Kalshi Loses Federal Appeal on Gambling Law Jurisdiction

A federal appeals court has once again ruled against Kalshi, a prediction market company, determining that states can enforce their gambling laws against its operations. The unanimous decision by a three-judge panel in the US Court of Appeals for the Sixth Circuit, issued on Friday, sided with Ohio and Tennessee. Kalshi had argued that its prediction markets, particularly those involving sports events, should be exclusively regulated by the US government, specifically the US Commodity Futures Trading Commission (CFTC). The court, however, found that the sports wagers offered on Kalshi do not meet the legal definition of 'swaps,' which would fall under the CFTC's exclusive jurisdiction. Judge Julia Smith Gibbons, an appointee of President George W. Bush, authored the ruling, stating, "We hold that Kalshi has not shown that its sports-event contracts satisfy the statutory definition of a 'swap' so as to fall within the scope of the CFTC's 'exclusive jurisdiction.'" This finding directly challenges Kalshi's core argument for federal preemption of state laws. Furthermore, the court provided an alternative holding: even if Kalshi's sports-event contracts were considered swaps, the regulatory framework established by Congress, specifically the Commodity Exchange Act (CEA), does not prohibit states from enforcing their own gambling laws on such prediction markets. "And, even assuming that Kalshi’s sports-event contracts are swaps, we alternatively hold that the CEA [Commodity Exchange Act] neither expressly nor impliedly preempts Ohio’s or Tennessee’s gambling laws," the ruling elaborated. This dual reasoning reinforces the authority of state governments to regulate activities they classify as gambling, even when conducted through platforms that claim to be financial derivatives. The decision represents a significant setback for Kalshi's business model, which relies on operating outside the purview of state-level gambling regulations. The company's assertion of exclusive federal jurisdiction has been consistently challenged, and this latest ruling from the Sixth Circuit is a clear indication that its interpretation of federal law is not being upheld by the judiciary. The implications of this ruling could extend to other prediction market platforms that similarly seek to operate under federal oversight while offering event-based contracts that resemble wagers. State regulators in Ohio and Tennessee, along with other jurisdictions, will likely view this decision as a validation of their efforts to apply existing gambling statutes to these evolving forms of market activity. The core of the legal dispute centers on the classification of Kalshi's contracts and the extent to which federal law, particularly the CEA, preempts state gambling laws. By ruling that the contracts are not swaps and that federal law does not implicitly or explicitly preempt state laws, the court has effectively opened the door for states to regulate Kalshi's operations under their own legal frameworks. This outcome underscores the ongoing tension between innovative financial platforms and established regulatory structures, particularly in areas that intersect with gambling and speculative trading.