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Prediction markets Kalshi and Polymarket claim to be truth machines that offer insights into everything from elections to interest rates. But they are also something else: Massive sports betting platforms. Recent reports have found that sports wagers accounted for over 85% of all bets on Kalshi and that, during one four-day stretch, the platform made $25 million in fee revenue from March Madness alone. Prediction markets may have all sorts of promising applications but, for now, sports are clearly the young industry\u2019s golden goose\u2014a goose that faces the very real possibility of being killed.<\/p>\n
The threat comes from state governments and Native American tribes, which have filed a flood of legal challenges to claim Kalshi is running an unlicensed gambling operation. Judges in at least three states have agreed with this argument, but others have sided with Kalshi and held instead that its sports wagers are a unique type of contract allowed by federal law.<\/p>\n
Earlier this month, a federal appeals court ruled on the issue for the first time, siding with Kalshi over the state of New Jersey. But this week, a different set of judges heard arguments in an appeal out of Nevada, and made comments that suggested they will come to a different conclusion. If that occurs, or if another appeals court rules against Kalshi, the issue will be teed up for the Supreme Court by next year, according to gaming industry lawyers, who believe this is a likely outcome.<\/p>\n
So how might the Supreme Court rule on a sports prediction market industry expected to grow to around $200 billion in volume this year? For now, observers regard the outcome\u2014which turns on state versus federal power as well as how to apply a law created in the wake of the 2008 financial crisis\u2014as a true jump ball. Meanwhile, the legal scuffles have also prompted members of Congress to take sides in a fight that will decide not just the fate of the upstart prediction market industry, but the future of gambling in America.<\/p>\n
When is gambling not gambling?<\/p>\n
\u201cBasic abductive reasoning tells us that if it looks like gambling, talks like gambling, and calls itself
gambling, it\u2019s gambling,\u201d wrote U.S. Circuit Judge Jane Roth, siding in dissent with the New Jersey Division of Gaming Enforcement in this month\u2019s ruling by the Third Circuit.<\/p>\n
Unfortunately for the New Jersey regulators, Roth was outvoted by two other appeals court judges, who pointed out that while the wagers on Kalshi might look like gambling, they are technically \u201cevents contracts\u201d which are classified as swaps under federal law.<\/p>\n
The idea of a swap is familiar enough but the word took on a very specific meaning following the financial crisis of 2008. That\u2019s when a huge stack of credit default swaps\u2014insurance deals between giant financial firms invisible to the broader market\u2014imploded, triggering a meltdown across Wall Street. In response, Congress passed a series of reforms known as Dodd-Frank, which included a rule that made swaps a new form of derivative under the oversight of the Commodity Futures Trading Commission.<\/p>\n
In the eyes of the Third Circuit majority, Kalshi had obtained a so-called Designated Contracts Market license fair and square, which means it has the right to operate a swaps forum where users enter wagers with each other on nearly anything, including sports.<\/p>\n
The other big question for the Third Circuit, and over a dozen other courts in the country, is whether Kalshi\u2019s status as a swap operator, which is a subset of futures trading, means it can blow off state gambling authorities. Those agencies enjoy so-called police powers reserved to the states by the Constitution, and have long used that authority to oversee or ban gambling.<\/p>\n
The problem for New Jersey and other states is the concept of pre-emption, a doctrine that says the federal government, when lawfully exercising its powers, takes precedence over state agencies operating in the same field. Common examples are fields like immigration or pharma regulation, which have seen the feds totally pre-empt state authorities.<\/p>\n
The case of Kalshi is less cut-and-dry, but the Third Circuit at least concluded that the platform\u2019s status as a swap operator means New Jersey gambling authorities are pre-empted from regulating it too. The dissenting judge, however, didn\u2019t buy this premise and accused her colleagues of buying into \u201cacts of alchemy\u201d that transformed old-fashioned sports betting into futures trading.<\/p>\n
The game score so far<\/p>\n
\u201cRight now it IS the industry,\u201d says Dustin Gouker, describing how much sports betting contributes to the prediction markets industry. Gouker, who publishes a newsletter devoted to the sector, believes that other categories, including wagers related to politics and crypto prices, will make up a greater share of prediction market bets over time. But for now, sports is the only game in town, pun intended, and has helped Kalshi and Polymarket justify eye-popping valuations of $22 billion and $20 billion respectively.<\/p>\n
Needless to say, those valuations would be punctured badly if courts ultimately rule Kalshi\u2019s status as a swap operator doesn\u2019t shield it from state authorities. And there is a distinct possibility that could happen.<\/p>\n
