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

“Kalshi has a gambling problem,” the 9th Circuit Court of Appeals wrote last Friday, when it ruled that the Commodity Exchange Act (CEA) did not preempt Nevada from enforcing its gambling laws against prediction market Kalshi’s sports-related event contracts.

Now, thanks to the decision—which affirmed an earlier ruling by a district court— prediction platforms like Kalshi, Crypto.com, and Robinhood will no longer be able to offer sports event contracts in Nevada. The decision could also clear the way for other 9th Circuit states like Arizona—where Kalshi was granted an injunction in May—to enact their own regulations governing prediction markets.

The case turned on whether the sports event contracts offered by Kalshi count as swaps as defined under the CEA, which would exempt them from state gambling laws. Unlike the 3rd Circuit Court of Appeals—which in April granted Kalshi an injunction against New Jersey regulators—the 9th Circuit preferred a narrow textual reading of the CEA.

In the context of a prediction market, a swap means “any agreement, contract, or transaction…that provides for any purchase, sale, payment, or delivery…that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.” 

The 9th Circuit agreed with the U.S. Commodity Futures Trading Commission (CFTC) that the CEA gives it “exclusive jurisdiction over ‘transactions involving swaps…traded or executed” on designated contract markets, which include prediction markets like Kalshi. Still, the court determined that a “broad reading” of the definition of the word swap that includes sports-related event contracts is “not the best textual reading in context, does not square with the statutory scheme, does not have a limiting principle, and would raise concerns under the major-questions doctrine,” which requires matters of national economic and political significance to be supported by authorization from Congress. 

Instead of relying solely on the dictionary definitions of the words “occurrence, event, and contingency,” the court considered the statute’s “language, structure, subject matter, context, and history” and concluded that Congress did not intend to “upend its decades of careful regulation of gambling based on broad definitions of the words used in a Wall Street Reform Bill” to allow sports event contracts under its definition of a swap.

Ironically, Kalshi’s case was harmed by its marketing strategy, which features the word bet and insinuates at times that its platform is a loophole for sports betting in places where it’s prohibited. In the end, the 9th Circuit found the company’s “attempts to distinguish its sports event contracts from sportsbooks betting” to be “unpersuasive.” 

Since Kalshi “markets its sports event contracts” as legal sports betting and sports betting is a “quintessential form of gambling,” the court reasoned a broad reading of the law would leave no “limiting principle” separating sports event contracts on prediction platforms from the betting offered by sportsbooks like Caesars and FanDuel.

In a statement emailed to Reason, CFTC spokesman Zach Fulton said, “Unfortunately, the Ninth Circuit misreads both our statute and our regulations when it comes to swaps and the Special Rule.” 

There’s a sliver of hope for fans of prediction markets living in the court’s jurisdiction. In his concurring opinion, 9th Circuit Judge Kenneth K. Lee argued that the CEA’s special rule provision—which gives the CFTC the authority to prohibit event contracts it deems contrary to the public interest—could leave room for “some unique sports events” to be considered swaps “if they meet the statutory requirements.” 

In Lee’s opinion, the CFTC’s proposed amendment to the special rule provision, which was published in June, “controls the outcome of this appeal.” This would “establish a procedural framework” for determining if a contract offered by prediction markets is contrary to the public interest, including gaming contracts. The agency’s proposal would define gaming as “any activity that: (i) one or more participants typically engage in for purposes of recreation or to entertain others, (ii) is governed by rules; and (iii) includes measurable occurrences or outcomes that depend on the participants’ luck, skill, or athletic ability during the activity.”

Under this definition, a contract on fan attendance at a game between the Baltimore Orioles and the Boston Red Sox wouldn’t be considered gaming, while a contract on the outcome of the Little League World Series would.

Nevada isn’t the only state fighting to regulate prediction markets. There are currently 20 states locked in legal battles with prediction platforms, according to The New York Times. In July, 43 other states signed on to a letter from Ohio Attorney General Andy Wilson, disagreeing with the CFTC’s claim of exclusive regulatory jurisdiction over prediction markets.

For now, prediction markets operating in Nevada can no longer offer sports event contracts, a restriction that could soon extend to contracts on political outcomes. In its ruling, the 9th Circuit asked the district court to reconsider Nevada’s challenges to Kalshi’s election contracts “consistent with this opinion.”

Looking ahead, the nation’s highest court could decide the case. Fulton says the decision “teed up a circuit split that calls out for resolution by the Supreme Court.”