9th Circuit rules Kalshi sports prediction contracts constitute gambling

"Kalshi has a gambling problem," the 9th Circuit Court of Appeals wrote last Friday, ruling that the Commodity Exchange Act (CEA) does not preempt Nevada from enforcing its gambling laws against prediction market Kalshi's sports-related event contracts.

Impact on Prediction Platforms

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 Legal Question

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."

Court's Reasoning

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.

However, 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"
• "Would raise concerns under the major-questions doctrine"

The major-questions doctrine requires matters of national economic and political significance to be supported by authorization from Congress.

Instead of relying solely on dictionary definitions of "occurrence, event, and contingency," the court considered the statute's "language, structure, subject matter, context, and history." It 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.

Kalshi's Marketing Backfires

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.

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 that 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.

CFTC Response

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."

A Note of Hope

There is 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...