A federal appeals court has dealt prediction markets another setback, ruling that sports event contracts offered by Kalshi are not federally regulated “swaps” and that states remain free to enforce their gambling laws against the platform.
The unanimous U.S. Court of Appeals for the Sixth Circuit ruling Friday (Sept. 25) sided with Ohio and Tennessee, rejecting Kalshi’s argument that its status as a Commodity Futures Trading Commission-regulated exchange shields its event contracts from state gambling regulation. The decision makes the Sixth Circuit the second federal appeals court to side with states in the rapidly developing jurisdictional fight over prediction markets.
The ruling strikes at both pillars of Kalshi’s legal strategy. The court found that Kalshi’s sports contracts do not meet the Commodity Exchange Act’s definition of a swap and therefore do not fall within the CFTC’s exclusive jurisdiction. It also held that, even if the contracts qualified as swaps, the CEA does not expressly or implicitly preempt Ohio and Tennessee gambling laws.
“We hold that Kalshi has not shown that its sports-event contracts satisfy the statutory definition of a ‘swap’ so as to fall within the scope of the CFTC’s ‘exclusive jurisdiction,’” Judge Julia Smith Gibbons wrote.
The distinction turns partly on the CEA’s definition of swaps as contracts dependent on events “associated with a potential financial, economic, or commercial consequence.” The Sixth Circuit interpreted that language as requiring an event to be intrinsically associated with a financial consequence, such as a change in interest rates, where hedging financial risk or establishing pricing information would have an identifiable economic purpose.
Sports results do not satisfy that test merely because they can produce downstream economic effects, the court concluded. Unlike contracts tied to interest rates or stock prices, Kalshi’s sports contracts have only indirect economic consequences, assuming they produce economic consequences at all.
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According to Ars Technica, that interpretation could significantly narrow prediction markets’ ability to characterize sports wagering as federally regulated derivatives rather than gambling subject to state oversight.
The Sixth Circuit separately rejected Kalshi’s broader preemption argument. Although Congress expressly displaced state law in some portions of the CEA, it did not do so for state gambling regulation. The statute also authorizes the CFTC to prohibit designated contract markets from listing event contracts involving activities unlawful under federal or state law, language the court said implies that some contracts may legally be offered in one state but prohibited in another.
The court distinguished state laws governing the licensing and operation of federally regulated exchanges, which can be preempted, from generally applicable gambling laws, per Ars Technica. Ohio and Tennessee are not attempting to regulate Kalshi simply because it operates a designated contract market, the judges said. Their laws apply because Kalshi chose to offer contracts “virtually indistinguishable from” sports bets.
The decision deepens an appellate split that increasingly appears headed toward the Supreme Court.
Three federal circuit courts have now addressed whether states can regulate Kalshi’s sports contracts. The Third Circuit sided with Kalshi in litigation involving New Jersey, while the Ninth Circuit ruled for Nevada. The Sixth Circuit has now joined the Ninth Circuit on the states’ side, leaving states with two appellate victories to Kalshi’s one. A Fourth Circuit case involving Maryland remains pending, while New Jersey has asked the Supreme Court to resolve the conflict.
The CFTC has backed Kalshi’s position, arguing in an amicus brief that the contracts fall within its exclusive jurisdiction, and has separately sued nine states over efforts to regulate prediction markets.
Kalshi said it disagreed with the Sixth Circuit and does not believe the ruling will “survive further review,” according to Ars Technica. The company argued that the growing circuit split demonstrates why prediction markets need a national regulatory framework rather than rules that change across state lines.
For prediction markets, the ruling raises the stakes of the federal-state battle significantly, Reuters reported. Unless the Supreme Court or Congress establishes a nationwide rule, platforms offering sports-event contracts face an increasingly fragmented regulatory landscape in which their products may be federally permissible yet still subject to state gambling restrictions.
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