Court hands states a win in fight over who regulates prediction markets

A federal appeals court has ruled that states can regulate prediction market platforms like gambling, marking a significant shift in the legal landscape surrounding these services. On Friday, the 9th Circuit Court of Appeals issued a unanimous decision affirming that Nevada gaming regulators can oversee prediction markets offering sports-related wagers, such as those hosted by Kalshi. The ruling dealt a substantial setback to the industry, which has long sought to position itself as a federally regulated financial instrument rather than a form of gambling. The case centered on Kalshi’s attempt to block Nevada from applying its gambling laws to sports-related contracts on its platform. Kalshi had argued that these contracts fall under the Commodity Exchange Act (CEA), which regulates commodity futures trading, and therefore should be exempt from state regulation. However, the 9th Circuit rejected this claim, stating that the contracts in question are not federally regulated "swaps" but rather sports bets. The court emphasized that the nature of the contracts, wagering on the outcome of sporting events, aligns more closely with traditional gambling than with financial derivatives. This decision contrasts with an earlier ruling from the 3rd Circuit Court of Appeals in April, which held that the Commodity Futures Trading Commission (CFTC) holds exclusive authority over sports-related event contracts on Kalshi. The conflicting rulings have created a legal split, raising the likelihood that the issue will eventually reach the Supreme Court. The 9th Circuit’s opinion noted that both courts agree on a key point: federal law prohibits states from regulating trading on a federally licensed exchange, such as Kalshi. Despite this agreement, the two circuits reached opposite conclusions regarding the classification of the contracts. Kalshi, represented by spokeswoman Dani Lever, expressed disappointment with the ruling, asserting that the CFTC’s regulations do not bar sports contracts and that the agency is currently clarifying its stance. Lever stated the company plans to pursue further legal action. Meanwhile, the Nevada Gaming Control Board welcomed the decision, calling it a vindication of its position that sports betting must be properly regulated by the state. The board’s chairman, Mike Dreitzer, reiterated that the contracts in question constitute sports betting and require state oversight. The ruling has sparked immediate reactions within the gambling industry. Shares of DraftKings and Flutter Entertainment, the parent company of FanDuel, saw increases following the decision, as investors evaluated the potential impact on the prediction market sector. Legal scholars have also weighed in, with Columbia Law School professor Joshua Mitts describing the situation as a "classic circuit split." He noted that such differences in interpretation often lead to Supreme Court intervention. The broader legal battle reflects a larger conflict between state and federal authorities over the regulation of emerging financial technologies. Roughly 20 states are involved in litigation concerning prediction markets, with each arguing that their regulatory frameworks are necessary to protect consumers from gambling-related harm. Advocacy groups, including Better Markets, have praised the 9th Circuit’s decision as a victory for the rule of law and for states that have developed robust regulatory systems. As the legal landscape continues to evolve, the fate of prediction markets, and the balance of power between state and federal regulators, remains uncertain. The upcoming months will likely see increased activity from both sides, with the possibility of a Supreme Court showdown looming. For now, the 9th Circuit’s ruling stands as a clear endorsement of state authority in this contentious arena.