Key Points

• The 9th U.S. Circuit Court of Appeals ruled that sports-related event contracts are not federal "swaps," a blow to prediction market platforms.
• Platforms and the CFTC argue these contracts are federal derivatives, while states claim they are illegal gambling.
• This ruling conflicts with a previous decision by the 3rd U.S. Circuit Court of Appeals, setting the stage for a likely Supreme Court battle.

Prediction market platforms suffered a significant legal setback on Friday as the 9th U.S. Circuit Court of Appeals ruled against their assertion that sports-related event contracts qualify as federal "swaps." This decision directly challenges the platforms' ability to operate free from state gambling regulations and sets up a potential high-stakes confrontation at the Supreme Court.

The court rejected appeals from prominent platforms like Kalshi and Crypto.com, as well as Robinhood, which sought to prevent states, particularly Nevada, from halting their operations. Nevada had argued that these offerings constituted gambling, falling outside the purview of federal financial regulation.

The core of the dispute lies in how these event contracts are classified. While the platforms and the Commodity Futures Trading Commission (CFTC) contend that all event contracts are a form of derivative regulated at the federal level, numerous states, including Nevada, assert they are essentially sports bets. The 9th Circuit's ruling aligns with the states' perspective, stating that "The sports event contracts were not 'swaps' because they were sports bets."

This ruling directly contradicts a decision made in April by the 3rd U.S. Circuit Court of Appeals, which had sided with the CFTC, deeming all event contracts as swaps under federal jurisdiction. This stark divergence between two federal appellate courts creates a circuit split, a scenario that significantly increases the likelihood of the Supreme Court intervening to provide a definitive ruling.

The Nevada Attorney General's office hailed the decision as a major victory. Deputy Communications Director Alcinia Whiters stated, "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. 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'."

A spokesperson for the CFTC expressed disagreement with the 9th Circuit's reasoning, stating, "A derivative contract structured as a swap is a swap regardless of the underlying subject matter — the only exceptions in statute are onions and movie box office receipts." The spokesperson argued that the court had "invented a new and atextual exception to the CEA" (Commodity Exchange Act), which grants the CFTC authority over such contracts.

Legal experts anticipate that this clash over regulatory authority will inevitably reach the Supreme Court. Joshua Mitts, a professor at Columbia Law School, described the situation as a "classic circuit split," emphasizing that such disagreements are precisely what the Supreme Court is designed to resolve.

Kalshi's head of litigation, Jovy Dedaj, acknowledged that federal law prevents states from regulating federally licensed exchanges but argued the 9th Circuit erred in classifying sports-related event contracts as non-swaps. He pointed to the Commodity Exchange Act, which he believes grants the CFTC, not states, the power to determine if gaming-related contracts are against public interest.

Robinhood plans to appeal the decision, asserting that "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 did not immediately respond to a request for comment.

The ruling had a positive impact on shares of online sportsbooks. DraftKings saw a 7% increase, while Flutter Entertainment, the parent company of FanDuel, rose more than 6%. Both companies have faced pressure from the rise of prediction markets and have been actively developing their own similar platforms.