At a hearing before the Ninth Circuit this week, reports say judges appeared to favor the arguments of the state of Nevada over those of Kalshi, as well as Robinhood and Crypto.com, which have launched prediction markets of their own. (Kalshi\u2019s main rival, Polymarket, is not part of the litigation since for now it is not operating in the U.S.).<\/p>\n
A ruling from that appeals court is expected in coming weeks and, if it goes against the prediction market companies, it will create the sort of circuit split that makes a case ripe for the Supreme Court. In the meantime, though, it is likely the top court may wait for further appeals rulings to bubble up in other courts.<\/p>\n
\u201cIf you are the prediction markets, the goal is to create litigation in as many circuits as possible to expand the runway\u201d, said gaming lawyer Daniel Wallach, explaining that a prolonged legal battle will buy Kalshi and others time to keep offering sports bets.<\/p>\n
Meanwhile, the prospect of sprawling litigation on another prediction-markets front is already a reality. The Commodity Futures Trading Commission, long a relatively small and obscure agency, has taken the unusual step of seeking court rulings to stave off Arizona, Connecticut and Illinois (all of which are home to significant gaming interests) from issuing injunctions against Kalshi.<\/p>\n
What matters most, of course, is how the Supreme Court might rule and, for now, lawyers say any outcome appears genuinely uncertain.<\/p>\n
\u201cThis is a classic case of old tools being applied to cutting edge technologies, and it\u2019s too soon to say how courts will come out on those questions,\u201d said Austin Evers, a partner at Freshfields in Washington, D.C.<\/p>\n
That echoes the view of other attorneys, including Kayvan Sadeghi, partner at Jenner & Block in New York. He notes that, while the Trump administration and some Republicans support the prediction markets, conservative judges are frequently sympathetic to states\u2019 rights arguments\u2014an inclination that could be at play on the heavily conservative Supreme Court.<\/p>\n
Lawyers note that Kalshi and its allies will also have to contend with a pair of relatively recent rulings by the top court that are unlikely to help their cause. The first is the 2018 ruling known as Murphy v. NCAA that struck down the federal government\u2019s exclusive authority over sports betting, which could undermine the CFTC\u2019s claim that its authority over sports-related swaps freezes out the states. The other is a case known as Loper Bright from 2024 where the justices ruled that courts owe no deference to the expertise of agencies, which could again undercut the CFTC\u2019s position.<\/p>\n
Even if the Supreme Court were to rule against Kalshi\u2014not a sure thing by any means\u2014that is hardly the end of the matter. Even as the litigation train barrels towards the top court, another branch of government is taking an interest in prediction markets.<\/p>\n
Unusual coalitions<\/p>\n
\u201cPervasive gambling is not good for society. It turns life into a casino, traps people in addiction & debt, surges domestic violence, and fosters manipulation,\u201d Congresswoman Alexandria Ocasio-Cortez (D-N.Y.) wrote on X in response to news from Polymarket that it has secured a partnership with Major League Baseball.<\/p>\n
The remark is hardly a surprise given Ocasio-Cortez\u2019s progressive reputation. What is surprising is that numerous conservatives piped up to agree with her, including Daily Wire host Michael Knowles, who wrote, \u201cThis is sad: I agree with @AOC.\u201d<\/p>\n
While Republicans in Congress typically march in lock-step with President Trump, several members have already sought to corral prediction markets, including Sen. John Curtis (R-Utah) who is co-sponsor of a bipartisan bill with Sen. Adam Schiff (D-Calif.) titled the Prediction Markets are Gambling Act. The bill proposes to close what the legislators deem a CFTC \u201cloophole.\u201d<\/p>\n
Evers, the Freshfields lawyer, says that prediction markets are still new enough that overall public opinion has not yet coalesced around how to regulate them and that, even if Democrats take back control of Congress in the mid-terms, it is not automatic that legislation will follow.<\/p>\n
\u201cIt\u2019s always easy placing a bet on Congress being unable to pass legislation,\u201d notes Evers. But he adds that prediction markets amount to an important new public policy debate, so lawmakers are likely to be engaged.<\/p>\n
Meanwhile, in a sign of the fluidity of opinion around prediction markets, Blanche Lincoln, a senator from Arkansas at the time, warned during the debate over Dodd-Frank in 2010 that regulated swaps should not be extended to cover wagers on the Masters or the Super Bowl. Today, she is a registered lobbyist for Kalshi, arguing the opposite.<\/p>\n
As the fate of sports-related prediction markets remain up in the air, there is one tool that could supply valuable insight for whether they will remain legal. Alas, there are currently no events contracts on Kalshi that let users bet on the company\u2019s own fate in Congress or in court.<\/p>\n
#Kalshis #fight #prediction #markets #sports #betting #moves #Supreme #Court<\/p>\n","protected":false},"excerpt":{"rendered":"
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