A federal appeals court has ruled that individual states retain the authority to regulate sports-related offerings on prediction market platforms, delivering a significant legal setback to the industry as it faces increasing scrutiny from state officials.
In a unanimous decision issued Friday, the 6th U.S. Circuit Court of Appeals determined that Ohio and Tennessee are permitted to enforce their state gambling statutes against Kalshi’s sports-event contracts. The ruling marks the second time a federal appellate court has sided with states in the ongoing jurisdictional battle over who controls the regulation of these digital markets.
“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,” the panel wrote in its opinion.
Prediction market operators, including Kalshi, have long argued that all event-based contracts constitute financial derivatives known as swaps, which fall under the exclusive regulatory purview of the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act. Conversely, states contend that these sports-related contracts are equivalent to traditional sports bets and should therefore be governed by local gambling laws.
This fundamental disagreement has triggered a wave of litigation nationwide. States have filed lawsuits alleging that platforms are operating illegal gambling operations, while the exchanges have counter-sued to prevent states from enforcing local regulations on what they describe as federally regulated financial exchanges.
The CFTC has also entered the fray, suing nine states to defend its position that it holds sole authority over event contracts. However, the 6th Circuit rejected the agency’s preemption argument. “Even assuming that Kalshi’s sports-event contracts are swaps, we alternatively hold that the CEA neither expressly nor impliedly preempts Ohio’s or Tennessee’s gambling laws,” the court stated.
The decision overturns a previous ruling by a Tennessee federal district court that had favored Kalshi, while simultaneously affirming a lower court decision in Ohio that supported the state’s position. Neither Kalshi nor the CFTC immediately responded to requests for comment following the announcement.
The ruling aligns with a decision by the 9th U.S. Circuit Court of Appeals last month, which similarly upheld Nevada’s right to regulate sports-related event contracts, classifying them as sports bets rather than swaps. With two federal appeals courts now siding with state regulators, legal experts widely anticipate that the Supreme Court will eventually be asked to resolve the question of federal versus state authority over prediction markets.
Wait, so the CFTC can’t protect them even if they are swaps? That interpretation seems really broad for states.
Finally, accountability. These platforms have been flying under the radar for too long.