Kalshi Says It's a Prediction Market. The 9th Circuit Says It's Gambling.

The 9th Circuit Court of Appeals ruled last Friday that Kalshi’s sports-related event contracts fall under the Commodity Exchange Act (CEA) and thus are classified as gambling, thereby allowing Nevada to enforce its gambling laws against the prediction market platform. The decision affirmed a prior ruling by a district court and effectively bars Kalshi from offering such contracts in Nevada. The ruling could also enable other states within the 9th Circuit, including Arizona, to impose their own regulations on prediction markets. The case hinged on whether Kalshi’s sports event contracts qualify as "swaps" under the CEA, which would exempt them from state gambling laws. The court rejected a broad interpretation of the term "swap," instead adopting a narrower textual reading aligned with the CEA’s statutory scheme. According to the court, the CEA grants exclusive jurisdiction over transactions involving swaps traded on designated contract markets, which include platforms like Kalshi. However, the court emphasized that a broad reading of the definition would lack a limiting principle and conflict with the major-questions doctrine, requiring congressional authorization for significant regulatory actions. The court noted that Kalshi’s marketing strategies, which included the word "bet" and implied that its platform served as a loophole for sports betting, undermined its argument that its contracts were distinct from traditional sports betting. Since sports betting is considered a quintessential form of gambling, the court concluded that a broad interpretation would blur the lines between prediction market contracts and conventional betting, leaving no clear distinction. In response, a spokesperson for the Commodity Futures Trading Commission (CFTC) stated that the 9th Circuit misread both the statute and the agency’s regulations regarding swaps and the Special Rule. The CFTC’s position is that the Special Rule allows it to prohibit certain event contracts if they are deemed harmful to the public interest. However, the court’s ruling suggests that the CFTC must provide clearer guidance before such contracts can be legally classified under the CEA. Judge Kenneth K. Lee, in a concurrence, suggested that the CFTC’s proposed amendment to the Special Rule, published in June, might influence future rulings. He argued that the amendment establishes a procedural framework for determining whether specific event contracts should be considered swaps under the CEA. While the current ruling prevents Kalshi from operating in Nevada, Lee’s opinion leaves open the possibility that some unique sports events could still qualify as swaps if they meet the statutory criteria. Meanwhile, Kalshi faces additional scrutiny beyond the legal battle with Nevada. The platform recently suspended a Republican House candidate, Laurie Buckhout, for betting on her own race and imposed a fine of nearly $2,600. Buckhout described the incident as a “dumb mistake,” highlighting the personal consequences of engaging in prediction market activities. On a separate front, Kalshi is expanding its reach through partnerships with global brokerage firms. The platform is collaborating with Alpaca, a brokerage that serves 14 million accounts across more than 300 financial institutions worldwide. This partnership aims to introduce prediction markets to a broader international audience, potentially opening new markets outside the scope of the current legal challenges. As the legal landscape continues to evolve, the implications of the 9th Circuit’s ruling extend beyond Kalshi. Other prediction market platforms, such as Crypto.com and Robinhood, may face similar restrictions in Nevada, while states like Arizona could take steps to regulate these markets independently. The ongoing debate over how to classify prediction markets under existing financial regulations underscores the complex interplay between innovation and traditional regulatory frameworks.