Federal Court Rules States Can Regulate Prediction Markets as Gambling

2026-08-29 economy

Washington, Saturday, 29 August 2026.
A federal appeals court ruled states can regulate sports prediction markets like traditional gambling, creating a legal split likely headed to the Supreme Court.

Court Rejects Federal Preemption Claim

On August 27, 2026, the 9th U.S. Circuit Court of Appeals ruled against KalshiEX, LLC, affirming that states retain authority to regulate prediction markets as gambling [1][6]. This decision reverses a preliminary injunction that had previously blocked Nevada officials from enforcing state gaming laws against the platform [5].

The ruling escalates a regulatory conflict first highlighted when industry figures previously urged state officials to defer to federal oversight [7]. Approximately 20 states are now involved in litigation determining whether prediction markets fall under state gambling laws or federal commodity regulations [2]. The 9th Circuit panel wrote it disagreed with Kalshi’s overly broad reading that the Commodity Exchange Act allows it to offer sports event contracts [5].

Defining Swaps Versus Sports Bets

The appellate panel determined that Kalshi’s sports event contracts do not qualify as “swaps” under the Commodity Exchange Act [6]. Judge Ryan Nelson wrote that the substance of the contracts is sports gambling, regardless of the platform’s classification [1].

The court noted that current CFTC regulations prohibit listing contracts related to gaming on prediction markets [5]. This interpretation rejects Kalshi’s argument that compliance with both Nevada law and federal act was impossible [5]. The court analyzed 7 U.S.C. § 1a(47)(A)(ii), which defines “swaps” under the Dodd-Frank Act [6]. It noted that the CFTC holds the authority to prohibit swaps deemed contrary to the public interest if they involve gaming [6].

Market Reaction and Supreme Court Path

Following the ruling, shares of DraftKings rose 7% and Flutter Entertainment rose more than 6% [3]. Legal experts anticipate the dispute will reach the Supreme Court due to a circuit split with the 3rd Circuit Court of Appeals [3].

The 3rd Circuit previously ruled that the CFTC has exclusive control over sports-related event contracts [2]. Kalshi spokesperson Dani Lever stated the company intends to seek further review of the decision [4]. A coalition of 44 states maintains that prediction market platforms operate as gambling services subject to state gaming laws and taxes [5]. The CFTC spokesperson stated that a derivative contract structured as a swap is a swap regardless of the underlying subject matter [3].

Sources

Prediction Markets Financial Regulation