1. Washington Takes Kalshi's Side in Arkansas
The federal government sued Arkansas on November 12 to stop the state's lawsuit against prediction market Kalshi. In a complaint filed in the U.S. District Court for the Eastern District of Arkansas, the United States and the Commodity Futures Trading Commission (CFTC) argue that federal law gives the CFTC exclusive authority over Kalshi's sports event contracts and overrides Arkansas law.
The defendants are the State of Arkansas and its Attorney General, Tim Griffin. Lawyers from the Department of Justice appear for the United States, while the CFTC's own attorneys represent the agency. Together they want a federal judge to halt the case Griffin opened against Kalshi in state court only days earlier, and to bar Arkansas from pursuing similar actions against other exchanges the CFTC supervises.
The filing turns a dispute between one company and one state into a direct confrontation between Washington and a state government. It is also the latest chapter in a widening fight over who gets to regulate prediction markets in the United States, a fight that now spans courtrooms in more than ten states.
2. What Is the Kalshi Lawsuit in Arkansas About?
At its core, the Kalshi lawsuit asks whether a federally approved derivatives exchange can be treated as an unlicensed gambling business by a state. Arkansas says yes; the federal government says the question belongs to Washington alone.
Griffin filed his suit on November 4 in the Circuit Court of Independence County, naming both Kalshi Inc. and its exchange subsidiary, KalshiEX LLC. The state's claims rest on the Arkansas Deceptive Trade Practices Act and on a theory of unjust enrichment, meaning the company allegedly profited at the expense of residents in a way the law should not allow it to keep.
As described in the federal filing, Arkansas characterizes Kalshi as being, "in large part," a straightforward gambling platform. The state is asking its court for an injunction, restitution, damages, unpaid taxes and civil penalties. Taken together, those requests would both stop Kalshi from operating in Arkansas and force it to hand over money tied to its past activity there.
Kalshi lets users buy and sell contracts whose value depends on whether a specific event happens. Sports outcomes have become one of the most active categories on platforms of this kind, and they are exactly the products that put prediction markets on a collision course with state gaming regulators, who have long controlled sports wagering within their borders.
3. The Federal Argument: Event Contracts Are Swaps
Washington's case rests on a single classification. The complaint argues that Kalshi's sports event contracts are swaps under the Commodity Exchange Act, the statute that governs U.S. futures and derivatives markets.
That label matters because the act places swaps traded on CFTC-overseen exchanges under the agency's exclusive jurisdiction. If the contracts are swaps, the government reasons, then a state cannot layer its own gambling or consumer protection regime on top of the federal one, because doing so would conflict with the system Congress built. Legal scholars call this preemption: where federal law occupies a field or directly conflicts with state law, the state law gives way.
In broad terms, a swap is a contract in which two parties exchange payments based on the value of some underlying reference, such as an interest rate, a commodity price or, in this case, the outcome of an event. After the 2008 financial crisis, Congress expanded federal oversight of swaps and directed that many of them trade on regulated venues, which is why the classification carries so much weight in disputes like this one.
Kalshi's regulatory status supports that framing. The company operates as a designated contract market, or DCM, a type of exchange the CFTC approved it to run in 2020. Designated contract markets are subject to federal rules on market integrity, customer protection and surveillance, and the government argues that this oversight already covers the products Arkansas is targeting.
The relief requested goes beyond Kalshi. The United States and the CFTC want a court declaration that Arkansas law is preempted as applied to these trades, plus an injunction preventing the state from investigating or taking enforcement action against CFTC-regulated firms, their affiliates and their business partners. If granted, that would shield a broad slice of the prediction market industry inside Arkansas, not just a single company.
4. Penalties That Could Dwarf Kalshi's Fees
A central part of the federal complaint is the scale of the financial threat Arkansas poses. State law allows civil penalties of up to $10,000 for each violation, and the government warns that the total could quickly become enormous.
