DEX in the City: The CFTC's Kalshi Rescue and the Limits of Emergency Power

The CFTC invoked Section 8A9, its emergency authority, to direct Kalshi as a registered exchange to maintain orderly trading under Commodity Exchange Act core principles despite ongoing state litigation. This authority has been used only approximately six times in the CFTC's history, and every prior invocation responded to a large market event perceived as a potential catastrophe, not a regulatory dispute. Jesse raised concern that using emergency orders in a non-emergency context normalizes their use and creates a slippery slope applicable to unrelated policy areas, while Jacob viewed the action as inevitable once Kalshi made clear to the CFTC that it needed the intervention.

The underlying state-federal conflict has been ongoing in New York since approximately October 2025, with Attorney General Letitia James and multiple other state attorneys general asserting authority over prediction markets, and the New York City Council adding a further layer of scrutiny. States argue Kalshi contracts are bets, while Kalshi and other federally regulated exchanges argue they operate under a distinct framework Congress granted to the CFTC. Jacob argued that if states can determine what contracts are allowed to be traded, they recapture authority Congress already delegated to the CFTC, and that users with open positions on Kalshi markets, potentially for hedging purposes, are citizens of the very states pursuing restrictions in the name of consumer protection.

Jacob and Jesse both predicted the dispute will likely reach the Supreme Court. Jesse argued the legal question of CFTC authority over sports gambling prediction markets in particular should be resolved by the Supreme Court rather than by agency emergency action, and noted an inconsistency in crypto broadly supporting the overturning of Chevron on grounds of limiting agency authority while simultaneously supporting agency emergency action here. Jesse also noted that sports gambling prediction markets require separate analysis because states currently hold authority over sports gambling through state commissions. Jane drew a meaningful regulatory distinction between a sports game outcome and a tangible hedging transaction, citing the example of Castle Labs working with Kalshi to help a California goat herder hedge against potential non-renewal of a tax break for the goat herding industry, a story that received coverage in Matt Levine's Bloomberg column, CNBC, and Bloomberg.

The SEC canceled a scheduled release of a proposed rulemaking document reported to be approximately 400 pages covering crypto market structure rules, citing a scheduling conflict that Jacob indicated is likely not the real reason. One reported explanation is that White House officials did not want the Clarity Act overshadowed, and another is that traditional securities industry members opposed rules that would facilitate tokenization of securities. Separately, Clarity Act passage odds were described as plummeting, while the Genius Act has already passed with more guidance and rulemaking expected to follow.

Anthropic announced that Claude will embed watermarks worldwide due to the EU AI Act requirement that AI-generated content be marked as such, with Anthropic unable to split the product by region. The watermarking works by changing word selection based on a secret key rather than a random coin flip, allowing statistical proof of authorship, though decoders already exist on GitHub. Jacob argued the requirement could constitute compelled speech because it changes Claude output without the user's knowledge or control, and raised the question of whether the watermark persists if a user edits AI-drafted content. Speakers broadly criticized the EU approach as over-inclusive, noting that even minimal AI assistance could trigger the watermark, that bad actors are unlikely to use compliant AI models, and that the outcome may push more companies out of the EU market rather than solving the problems it targets.

The US president signed a memorandum allowing vetted private companies to run offensive cyber operations against foreign criminal groups under DOJ and DHS supervision. Jane described the memorandum as formalizing an existing relationship tracing back to an executive order focused on combating cyber crime, fraud, and predatory cyber scams, with a National Coordination Center established in 2025 to oversee the program. Participating companies must comply with all applicable laws including international law and must obtain approval from the DOJ or DHS before taking action, which is expected to slow response times to active cyber intrusions. The Computer Fraud and Abuse Act remains fully in force for all participants. The overall directional framing was described as positive, but speakers noted actual impact will depend entirely on implementation details, with a 60-day window to establish processes and annual assessments of adherence.