A federal appeals court has handed the Commodity Futures Trading Commission (CFTC) a significant victory in its escalating jurisdictional battle with state regulators, ruling for the first time that states cannot apply gambling laws to certain prediction market activity conducted on federally regulated exchanges.
In a 2–1 decision, the U.S. Court of Appeals for the Third Circuit held that New Jersey cannot enforce its sports betting laws against Kalshi, a CFTC-registered “Designated Contract Market” (DCM), because the trades in question qualify as “swaps” under federal law.
The ruling affirms a lower court injunction blocking the New Jersey Division of Gaming Enforcement from acting against Kalshi’s sports-related event contracts. Writing for the majority, Judge David Porter concluded that the Commodity Exchange Act (CEA) grants the CFTC “exclusive jurisdiction” over swaps traded on federally registered exchanges, preempting state laws that would otherwise regulate the same activity.
At the center of the dispute is how to characterize prediction market contracts that allow users to bet on real-world events, including sports outcomes. New Jersey argued that these offerings are functionally indistinguishable from traditional sports betting and therefore subject to state licensing requirements and constitutional restrictions, including a prohibition on betting on collegiate sports.
The court rejected that framing, adopting a narrower interpretation focused on the federal regulatory structure. Because Kalshi’s contracts are listed and traded on a CFTC-regulated exchange, the majority found they fall squarely within the statutory definition of swaps—financial instruments whose value depends on the occurrence of an event.
That classification proved decisive. The Dodd-Frank Act expanded the CFTC’s authority over swaps and explicitly granted it exclusive jurisdiction over such transactions on DCMs, even where those contracts may resemble gambling products. The court emphasized that Congress also gave the CFTC discretion to prohibit certain categories of event contracts, including those tied to gaming, but noted that the agency has not exercised that authority with respect to sports-related contracts.
Read more: Feds Target Three States With Lawsuits Over Prediction Market Regulation
The decision marks a critical inflection point in a broader and increasingly contentious struggle between state and federal regulators over control of prediction markets. Just days before the ruling, the Department of Justice and the CFTC jointly filed lawsuits against Illinois, Arizona and Connecticut, accusing those states of unlawfully attempting to regulate federally authorized event-contract markets.
Those lawsuits argue that state cease-and-desist actions against platforms such as Kalshi, Polymarket and Crypto.com violate federal law by encroaching on the CFTC’s exclusive jurisdiction. The agency has framed the dispute as a defense of regulatory uniformity, warning that a patchwork of state rules would undermine market integrity and increase risks of fraud and manipulation.
“The CFTC will continue to safeguard its exclusive regulatory authority over these markets and defend market participants against overzealous state regulators,” Chairman Michael Selig said in announcing the litigation.
States, however, have pushed back aggressively, arguing that prediction markets—particularly those tied to sports—are simply gambling products repackaged to avoid state oversight and taxation. That view was forcefully articulated in a dissent in the New Jersey case by Circuit Judge Jane Roth, who warned that the majority’s reasoning elevates form over substance.
Roth described Kalshi’s offerings as “virtually indistinguishable” from those available on mainstream sportsbooks, pointing to wagers on game outcomes, point spreads and player performance. She accused the company of engaging in a “performative sleight” that rebrands gambling as derivatives trading, arguing that such activity should remain subject to state regulation.
More broadly, per Ars Technica, Roth cautioned that the majority’s expansive reading of “swaps” could produce absurd results, potentially sweeping in nearly any form of wagering—even informal bets—under federal commodities law. Such an interpretation, she argued, risks undermining the balance Congress intended between federal and state authority.
Despite the appellate ruling, the legal landscape remains unsettled. Courts across multiple jurisdictions are grappling with similar questions, and rulings have been mixed, with some states, such as Nevada, securing injunctions against prediction market operators while others have failed.
Meanwhile, pressure is building in Congress to clarify the regulatory framework. Bipartisan legislation introduced in March would bar CFTC-regulated platforms from offering contracts that resemble sports betting, according to Ars, reflecting growing concern that federal oversight may be enabling an end-run around state gambling laws.
For now, however, the Third Circuit’s decision strengthens the CFTC’s hand and signals that, at least in some jurisdictions, federal commodities law may take precedence over state gambling regimes in governing the fast-evolving prediction market sector.