The complaint contrasts that exposure with how little Kalshi earns on any single trade. On most transactions, the exchange collects between $0.07 and $2.63 in fees per 100 contracts, according to the filing. Because penalties can be counted per violation, and a busy market generates huge numbers of individual trades, the government says the potential penalties "could reach the hundreds of millions of dollars."
That gap between modest per-trade revenue and potentially vast per-violation liability is one reason the federal side is pressing for a court order now rather than waiting for the state case to play out. A large enough penalty could effectively push a federally licensed exchange out of a state regardless of how the jurisdictional question is ultimately answered.
5. A CFTC Rule That Leaves Little Room to Exit
Federal officials also argue that Kalshi cannot simply sidestep Arkansas by blocking residents of the state. On November 5, one day after Griffin filed his suit, the CFTC issued an interpretation giving designated contract markets 30 days to remove domestic geographic restrictions or explain why they are unable to do so.
The government's position is that cutting off Arkansas customers would put exchanges in breach of that federal guidance. In other words, the state's demand and the regulator's expectations point in opposite directions, leaving the exchange caught between them. That conflict, the complaint argues, is precisely the kind of clash preemption is meant to resolve.
The interpretation also signals how the CFTC views its role. By insisting that federally regulated venues serve customers nationwide on equal terms, the agency is treating these markets as national infrastructure rather than local businesses that can be carved up state by state.
6. Eleven States and Counting
Arkansas is far from the only battleground. The federal filing lists preemption disputes in ten other states, with Arizona, Illinois, Minnesota, New York and Utah among them. The Utah matter is listed as of October 26.
So far the federal side has fared well at the preliminary stage. Courts in Arizona, Illinois and Minnesota have granted preliminary injunctions in its favor. In Illinois, a single order issued on October 2 resolved three related cases at once, including actions brought by the U.S. government and by Coinbase Financial Markets, the derivatives arm of crypto exchange Coinbase.
Preliminary injunctions are not final judgments. They indicate that a judge believes one side is likely to win and would suffer harm without temporary protection. Still, a string of such rulings gives the government and the exchanges momentum as they head into the Arkansas case, and the complaint leans on that track record.
The spread of the conflict reflects how quickly event contracts have grown. As prediction markets expanded from political and economic questions into sports, state attorneys general and gaming regulators have increasingly argued that the products are wagering in all but name and should be licensed and taxed like any sportsbook.
7. Why the Stakes Reach Beyond Arkansas
The question of who regulates prediction markets is quickly becoming one of the most consequential legal fights in U.S. financial regulation. Industry figures have argued that the issue may only be settled at the highest level.
Jessi Brooks, general counsel at venture firm Ribbit Capital, addressed the tension at an industry event in August. She said federal involvement can be valuable when states overreach, while acknowledging that states currently hold authority over sports gambling. In her view, the legal debate ought to end up before the Supreme Court.
Her comments capture the dilemma. Gambling has traditionally been policed by the states, and many of them rely on licensing fees and taxes from sportsbooks. Derivatives, by contrast, have been a federal domain for decades. Sports event contracts sit squarely on the boundary between the two, and the outcome will shape whether companies like Kalshi operate under a single national rulebook or a patchwork of state regimes.
8. What's Next for the CFTC and Prediction Markets
The next step is in the Eastern District of Arkansas, where a federal judge will decide whether to block the state's enforcement effort while the preemption question is litigated. The state court case Griffin filed on November 4 remains pending in Independence County in the meantime.
A parallel regulatory track could strengthen Washington's hand. In a proposal published in the Federal Register on October 19, the CFTC and the Securities and Exchange Commission (SEC) proposed expressly defining event contracts as swaps. The proposal covers contracts tied to sports, politics, weather and culture.
According to the complaint, a final version of that rule would give the government an independent basis for treating the contracts Arkansas is targeting as swaps, beyond its reading of the existing statute. Until then, the dispute will continue to be fought case by case, with Arkansas now joining the growing list of states where the boundaries of federal authority over prediction markets are being tested in court.