Kalshi’s Prediction Contracts Spark Wide-Ranging Legal Battle

Kalshi Inc. and other platforms tapping into the increasingly popular sports prediction market are in the midst of litigation battles across the country to avoid state regulation, a sprawling feud that could end up at the US Supreme Court.

The dispute centers on whether sports-related event contracts—which let individuals trade on the likelihood of yes-no occurrences like whether the New England Patriots will beat the New York Jets Thursday—are gaming that can be regulated by states laws and federal tribal law, or financial instruments that fall under the federal Commodity Futures Trading Commission’s oversight.

States and tribes oppose the latter notion, arguing Congress never meant to add sports betting to the CFTC’s authority. “If it looks like a duck, walks like a duck, acts like a duck—it’s a duck,” said Derrick Beetso, executive director of Indian Gaming and Self-Governance at Arizona State University’s Sandra Day O’Connor College of Law.

Kalshi, on the other hand, says these are “swaps” on federally recognized designated contract markets solely under the CFTC’s purview. The agency hasn’t expressly said sports event contracts are gaming, leaving the issue to courts with mixed results.

Sports event contracts burst into popularity after Kalshi’s market KalshiEX LLC prevailed against the Biden administration’s CFTC over election-related contracts last year. The issue is gaining momentum as the Trump administration has been more welcoming toward prediction markets, with the president’s familial ties to the prediction market deepening, while more players seek to enter it early, including Polymarket, ProphetX and FanDuel.

Kalshi is arguing in more than a dozen lawsuits that it can offer sports event contracts without a state license or on tribal lands, including in New York, Ohio, Maryland, Massachusetts, Nevada, and New Jersey. Federal trial court rulings in New Jersey, Nevada, Maryland, and California have been mixed. Two federal appeals courts are currently reviewing the issue, with more likely jumping in soon.

Attorneys are betting on at least a high court bid, even if the justices don’t bite. “It’ll reach the Supreme Court in some shape or form. Whoever loses in the courts of appeal will file cert,” said Aitan Goelman, a partner at Zuckerman Spaeder LLP.

Kalshi, rumored to be fielding investor offers that value the startup at over $10 billion, didn’t provide a requested comment for this story.

Mixed Courts

A Robinhood Markets Inc. unit, which partners with Kalshi’s designated contract market, and Crypto.com’s exchange are also battling state regulators over attempts at overseeing sports event contracts.

“We firmly believe that the swaps, event contracts, and other derivatives we offer in the US are subject to the exclusive jurisdiction of the CFTC, are fully compliant, and licensed pursuant to all applicable law. We believe that courts will ultimately rule in our favor,” Crypto.com spokesperson Victoria Davis said.

A federal judge in Maryland sided with the state, holding federal law doesn’t preempt it from regulating sports event contracts, denying a Kalshi bid for injunctive relief.

For the states it comes down to regulation and revenue. “They’re conducting sports wagering without a license, and in doing so, they’re avoiding the collection of sports wagering taxes that legal operators pay to the State,” Maryland Lottery and Gaming Director John Martin said in April. Maryland’s sports wagering market generated $14.1 million for the state in October.

New Jersey and Nevada federal judges reached the opposite conclusion, extending Kalshi temporary reprieves against state regulators. However, last month the same Nevada judge ruled against Crypto.com, saying its contracts appeared to be sports wagering.

The US Court of Appeals for the Third Circuit heard New Jersey’s appeal in September.

“Let’s see what the Third Circuit does, but the fact that the Nevada court essentially reversed itself means that only the New Jersey court got it wrong,” Goelman said.

A California federal judge earlier this week refused to preliminarily bar Kalshi’s sports offerings on tribal lands, holding the CFTC is the designator of whether the contracts are “gaming” and otherwise aren’t considered bets or wagers under an act barring illegal internet gambling.

“It’s important for the tribes because on Indian reservations, the gambling isn’t Steve Wynn or Donald Trump, or gaming in Las Vegas, where the winnings, the net profits, are going to line the pocket of corporate investors,” Les Marston, the tribes’ counsel, said before the ruling. Funds go back into the community, risking needs like hot meals for schoolchildren and transportation for the elderly to get medical care, he said.

Kalshi appealed the Maryland decision to the Fourth Circuit, while the tribes and Crypto.com said they’ll appeal their respective cases to the Ninth Circuit. A Massachusetts federal judge heard Robinhood’s arguments for a reprieve against state enforcement Wednesday, potentially setting up a First Circuit bid.

CFTC Oversight

To do what Kalshi’s doing, “you’ve got to be very confident that the CFTC is not going to take action or not going to be forced to take action by litigation and by the courts,” said David Zaring, a Wharton School professor of legal studies and business ethics.

If the CFTC said the contracts were gaming, he said, “then I think there’d be no way Kalshi could successfully litigate against that.”

Before the government shutdown, the CFTC released an advisory telling markets to account for state regulatory actions and pending litigation surrounding sports event contracts “with appropriate contingency planning, disclosures, and risk management policies and procedures.”

The White House and CFTC sent auto-replies citing the shutdown in response to requests for comment.

Absent regulatory scrutiny, event contracts could threaten all gambling, said Kevin Washburn, a former Assistant Secretary of Indian Affairs who teaches law at UC Berkeley. The expansion and contraction of support for gaming-like offerings grows particularly stark against recent sports leagues’ gambling scandals involving prop bets, another potential industry threat, he said.

“We may have reached peak liberalization of gambling in the United States, and we will now see contraction,” Washburn said. “Kalshi, we’ll see if they were late to the game.”