6th Circuit Rules States Have Authority to Regulate Kalshi's Prediction Markets, Not the CFTC

The regulatory landscape for prediction markets just underwent a structural shift. The 6th U.S. Circuit Court of Appeals delivered a unanimous ruling on Friday that grants Ohio and Tennessee the authority to regulate sports-related event contracts on platforms like Kalshi. This decision serves as a significant technical setback for the industry, which had hoped for a federal mandate to streamline operations and reduce compliance costs.

The fundamental disagreement rests on the precise definition of the financial instrument. Kalshi and other market makers argue that these event contracts function as swaps, a specific type of financial derivative that falls under the exclusive jurisdiction of the Commodity Futures Trading Commission. However, the three-judge panel found that the contracts do not satisfy the statutory definition of a swap according to the Commodity Exchange Act. The opinion states that the court has not shown that sports-event contracts meet that technical requirement.

The legal analysis extends beyond simple classification to the concept of statutory preemption. The panel determined that the Commodity Exchange Act does not prevent state gambling laws from applying to these contracts. The court noted that even if the contracts were considered swaps, the federal statute does not explicitly or implicitly strip states of the right to regulate sports betting. This creates a complex overlay where the state physics of gambling laws often override the federal mechanics of derivatives trading. The ruling overturns a previous district court decision that sided with Kalshi.

This outcome represents a second major legal hurdle for prediction market platforms at the appeals court level. Last month, the 9th Circuit Court of Appeals ruled that Nevada has the right to regulate sports-related event contracts on similar grounds. Conversely, the 3rd Circuit previously sided with the Commodity Futures Trading Commission in April, arguing that the CFTC has exclusive jurisdiction over all swaps, regardless of type. New Jersey has now filed a petition to the Supreme Court to resolve this circuit split. The industry is currently navigating a fragmented legal environment where the rules for trading events seem to change depending on the geography of the trade.