Another appeals court rules against prediction market provider Kalshi, says sports contracts are subject to state regulations

The Sixth Circuit Court of Appeals delivered another legal setback to Kalshi, the prediction market platform backed by crypto venture capital. The panel ruled that sports-related event contracts traded on prediction markets do not qualify as swaps under federal law, meaning they fall outside the purview of federal regulators like the Commodity Futures Trading Commission (CFTC) and instead remain subject to state-level regulation.

This decision reinforces an earlier ruling against Kalshi and narrows the legal pathways available for prediction market operators seeking federal regulatory clarity. The core dispute hinges on whether prediction market contracts constitute derivatives or swaps as defined under the Dodd-Frank Act. Kalshi argued that treating these contracts as federally regulated swaps would allow it to operate nationally under CFTC oversight. The appeals court rejected this framing, instead determining that state gambling and wagering laws apply.

The ruling carries immediate implications for Kalshi's business model. The platform has positioned itself as a regulated alternatives market for event-based contracts, including political elections and sports outcomes. Without federal swap classification, Kalshi faces a patchwork compliance landscape where each state sets its own rules. Some states permit prediction markets; others classify them as illegal gambling. This fragmentation makes scaling a nationwide platform exponentially harder.

The CFTC has battled prediction market operators for years. The agency views event-based contracts as falling within its jurisdiction and has historically opposed their expansion. Kalshi's legal strategy involved seeking court validation that prediction markets serve legitimate hedging and price discovery functions, similar to traditional derivatives markets. The Sixth Circuit's decision undermines that argument by declining to grant prediction markets the same federal regulatory treatment as commodity futures or other swaps.

This is not Kalshi's first courtroom loss. Previous legal challenges have also resulted in rulings favorable to regulatory skeptics and unfavorable to Kalshi's expansion ambitions. The pattern suggests courts remain unconvinced by arguments that prediction markets merit federal derivatives oversight, at least in the context of sports events.

The prediction market sector faces structural headwinds beyond Kalshi. Polymarket, another prominent player, operates primarily on the Polygon blockchain and has skirted traditional regulatory frameworks entirely by positioning itself as a decentralized platform. However, decentralized approaches carry their own legal risks, particularly regarding enforcement and consumer protection.

State-level regulation creates barriers to entry for legitimate platforms while potentially benefiting offshore and decentralized competitors operating in legal gray zones. Kalshi's venture-backed business model depends on legitimate regulatory pathways. Operating under fragmented state rules increases compliance costs without guaranteeing market access.

The Sixth Circuit ruling does not foreclose all federal options for prediction market regulation. Congress could theoretically create a specific regulatory framework for event contracts, or the CFTC could pursue different statutory interpretations. However, the current judicial direction suggests prediction markets will remain primarily state-regulated activities in the near term.

For participants and investors in prediction market platforms, this decision signals that federal regulatory approval remains unlikely under existing legal structures. Platforms seeking to operate broadly across the United States must navigate state-by-state compliance or consider alternative business models that sidestep traditional financial regulation altogether.