A federal appeals court ruled on Friday that states had the ability to regulate prediction markets, a win for the states in an ongoing battle with federal regulators over who had authority over popular wagering platforms.
The U.S. Court of Appeals for the Ninth Circuit in San Francisco rejected Kalshi’s request for relief against Nevada’s gambling laws, after the state sued the company in February for “unlicensed operations.”
Prediction markets, notably Kalshi, have exploded in popularity this year and attracted billions of dollars in trades on topics as varied as elections, sports and reality television. But their surge of success has prompted state pushback. Now more that 20 states are locked in litigation over whether the prediction markets are subject to their gambling laws.
The nationwide legal battle boils down to a debate over whether prediction markets offer swaps, a type of financial contract that is regulated only at the federal level.
Judge Ryan Nelson wrote in the opinion issued on Friday that Kalshi’s “sports event contracts were not ‘swaps’ because they were sports bets,” and should be subject to state gambling laws, as a previous federal court had determined. In July, Kalshi had agreed to restrict users in Nevada from wagering on sports, elections and entertainment.
But the ruling contradicted a decision by Philadelphia’s Third Circuit in April that said Kalshi’s sports event contracts were swaps under the Commodity Exchange Act, which granted them federal pre-emption from state laws.
“The Ninth Circuit has now teed up a circuit split that calls out for resolution by the Supreme Court,” said Zach Fulton, a spokesman for the Commodity Futures Trading Commission, or C.F.T.C., the federal agency that oversees the industry. Mr. Fulton added that the court “erred today” and accused it of inventing a new exception to the Commodity Exchange Act.
Aaron Ford, Nevada’s attorney general, said in a statement that his office was “proud to have defended Nevada’s authority,” adding that “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 spokeswoman for Kalshi, Dani Lever, said the company believed that C.F.T.C. regulations did not prohibit sports contracts, despite the court’s opinion. “We will be seeking further review,” she said.
Last month, 44 states signed a letter in disagreement, arguing that “sports bets are not swaps, futures or other derivatives, so the C.F.T.C. lacks statutory authority to regulate them.”
The issue of federal versus state control of prediction markets is also pending in the Second, Fourth, Sixth and Seventh Circuit Courts of Appeals.
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