Prediction markets like Kalshi have argued that because the Commodity Futures Trading Commission regulates their exchanges, state gambling regulators can’t touch their sports contracts. A federal appeals court rejected that argument on Friday, and it did so twice over.
A unanimous three-judge panel of the Sixth Circuit ruled that Kalshi had not shown its sports contracts meet the legal definition of a “swap,” the category of derivatives over which the CFTC has exclusive jurisdiction. The judges added that even if the contracts were swaps, the Commodity Exchange Act does not preempt Ohio’s or Tennessee’s gambling laws.
The court upheld an Ohio judge’s refusal to block the state’s regulators and vacated an injunction that had barred Tennessee’s from acting against Kalshi.
Hedging or Betting
Kalshi argued its contracts qualify because they turn on events “associated with a potential financial, economic, or commercial consequence.” The court read that to mean events tied to a financial consequence by their nature, and said sports results aren’t. An industry group backing Kalshi pointed to a Spanish soccer club hedging against relegation and a bar hedging a free-drinks promotion on the Knicks. The judges called those “isolated examples” that were “a far cry from establishing that sports-event contracts are inherently associated with a financial consequence” or commonly used to hedge risk.
The laws’ effects on exchanges are limited, the court wrote in its opinion, and felt only because exchanges like Kalshi chose to list contracts that “are virtually indistinguishable from” sports bets, a phrase it borrowed from a dissent in the Third Circuit’s case.
A Deepening Split
The Sixth Circuit is now the second appeals court to side with the states. The Ninth Circuit ruled for Nevada on Aug. 28, while the Third Circuit sided with Kalshi against New Jersey in April. A Fourth Circuit appeal over Maryland is still pending, the opinion notes.
New Jersey has already petitioned the Supreme Court to take up the question.
Kalshi disagreed with the decision. Spokesperson Dani Lever said in a statement reported by CNBC that “the ruling shows exactly why a state-by-state patchwork doesn’t work.”
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