Prediction markets should be regulated like gambling, appeals court says

A federal appeals court ruled on Friday that states have the ability to regulate prediction markets, a win for states in an ongoing battle with federal regulators over who has authority over popular betting platforms.

The U.S. Court of Appeals for the Ninth Circuit in San Francisco denied Kalshi’s request for relief against Nevada’s gambling laws after the state sued the company in February for “unlicensed operations.”

Prediction markets, especially Kalshi, have exploded in popularity this year, attracting billions of dollars in trades on topics as diverse as elections, sports and reality TV. However, their rise to success prompted a state crackdown. Now 20 states are locked in a lawsuit over whether prediction markets are subject to their gambling laws.

The nationwide legal battle boils down to a debate over whether prediction markets offer swaps, a type of financial contract that is regulated only at the federal level.

Judge Ryan Nelson wrote in Friday’s opinion that Kalshi’s “sporting contracts were not ‘swaps’ because they were sports bets, and should be subject to state gambling laws, as a previous federal court ruled. In July, Kalshi agreed to restrict users in Nevada from betting on sports, elections and entertainment.”

But the ruling contradicted a Third Circuit ruling in Philadelphia in April that held Kalshi’s sporting events contracts were swaps under the Commodity Exchange Act, which gave them federal preemption rights over state laws.

“The Ninth Circuit has now reversed a circuit split that requires resolution by the Supreme Court,” said Zach Fulton, a spokesman for the Commodity Futures Trading Commission, or CFTC, the federal agency that oversees the industry. Mr Fulton added that the court had “got it wrong today”, accusing it of inventing a new exemption from the Commodity Exchange Act.

Aaron Ford, Nevada’s attorney general, said in a statement that his office was “proud to defend Nevada’s authority,” adding that “the Ninth Circuit rejected that argument and made clear what we’ve said all along: Sports betting doesn’t become something else just because a company calls it a ‘contract of action.’

Kalshi spokeswoman Dani Lever said the company believes CFTC regulations do not prohibit sports contracts, despite the court’s opinion. “We will be looking for another review,” she said.

Last month, 44 states signed the letter disagreeing that “sports betting is not a swap, futures, or other derivative, so the CFTC lacks statutory authority to regulate it.”

The issue of federal versus state control of prediction markets is also being heard by the Second, Fourth, Sixth, and Seventh Circuit Courts of Appeals.