A U.S. appeals court has ruled that sports-related prediction market contracts are gambling, not federally regulated ‘swaps,’ dealing a significant blow to platforms like Kalshi and Crypto.com. This decision by the 9th U.S. Circuit Court directly contradicts a prior ruling from the 3rd Circuit, creating a ‘circuit split’ that legal experts say will force the Supreme Court to provide a definitive answer on the regulatory future of prediction markets.
In a pivotal decision impacting the future of the prediction market industry, the 9th U.S. Circuit Court of Appeals has ruled against platforms like Kalshi and Crypto.com, determining that sports-related event contracts are a form of gambling, not federally regulated 'swaps.' This ruling directly contradicts a previous decision by the 3rd U.S. Circuit Court of Appeals, creating a significant legal 'circuit split' that experts anticipate will escalate to the Supreme Court for final resolution.
The 9th Circuit's judgment denied requests for injunctive relief from Kalshi, Crypto.com, and Robinhood, which had sought to prevent the Nevada Gaming Control Board from halting their operations. Nevada, alongside 43 other states, maintains that these sports-centric offerings fall squarely under sports betting regulations, outside the purview of federal financial instrument oversight.
At the heart of the legal battle is the definition of event contracts. The prediction market platforms, supported by their federal regulator, the Commodity Futures Trading Commission (CFTC), contend that all event contracts, irrespective of their underlying subject matter, are 'swaps.' As derivatives, swaps are exclusively regulated by the CFTC, an authority the agency has vigorously defended, even suing nine states to assert its sole jurisdiction.
However, the 9th Circuit firmly rejected this classification in its opinion against Kalshi, stating, "The sports event contracts were not 'swaps' because they were sports bets." This pronouncement marks a notable victory for the Nevada Attorney General's office.
“Kalshi sought to sidestep Nevada's gaming laws by claiming its sports wagering products were federally regulated financial instruments beyond the reach of state regulators,” commented Alcinia Whiters, deputy communications director for the Nevada Attorney General’s office. “The Ninth Circuit rejected that argument and made clear what we have maintained from the beginning: sports betting does not become something else simply because a company calls it an 'event contract' ... Our office is proud to have defended Nevada's authority.”
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The CFTC, in a statement to CNBC, acknowledged the court's understanding of its exclusive regulatory power over swaps but contested the ruling that sports-related event contracts do not fit this definition. A spokesperson highlighted that a derivative structured as a swap remains such "regardless of the underlying subject matter – the only exceptions in statute are onions and movie box office receipts." The CFTC asserted that the 9th Circuit "erred today when it invented a new and atextual exception to the CEA," referring to the Commodity Exchange Act.
Legal scholars, including Joshua Mitts, a professor at Columbia Law School, have consistently predicted that this contentious issue of state versus federal authority over sports-related event contracts would eventually reach the nation's highest court. "This is a classic circuit split," Mitts explained, noting that such conflicting interpretations by federal appeals courts are precisely the type of legal controversies the Supreme Court resolves.
Jovy Dedaj, Kalshi’s head of litigation, conveyed on X (formerly Twitter) that while both the 9th and 3rd Circuits agreed federal law prohibits states from regulating federally licensed exchanges, the 9th Circuit overstepped by unilaterally deeming sports-related event contracts outside the definition of swaps. Dedaj argued that Congress, through the Commodity Exchange Act, empowered the CFTC to determine if event contracts related to 'gaming' are contrary to public interest, not individual states.
Robinhood has confirmed its plans to appeal the decision, stating, "Every eligible customer should have access to these markets, which are federally regulated by the CFTC and offered through our CFTC-registered Futures Commission Merchant." Crypto.com has not yet issued a public response.
In a ripple effect on the stock market, shares of online sportsbooks DraftKings and Flutter Entertainment (the parent company of FanDuel) experienced significant rallies, jumping 7% and over 6% respectively. These companies had faced investor anxiety over potential disruption from prediction markets, and the ruling offered a temporary boost as they also explore launching their own prediction market exchanges.
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Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.
