comply, the company and its representatives face the prospect of civil and criminal liability,” it added.
“But if Kalshi bows to the Division and attempts to comply, it will incur massive and irrevocable economic costs, impose significant harms on users with investments on the platform, imperil its federal registration and undermine the public’s confidence in the integrity of its platform.”
What you’re proposing: The TRO said that “as a courtesy to Kalshi,” counsel for the NJDGE has agreed to extend the deadline of its cease-and-desist letter and thereby preserve the status quo for 10 days until April 7.
This might well be the first indication of the date of the upcoming CFTC roundtable on prediction markets, which could yet determine the body’s attitude to sports-based markets.
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Playing defense
Hey everyone, we’ve just invented betting exchanges: Kalshi said in its filing that it sees “crucial differences” between its trading offerings and traditional sports betting.
It made the point that a financial exchange is an “investment marketplace where traders enter into contracts with other traders – not with a casino or ‘house’.”
It’s not betting; it’s a ‘tailored investment strategy’: It added that with financial exchanges for event contracts, the market “sets the contract price rather than the price being set by the house.” In comparison, with sportsbooks, “by contrast, gamblers take a position against the house, and the house sets the line with the odds in its own favor.”
Kalshi insisted in its filing that with its version of sports trading, “those entering into event contracts with other sophisticated traders will ultimately net out.”
“Longitudinal studies bear out this difference,” the filing added.
“Speaking broadly, the house profits on sports bets in the long-term whereas tailored investment strategies on financial markets result in positive returns for all traders.”
These sportsbooks, they just can’t be trusted: These differences, Kalshi claimed, result in “different modes of regulation.” Further, the “power imbalance” between sportsbooks and punters and the “potential for abuse” means states regulate to “protect against exploitative activity within its jurisdiction.”
But that’s just not our thing: Exchanges such as Kalshi, conversely, operate marketplaces that facilitate “complex interstate transactions between traders.”
“Federal law focuses on preventing market manipulation and disruption and ensuring market efficiency nationwide,” the filing stated.
Culture warrior
Paging Brian Quintenz: In a LinkedIn post yesterday, Mansour said his company would “keep fighting for the right of prediction markets to thrive.” He added that, over the past decade, the “concept of objective truth has been dangerously eroded by aggressive politicization, rampant misinformation and biased journalism.”
“Without the ability to agree on some of the basis and without truth, we are blind, a society evolving without direction, endlessly debating itself into oblivion,” he added.
See you at the barricades, babe: He said America needs prediction markets “now more than ever,” suggesting they were the antidote to the biases of political discourse.
“They mobilize the most elegant and effective properties of free financial markets towards the pursuit of unbiased truth,” he added.
“They are the quintessential truth machines. With trust in traditional institutions at an all-time low, people are turning to prediction markets at an astronomical pace.”
“The growth of the ecosystem in the last year is a testament to how important they have become to the American people.”
You are not the boss of me: He said that despite gaming regulators in New Jersey and Nevada not being “our regulators,” they had issued cease-and-desist letters, which “fundamentally misunderstand prediction markets and undermine the foundation of US financial markets, which are regulated by the federal government.”
“We have made every effort to engage proactively with both Nevada and New Jersey and try to educate them about prediction markets, how they are regulated, and how critical they are,” he added.
“But our words fell on deaf ears.”
Line to take: The anti-innovation line appears designed to appeal to the MAGA movement’s dislike of overarching regulations, but with the twist of fighting on the territory of state rights.
It will be interesting to see whether CFTC chair Brian Quintenz, a board member of Kalshi, takes the bait.
Analysis from financial market experts at legal firm Katten said Quintenz is likely to advocate a “pro-business, pro-innovation stance.”
But they added this would likely be “moderated by practical risk management considerations.”
The team noted that rather than supporting blanket or vague regulations that inadvertently engulf a wide array of technologies, Quintenz has advocated for a “more tailored approach.”
Quintenz has argued previously the Commission should “not adopt regulations to address amorphous, hypothetical concerns or simply for the sake of having them on the book,” they added.
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The legal arguments
Same difference: Looking at Kalshi’s filing, Daniel Wallach, US gaming attorney, said on Linkedin he was not sure he was “buying” the argument of how it “attempts to distinguish its ‘sports-related event contracts’ from state-regulated ‘sports wagering’.”
“Peer-to-peer wagering, which also falls under the state regulatory umbrella for sports betting, also shares some of the same characteristics but it is no less sports betting in spite of those differences,” he said.
Opposites attack: Wallach also noted how Kalshi has “changed its story” in the Nevada and New Jersey lawsuits. On an “important point” it has “done what you should never do when appearing before multiple federal courts” and advanced “diametrically opposite positions before two different tribunals.”
“While now claiming that ‘sports-outcome contracts’ are lawful under federal law, it told the DC Circuit in November that ‘Congress did not want sports betting to be conducted on derivatives markets’.”
As Wallach added, this is a “complete 180.”
A late admittance: Recall, last week Kalshi also belatedly appeared to wake up to the potential for its prediction markets offering to encourage irresponsible player behavior by launching what it has called its ‘Customer Protection Hub’ in order to put “customer safety first.”
Events
Apr 24: The future for the UK gambling sector, London
May 8-9: Leaders in Compliance Conference, Frankfurt
May 14: Player Protection Symposium, SBC Americas, Fort Lauderdale
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