The Commodity Futures Trading Commission on Tuesday ordered prediction-market operator Kalshi to continue operating after the company declared a market emergency stemming from New York's effort to shut down its event-contract business.

The CFTC said Kalshi notified the agency of the emergency after New York Attorney General Letitia James sued the exchange last month, seeking a temporary restraining order that would bar Kalshi from offering event contracts nationwide. New York is also seeking more than $36 billion in damages.

"Congress did not intend for derivatives exchanges to be regulated under a patchwork of state gaming laws," CFTC Chairman Michael S. Selig said Tuesday. He said Kalshi operates a financial exchange that offers financial instruments across state lines and that New York has no authority to regulate those interstate markets.

The emergency order escalates a fight between the federal derivatives regulator and states over whether prediction markets should be treated as financial exchanges under federal oversight or as gambling operations subject to state laws.

Kalshi has argued that its event contracts are financial products regulated by the CFTC and that states don't have authority to regulate its federally licensed exchange. States, including New York, have argued that contracts tied to sporting events amount to unlicensed gambling and should be subject to state gambling laws.

New York sued Kalshi on July 31 after negotiations between the company and the state broke down. The state alleged that Kalshi was operating an illegal gambling operation without a New York gaming license and sought to force the company to forfeit its gains. The state's potential claims could reach $36 billion, according to the lawsuit.

The CFTC said Tuesday that the Commodity Exchange Act requires the agency to provide a uniform national market for derivatives and safeguard the resilience and orderly functioning of those markets.

Major disruptions to federally regulated derivatives markets, it said, could undermine confidence in those markets. Its emergency action was intended to ensure continued orderliness while the legal disputes proceed.

The CFTC's action comes as the agency and states have increasingly clashed over prediction markets. The commission said it has sued Arizona, Connecticut, Illinois, Kentucky, Minnesota, New Mexico, New York, Rhode Island and Wisconsin to protect its federal jurisdiction over derivatives exchanges.

Kalshi has rapidly expanded its prediction markets, allowing users to trade contracts tied to outcomes ranging from sports games to political and economic events. The company has promoted its availability nationwide, while state officials have challenged its ability to offer sports-related contracts without state gambling licenses.