States Pull Ahead in Prediction Market Fight
Federal courts are increasingly backing state gaming laws over prediction markets as the fight heads toward the Supreme Court.
The sands have shifted sharply below prediction markets in recent weeks as wins continue to arrive for states challenging their sports markets.
The appellate court scoreboard now reads 2-1 against Kalshi’s argument that federal commodities law overrides state gambling laws, with the latest blow coming from the Sixth Circuit as it stripped away Kalshi’s preliminary injunction against Tennessee.
An injunction is essentially a temporary court order that pauses something while a broader lawsuit plays out. In this case, it halted Tennessee’s enforcement of its gambling laws against Kalshi while the two sides fought over who actually had authority here.
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Now, the court has weighed in, holding against Kalshi on both of the things its national sports-market model depends on:
That sports contracts qualify as federally regulated “swaps,” with the court holding that Kalshi’s sports-event contracts do not qualify as swaps under the CEA
That federal commodities law prevents states from applying their own gambling laws to them.
Still, the Sixth Circuit now joins the Ninth in ruling against federal CFTC regulation being the end-all, be-all when it comes to sports markets. The Third Circuit remains the lone appellate court on Kalshi’s side, ruling earlier this year that the company was likely to prove its sports contracts were swaps and that federal law blocked New Jersey from enforcing its gambling rules against them.
And another Ninth Circuit ruling earlier this month made the jurisdictional mess even messier.
In a separate case, two California tribes, Blue Lake Rancheria and Chicken Ranch Rancheria, sued both Kalshi and Robinhood, arguing that Kalshi’s sports contracts were unauthorized gaming on tribal lands. The Ninth Circuit found the tribes were likely to succeed under the Indian Gaming Regulatory Act (IGRA), the federal law governing gaming on tribal lands, which gives tribes authority over qualifying gaming there.
So now, instead of just state law running into federal commodities law, you have the collision of two federal systems where one does not automatically erase the other.
Meanwhile, the CFTC continues arguing almost exactly the opposite when it comes to the states. It has repeatedly said Congress gave it exclusive authority over federally regulated prediction markets, going so far as to sue states and file briefs supporting Kalshi when local regulators try to apply their gambling laws.
But, as we covered in our last update, the CFTC is also working to demonstrate that federal oversight actually means oversight, keeping these platforms “on the rails” as they scale.
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The latest nudge came last week through new guidance around “mention markets”, markets on whether someone will say a certain word, attend an event, or interact with another person. The CFTC warned that these markets can be particularly easy to manipulate and laid out only limited circumstances where they can be listed.
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So the agency’s position remains: states, stay out; we’re the regulator. But we are, increasingly, regulating.
Further, we got our latest taste of why prediction markets are fighting so hard over that first point last week, when New York formally sued Polymarket for allegedly offering unlicensed sports wagering, including allowing users ages 18-20 to wager despite New York requiring sports bettors to be 21.
If the suit succeeds, it’d bring a big financial blow with it. New York wants Polymarket to give up its allegedly illegal gains, pay restitution and other damages, pay a penalty worth three times its alleged gains, and pay $100,000 for every unauthorized offer or attempted offer of sports wagering in the state.
New York Sues Polymarket Over Alleged Illegal Gambling on Bankless
New York alleged Polymarket operates as gambling and is seeking to block the platform in the state.
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That same basic penalty structure was brought against Kalshi in July, and Coinbase and Gemini before that in April. So losing this fight is not simply about geofencing New York or Tennessee going forward. It could mean states coming after prediction markets for money they already made while operating under the belief that their federal CFTC licenses gave them nationwide authority.
The next phase in all this is very likely the Supreme Court stepping in to settle the split.
Calls for this have already been made by both sides:
After losing its case in the Third Circuit in April, New Jersey formally asked the Supreme Court on Sept. 2 to review the Kalshi-friendly decision.
On Sept. 10, Robinhood did too, though asking for a review of its opposing ruling in the Ninth Circuit. Crypto.com followed on Sept. 11, asking the Court to review its own Ninth Circuit loss against Nevada.
The Supreme Court has not yet agreed to hear any of them. But with the appellate scoreboard now 2-1 and the disagreement only widening, the question only becomes increasingly difficult to avoid.
