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The legal landscape for prediction markets in the United States has grown increasingly complex following a significant ruling by the 6th U.S. Circuit Court of Appeals, which determined that individual states maintain the authority to regulate sports-event contracts under their respective gambling laws. In a unanimous decision issued on Friday, a three-judge panel sided with the states of Ohio and Tennessee, dealing a blow to Kalshi, a prominent prediction market platform that has sought to establish federal preemption over state-level gaming regulations. The court found that Kalshi failed to provide sufficient evidence that its sports-event contracts qualify as "swaps" under the regulatory jurisdiction of the Commodity Futures Trading Commission (CFTC), thereby leaving the door open for state-level oversight and enforcement.
This ruling marks a pivotal moment in the ongoing struggle between emerging financial technology platforms and traditional state gaming authorities. At the heart of the dispute is the classification of event contracts—financial instruments that allow users to trade on the outcome of specific events, ranging from economic indicators to sporting results. While Kalshi argues that these contracts are sophisticated financial derivatives that fall under federal commodities law, state regulators contend they are effectively a form of sports wagering, which is strictly governed by state statutes.
The Legal Conflict and the 6th Circuit Decision
The 6th Circuit’s decision centered on the interpretation of the Commodity Exchange Act (CEA) and whether Kalshi’s offerings fall within the specific definitions of financial products that the federal government intended to oversee exclusively. Ohio and Tennessee argued that Kalshi’s sports-related contracts constitute illegal gambling under their state codes. Kalshi sought an injunction to prevent these states from enforcing their laws, asserting that as a CFTC-regulated designated contract market (DCM), its products should be exempt from state-level interference through the doctrine of federal preemption.
However, the 6th Circuit panel was unconvinced. The judges ruled that Kalshi did not meet the burden of proof required to demonstrate that sports-event contracts are "swaps" as defined by federal law. By failing to secure this classification, Kalshi lost its primary defense against state regulation. The court noted that while the CFTC has broad authority over many types of contracts, that authority does not automatically strip states of their historical power to regulate gambling within their borders, especially when the products in question closely resemble traditional betting.
This ruling is particularly significant because it creates a direct conflict with other judicial findings across the country. Only a month prior, the 9th U.S. Circuit Court of Appeals reached a similar conclusion in a separate matter, reinforcing the rights of states to oversee these markets. Conversely, the 3rd U.S. Circuit Court of Appeals issued a ruling in April that favored Kalshi, allowing the company to continue its operations in New Jersey while its appeal proceeded. The 3rd Circuit had suggested that Kalshi was likely to succeed in its argument that federal law preempts state regulations, creating a "circuit split"—a scenario where different federal appeals courts disagree on the interpretation of the same law.
Chronology of the Kalshi Regulatory Struggle
The path to the 6th Circuit’s decision is part of a multi-year effort by Kalshi to expand the reach of prediction markets in the United States. The following timeline outlines the key milestones in this legal and regulatory journey:
- September 2023: The CFTC issued an order prohibiting Kalshi from listing contracts related to U.S. elections, arguing that such contracts involved "gaming" and were contrary to the public interest. This sparked a major legal battle over the definition of "gaming" under the CEA.
- April 2024: The 3rd U.S. Circuit Court of Appeals provided a temporary victory for Kalshi in a case involving New Jersey regulators. The court allowed the company to operate in the state, finding merit in the argument that federal oversight by the CFTC should take precedence over state gambling boards.
- September 2024: A U.S. District Court judge in Washington, D.C., ruled in favor of Kalshi in its separate lawsuit against the CFTC, allowing the platform to list election-related contracts. This was seen as a landmark victory for the industry, though the CFTC immediately appealed.
- October 2024: The 9th U.S. Circuit Court of Appeals ruled against the broad preemption of state laws, siding with state authorities who sought to classify certain prediction market activities as gambling.
- November 2024: A group of state lawmakers filed an amicus brief with the U.S. Supreme Court, urging the high court to intervene and clarify the jurisdictional boundaries between the CFTC and state gaming commissions.
- December 2024: The 6th U.S. Circuit Court of Appeals issued its unanimous ruling in favor of Ohio and Tennessee, further solidifying the trend of appellate courts rejecting Kalshi’s federal preemption arguments regarding sports contracts.
Understanding the Definition of "Swaps" vs. "Gambling"
The crux of the legal debate rests on technical definitions within the Commodity Exchange Act. Kalshi operates as a regulated exchange where users buy and sell "event contracts." For example, a user might buy a contract that pays out $1 if a specific team wins a game and $0 if they lose. Kalshi argues these are "binary options" or "swaps"—financial derivatives used for hedging risk.
