By Andres Castillo, of Saul Ewing
What happens when an unstoppable force meets an immovable object? An answer to that question—at least pertaining to Kalshi and whether the sports event contracts it offers are governed by federal derivatives law or state gambling law—is steadily approaching.
Kalshi is a web-based prediction market platform that allows customers to trade contracts based on whether specific events will happen in the future. As Kalshi puts it, customers can “trade on anything.” But the evidence shows that Kalshi customers are mostly interested in trading contracts based on whether certain sports events will occur. Since Kalshi’s inception in 2021, customers have traded $16.8 billion in sports event contracts, compared to $4.9 billion in other contracts. Naturally, state gaming regulators came knocking and demanded that Kalshi comply with state gambling law or face civil and criminal liability.
Rather than comply with state gambling law, Kalshi has vigorously argued that its sports event contracts are “swaps” under the Commodity Exchange Act (CEA) and therefore subject to the exclusive federal jurisdiction of the Commodity Futures Trading Commission (“CFTC”). The CFTC publicly supported Kalshi’s position and warned state regulators that it would defend this position. State gaming regulators disagree, arguing that the CEA does not apply to transactions like Kalshi’s sports events contracts because they involve “gaming” under state law.
Kalshi and state regulators are now involved in various lawsuits across the country. Both have federal courts that agreed with their position, creating a circuit split on whether Kalshi’s sports event contracts are subject to the CFTC’s exclusive jurisdiction. Federal judges in Tennessee and New Jersey held that the sports event contracts are “swaps” under the CEA, while judges in Ohio and Maryland held that they are not “swaps” and that the CEA was not intended to preempt state gambling law.
Because of this circuit split, Kalshi can offer its platform in some states without having to comply with state gambling law and in other states, Kalshi must comply with state gambling law in order to offer its platform. This creates uncertainty for all involved—Kalshi, state regulators, the CFTC, and Kalshi customers. The question now is whether Congress or the United State Supreme Court will be the unstoppable force that bursts the immovable object that is Kalshi’s status under the law when offering sports event contracts.
How Did We Get Here?
In 2020, Kalshi applied for and was approved by the CFTC as a “Designated Contract Maker” (DCM), which allows Kalshi to create and offer event contracts to the public—that is, contracts based on whether specific events will happen in the future. The CFTC can review and prohibit certain types of event contracts that are contrary to the public interest, including those that involve “gaming” under state law. In late January 2025, Kalshi created and offered sports event contracts for the first time. And since then, the CFTC has not taken any action against Kalshi for its sports event contracts.
In April 2025, several states, including Nevada, New Jersey, and Maryland, sent cease-and-desist letters to Kalshi, demanding that the platform comply with state gambling law or face civil and criminal liability. In response, Kalshi sued Nevada, New Jersey, and Maryland and requested a preliminary injunction, arguing that as an approved DCM, it is subject to the CFTC’s exclusive jurisdiction. The states argued that the CEA does not apply to sports events contracts because they involve “gaming” under state law, and was not intended to preempt state gambling law.
The Nevada and New Jersey federal courts sided with Kalshi. The Nevada court held that the CEA granted the CFTC exclusive jurisdiction over transactions involving DCMs, and the New Jersey court held that sports events contracts fall within the CFTC’s exclusive jurisdiction. On the other hand, the Maryland federal court sided with state regulators, holding that the CEA was not intended to preempt state gambling law and that compliance with federal derivatives law and state gambling law was possible.
The New Jersey and Maryland decisions are currently on appeal to the Third Circuit and Fourth Circuit, respectively. Interestingly, the Nevada court reversed course and sided with state regulators. The court held that the CEA was not intended to preempt state gambling law and that Kalshi’s sports event contracts closely resembled traditional sportsbook bets and are an attempt to evade state gambling law. Kalshi appealed this decision to the Ninth Circuit and was denied.
Kalshi and state regulators are also involved in similar lawsuits in Ohio, Tennessee, Massachusetts, Utah, and Iowa. The Ohio federal court and Massachusetts state court sided with state regulators, while the Tennessee federal court agreed with Kalshi. The Ohio and Massachusetts courts held that Kalshi’s sports event contracts are not “swaps” under the CEA and that the CEA was not intended to preempt state gambling law. On the other hand, the Tennessee court held that the sports event contracts are “swaps” and that compliance with federal derivatives law and state gambling law was impossible. The Utah and Iowa federal courts have not issued a decision yet given that Kalshi recently sued each state on February 23 and March 11, respectively.
What is Next?
Assuming that neither Kalshi nor state regulators surrender, Kalshi’s status under the law when offering sports event contracts can be settled in one of two ways. First, federal and state courts will continue to issue decisions until the United States Supreme Court grants certiorari and settles the matter. Or second, federal and state courts will continue to issue decisions until Congress adopts legislation that settles the matter. Until either happens, Kalshi would be offered only in states that have not opined on the matter or where the courts sided with Kalshi’s position, and the current cases between Kalshi and state regulators would proceed.
