DEX in the City: How Kalshi’s Rough Week Became a Federal Fight for Prediction Markets

**Vy Le** (0:00)
But the first thought that came to my mind when I saw this finally happen is, is this game over for everyone else trying to tokenize public equity? Because if you're DTCC, you're not just another company issuing tokenized stocks, you are the infrastructure.

**Katherine Kirkpatrick Bos** (0:17)
Hi all, and welcome to DEX in the City, where the wallets are cold and the takes are hot. Before we get going, remember, we're lawyers, but we're not your lawyers. Nothing you hear on DEX in the City is legal or financial advice, it doesn't create an attorney-client relationship. For the fine print, as always, check unchainedcrypto.com.
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**Katherine Kirkpatrick Bos** (1:00)
And we're back. So first we have Jessi, Web3 prosecutor turned Web3 protector at Ribbit Capital, and Vy from the SEC to Web3. And I'm your host, KK, Katherine, Fluent and TradFi and Conversion in Deep Tech.
So today, we have not talked about prediction markets in a minute, which is crazy because frankly, there's so much news happening about prediction markets every second of every day that we've specifically tried to avoid talking about them every week because some of this starts to feel legally and functionally repetitive, even though it's hitting the headlines. Well, we've gotten to the point now where today it is unavoidable to talk about some of the prediction markets and in particular, Kalshi has had a rough week, you guys.
There's a bunch to unpack here, but I'll dig in with probably the most important piece of this. So I'll refresh everyone. Basically, prediction markets are suing states, states are suing prediction markets, the CFTC is suing states. It's a mess, okay?

**Jessi Brooks** (2:11)
It's a love triangle.

**Katherine Kirkpatrick Bos** (2:13)
It is a dysfunctional love triangle, all over a slew of nerdy legal interpretation that will impact a little bit. But back in March, the state of Michigan sued Kalshi, saying that Kalshi's sport events contracts are actually betting, so Kalshi needs a Michigan gaming license. This goes back to something we've covered on the show before, but basically it's an interpretation of whether gaming and these sports event contracts in particular, listed on federally CFTC registered designated contract markets, which are exchanges for derivatives, are actually gaming or gambling or not.
This is the crux of the issue. Federal jurisdiction, CFTC jurisdiction versus state jurisdiction. Well, Michigan sued Kalshi. This litigation is proceeding. I think anyone who is a lawyer will understand that litigation takes months at a minimum, if not years. But post their actual lawsuit, they successfully sought and got something called a temporary restraining order or a TRO.
That happens a lot in litigation where it's like the plaintiff says, hey, you're doing something bad, you're doing something damaging. But while the lawsuit is proceeding to figure out if you're doing the bad thing or not, I'm asserting that you're doing this bad thing, so I'm going to seek a TRO to stop you from doing the alleged bad or violative conduct.

**Jessi Brooks** (3:43)
Let me just jump in there and say it does happen a lot, but it's actually a super high burden. The person who's asking for it has to show a high likelihood, I don't want to get into the legalese of it, a high likelihood of success. The judge has to think it is worth it enough to put a stop to this based on allegations alone because it seems like they're going to be successful, so it is a high burden.

**Katherine Kirkpatrick Bos** (4:09)
Absolutely, which is why you don't see it all that often. Now, other states have also similarly sought TROs against prediction markets. What has happened for the most part is these prediction markets have just moved to geoblock the state. Says, okay, we're no longer going to deal with Michigan people while this litigation is proceeding. But what is somewhat unusual is not only did the judge grant the TRO sought by Michigan, but the court also ordered Kalshi to liquidate the Michigan pending sports event contracts. The other orders, the other TROs have basically just said, Kalshi, Holly Market, Prediction Market, just stop offering these markets, and then allowed people to liquidate on their own. Kalshi said, okay, we got a state order. We have to follow the states.
We're going to go ahead and geofence Michigan, and then they moved to cancel the pending sports trades in Michigan by individuals in Michigan. They fully complied with the judge's order, and it was apparently a pretty small volume of trades, so fairly easy to do that. Here's where it gets fun. The CFTC then went to Kalshi and said, wait, do not cancel the trades. They actually did this by invoking emergency powers that they have, that haven't been used since 1980 I think before any of us were even born, when those emergency powers were last used in Jimmy Carter's grain embargo against the Soviet Union during the Cold War, I really needed to refresh myself on that.