From a financial perspective, a swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. Kalshi contends that its sports contracts allow businesses or individuals to hedge against the economic impacts of sporting events (such as a local business hedging against the loss of revenue if a local team fails to make the playoffs).
State regulators, however, view this as a semantic loophole. They argue that if the underlying event is a sporting contest, the activity is "sports wagering" regardless of the platform’s regulatory status with the CFTC. Under the 2018 Supreme Court decision in Murphy v. National Collegiate Athletic Association, which struck down the federal ban on sports betting, states were granted the authority to legalize and regulate sports gambling as they see fit. Ohio and Tennessee argue that allowing Kalshi to bypass state laws would undermine their ability to collect tax revenue, ensure consumer protections, and maintain the integrity of their local gambling markets.
Supporting Data: The Economic Stakes of the Prediction Market
The intensity of this legal battle is driven by the massive growth of the prediction market and sports betting industries. According to data from the American Gaming Association (AGA), the U.S. commercial gaming industry generated a record $66.5 billion in revenue in 2023. Sports betting alone accounted for nearly $11 billion of that total, a 44.5% increase from the previous year.
States like Ohio have seen significant windfalls from legalized sports betting. In its first year of operation (2023), Ohio collected over $900 million in sports betting revenue, resulting in substantial tax contributions to the state’s education and veterans’ funds. For state lawmakers, the emergence of prediction markets represents a potential "gray market" that could siphon off betting volume without adhering to the stringent tax and licensing requirements imposed on traditional sportsbooks like DraftKings or FanDuel.
Kalshi, while smaller than the aggregate sports betting market, has seen its volume surge. In the lead-up to the 2024 U.S. presidential election, prediction markets globally saw billions of dollars in trading volume. Platforms like Polymarket (which operates outside the U.S.) and Kalshi have demonstrated a high demand for event-based trading. Kalshi’s push into sports-event contracts is an attempt to capture a slice of the multi-billion dollar sports wagering pie by marketing its products as "investments" rather than "bets."
Official Responses and Industry Reactions
The 6th Circuit ruling has drawn reactions from legal experts and state officials who see the decision as a win for state sovereignty. In a statement following the ruling, representatives for the Ohio Attorney General’s office emphasized that the decision protects the state’s "long-standing authority to oversee gaming activities and ensure that all entities operating within the state follow the same set of rules."
Tennessee officials echoed these sentiments, noting that the ruling prevents a "federal end-run" around state consumer protection laws. They argued that if Kalshi were allowed to operate without state oversight, it would set a dangerous precedent where any gambling activity could be rebranded as a "financial derivative" to avoid local regulation.
Kalshi has remained firm in its position that a unified federal framework is necessary for the growth of the industry. In previous filings, the company has argued that a "patchwork of 50 different state regulations" would make it impossible for a national exchange to function efficiently. While the company has not yet issued a formal response to the 6th Circuit’s specific ruling, legal analysts expect Kalshi to seek a rehearing or petition the Supreme Court to resolve the growing circuit split.
Broader Impact and Implications for the Supreme Court
The ruling by the 6th Circuit, when contrasted with the 3rd Circuit’s earlier decision, makes a Supreme Court review increasingly likely. The U.S. judicial system generally seeks to avoid situations where federal law is applied differently in different parts of the country. A "circuit split" on a matter of federal preemption is one of the primary triggers for the Supreme Court to grant certiorari (a request to hear a case).
If the Supreme Court takes up the case, the implications will extend far beyond Kalshi. The final decision could redefine the boundaries of the CFTC’s power and determine the future of "FinTech" innovation in the U.S. A ruling in favor of the states could force prediction markets to obtain individual licenses in every state where they wish to offer sports-related contracts, a move that would significantly increase operational costs and regulatory hurdles.
Furthermore, the outcome will impact the broader decentralized finance (DeFi) and cryptocurrency sectors. Many crypto-based prediction markets operate on blockchain technology, often without centralized intermediaries. If the courts rule that these contracts are inherently gambling, it will provide a clearer roadmap for state regulators to crack down on offshore or decentralized platforms that currently serve U.S. users.
For now, the 6th Circuit’s decision stands as a major roadblock for Kalshi in Ohio and Tennessee. It reinforces the reality that while federal agencies like the CFTC may grant a platform the right to operate as an exchange, that federal "blessing" does not serve as a universal shield against the localized laws that have governed American gambling for decades. As the case moves toward a potential showdown in the nation’s highest court, the industry remains in a state of regulatory limbo, waiting for a definitive answer on whether prediction markets are the future of finance or simply a new way to bet on the game.