If history tells us anything though, it is that the Supreme Court or Congress will likely not settle the matter anytime soon. Therefore, Kalshi and state regulators must decide whether, and to what extent, they should continue to litigate the matter. Current cases will likely proceed in order for Kalshi and state regulators to obtain their requested relief and force the Supreme Court or Congress to take action. Meanwhile, Kalshi or other state regulators not involved in litigation with Kalshi could file a lawsuit in a state that has not opined on the matter in order for the federal or state court to decide on the matter and the Supreme Court or Congress to take action swiftly.
The cases between Kalshi and state regulators present five issues that must be resolved in order to fully settle the matter: (1) whether the CEA granted the CFTC exclusive jurisdiction over transactions involving DCMs; (2) whether Kalshi’s sports event contracts are “swaps” under the CEA and therefore subject to the CFTC’s exclusive jurisdiction; (3) whether the sports events contracts involve “gaming” under state law and are therefore excluded under the CEA; (4) whether the CEA intended to preempt state gambling law; and (5) whether compliance with federal derivatives law and state gambling law is possible. Whoever the unstoppable force is, these questions must be answered to settle Kalshi’s status under the law when offering sports event contracts.
Who Should be Paying Attention?
As a general matter, anyone who could be affected by or included as part of a Kalshi sports event contract or anyone who trades a sports event contract should pay attention to the cases between Kalshi and state regulators. The following three groups should pay especially close attention:
- Professional, Collegiate, eSports, and Video Game Leagues or Competitions
Professional, collegiate, eSports, and video game leagues or competitions should consider how the cases between Kalshi and state regulators affect their (i) integrity rules, (ii) data licensing, (iii) revenue models, and (iv) player monetization and adapt accordingly. First and foremost, leagues or competitions must ensure that athletes and participants are strictly prohibited from using platforms like Kalshi to trade sports events contracts. Even if these contracts are not considered gambling in the legal sense, they are based on whether certain sports events will occur. And to ensure and maintain competitive integrity, leagues and competitions must view such conduct as gambling and prohibit use of it by athletes and participants.
Second, leagues or competitions should partner with platforms like Kalshi to maximize revenue and increase fan engagement. Unless these platforms are financially crippled by the application of state gambling laws, they will likely still operate and continue to attract high trade volume, regardless of whether sports event contracts are governed by federal derivatives law or state gambling law. Leagues or competitions therefore cannot remain on the bench and must get in the game and capitalize on a tremendous opportunity to maximize revenue and increase fan engagement. Athletes and participants would in turn benefit significantly.
- Other Prediction Market Platforms
Other prediction market platforms like Kalshi should review the court holdings in the cases between Kalshi and state regulators and adapt accordingly. In fact, Polymarket and Robinhood also offer sports event contracts and are parties to current lawsuits in Michigan, California, and Wisconsin. These platforms must decide whether they want to join the fight or not offer sports events contracts. The former option would allow a platform to operate without uncertainty and force the Supreme Court or Congress to take action. The latter option would allow a platform to altogether avoid the matter and continue operation without state intervention.
- Prediction Market Customers
Customers that use prediction markets to trade sports event contracts should understand that in states that have not opined on the matter or where the courts sided with Kalshi’s position, state gambling law is inapplicable. Compared to federal derivatives law (which focuses more on market efficiency), state gambling law provides a comprehensive regulatory scheme designed to protect consumers from improper and illegal betting practices. State gambling laws typically require entities to obtain a license with the state and abide by certain restrictions, such as age, location, and payment type limitations. Therefore, Kalshi would have to comply with the state gambling law of any state it wished to offer sports event contracts in. Under federal derivatives law however, Kalshi could offer sports event contracts anywhere in the country regardless of state gambling laws.
Sources:
https://www.commerciallitigationupdate.com/prediction-markets-v-state-gaming-laws-the-kalshi-litigation-gamble
Third Time’s The Charm for Gambling Regulators in Kalshi Litigation
Cashing In On Preemption: Kalshi Lawsuits Preview the Future of Gambling Regulations
Ohio Judge Denies Kalshi Injunction, Creating Sixth Circuit Split Over Sports Event Contracts
Kalshi Sues Iowa Preemptively in Escalating Prediction Market Fight
Kalshi Files Preemptive Federal Lawsuit Against Utah Amid Escalating Political Pressure
https://www.espn.com/espn/betting/story/_/id/45377686/kalshi-prediction-markets-disrupt-sports-betting
https://www.stinson.com/newsroom-publications-sportsbooks-or-commodity-exchanges-the-rising-legal-tensions-between-sports-betting-and-prediction-markets
https://www.swlaw.com/publication/prediction-markets-on-trial-kalshi-robinhood-and-the-legal-crossroads-of-sports-betting/
