Appeals court rules against prediction markets, tees up SCOTUS fight

The 9th U.S. Circuit Court of Appeals rejected prediction market platforms’ requests for injunctive relief against the Nevada Gaming Control Board, concluding that sports-related event contracts are not a derivative regulated by the federal government. 

The court rejected appeals by Kalshi and Crypto.com, two prediction market platforms, to stop Nevada from halting their operations which the state claims are gambling offerings outside of the gaming control board’s framework. The court also ruled against Robinhood’s request for injunctive relief. That firm also features event contracts on its trading platform. 

Under scrutiny were the platforms’ sports-related event contract offerings, which 44 states argue are nothing more than sports betting. However, the platforms — and their federal regulator, the Commodity Futures Trading Commission — claim all event contracts, no matter the topic, are swaps. Swaps are a type of derivative under the purview of the CFTC, and the agency asserts that it has the exclusive jurisdiction to regulate all event contracts. 

The CFTC has even sued nine states to defend what it believes is its sole right to make rules for prediction markets. 

But the 9th Circuit rejected that argument. “The sports event contracts were not ‘swaps’ because they were sports bets,” the court said in its opinion against Kalshi. 

The Nevada Attorney General’s office said the ruling was a major victory.

“Kalshi sought to sidestep Nevada’s gaming laws by claiming its sports wagering products were federally regulated financial instruments beyond the reach of state regulators,” deputy communications director for the office Alcinia Whiters said in a statement. “The Ninth Circuit rejected that argument and made clear what we have maintained from the beginning: sports betting does not become something else simply because a company calls it an ‘event contract’ … Our office is proud to have defended Nevada’s authority.”

In a statement to CNBC, a CFTC spokesperson said that the court understood that swaps are exclusively regulated by the commission, but said it was wrong to believe that sports-related event contracts don’t fall under that definition.

“A derivative contract structured as a swap is a swap regardless of the underlying subject matter — the only exceptions in statute are onions and movie box office receipts,” the spokesperson said in a statement. “The Ninth Circuit erred today when it invented a new and atextual exception to the CEA,” referring to the Commodity Exchange Act, the law that details which event contracts the CFTC is allowed to permit and reject.

Legal experts have widely expected that the question of sports-related event contracts, and whether state gaming regulators or the CFTC has the right to regulate them, will eventually reach the Supreme Court. 

That now appears very likely, as the 9th circuit’s decision contradicts a ruling from the 3rd U.S. Circuit Court of Appeals in early April. In that case, the 3rd Circuit ruled that only the CFTC has the jurisdiction to regulate sports-related event contracts.

“This is a classic circuit split,” said Joshua Mitts, a professor at Columbia Law School. Circuit splits are when federal appeals courts rule differently on the same topic. “Ultimately, this is the kind of legal controversy or legal difference of opinion which will make its way to the Supreme Court.”

Kalshi’s head of litigation, Jovy Dedaj, in a post on X wrote that the 9th and 3rd Circuit’s decisions agreed that federal law stops states from regulating federally licensed exchanges, but said the 9th Circuit overstepped by declaring sports-related event contracts not as swaps. He added Congress gave the CFTC the power in the Commodity Exchange Act to determine if event contracts related to “gaming” are contrary to the public interest, not states.

In a statement, Robinhood said it plans to appeal the decision. “Every eligible customer should have access to these markets, which are federally regulated by the CFTC and offered through our CFTC-registered Futures Commission Merchant,” a spokesperson said.

Crypto.com did not respond to a request for comment. 

Meanwhile, shares of two online sportsbooks, DraftKings and Flutter Entertainment — the parent company of FanDuel — rose in response to the ruling. Both stocks have been hit in the last year over concerns of prediction markets disrupting the industry, and the companies have rushed to get their own prediction market exchanges online. 

DraftKings jumped 7%, while Flutter was up more than 6%. 

Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.