Prediction Markets Face Major Setback as Federal Court Backs State Gambling Regulation

A federal appeals court has handed Nevada a major victory in its fight with Kalshi, ruling that federal commodities law likely does not prevent the state from applying its gambling regulations to the prediction market operator’s sports contracts.

The unanimous decision from the US Court of Appeals for the Ninth Circuit leaves Kalshi unable to resume its sports and election markets in Nevada while the wider legal dispute continues. It also strengthens the position of state regulators that have argued prediction markets should not be allowed to offer sports wagering without the licenses, taxes and consumer protections required of sportsbooks.

The ruling does not settle the issue nationwide. It does, however, create a direct conflict with an earlier federal appeals court decision that protected Kalshi from state enforcement in New Jersey, increasing the likelihood that the regulatory battle will ultimately reach the US Supreme Court.

Nevada Wins the Jurisdiction Fight

Kalshi operates as a federally regulated designated contract market overseen by the Commodity Futures Trading Commission. The company has consistently argued that contracts traded on its exchange are financial derivatives governed by the Commodity Exchange Act, placing them outside the reach of state gambling regulators.

Nevada has taken the opposite position. State officials contend that contracts tied to sporting events function as sports bets, regardless of whether the platform describes them as event contracts or presents them through a market-style trading interface.

The dispute began after the Nevada Gaming Control Board ordered Kalshi to stop offering sports-related contracts without a state gaming license. Kalshi initially secured protection from enforcement, but a federal district court later dissolved that injunction after determining the company was unlikely to prevail on its preemption argument.

The Ninth Circuit has now backed that conclusion. The three-judge panel found that Kalshi had not shown that Congress intended federal commodities regulation to displace Nevada’s traditional authority over gambling. The court also rejected the idea that the CFTC’s oversight of designated contract markets automatically converts sports wagering products into instruments that states cannot regulate.

As a result, Nevada can continue enforcing its gaming laws against Kalshi’s sports markets while the case proceeds. The court sent the separate question involving election contracts back to the lower court for further analysis.

A Direct Split Between Federal Appeals Courts

In April, the Third Circuit reached the opposite conclusion in a case involving New Jersey. That court found that Kalshi’s sports event contracts were swaps regulated under federal law and blocked state officials from enforcing their gambling rules against the platform.

The Ninth Circuit’s ruling means Kalshi now faces different regulatory treatment depending on where a case is heard. Within the Ninth Circuit, states have stronger legal support for requiring prediction market operators to comply with local gambling laws. Within the Third Circuit, Kalshi has an appellate ruling supporting exclusive federal oversight.

Both decisions arose at the preliminary injunction stage, so neither represents a final nationwide resolution of the underlying issue. The disagreement between the circuits is still significant because federal law is now being interpreted differently by two appellate courts considering substantially similar products.

Other disputes involving Kalshi and state regulators are moving through courts across the country. The growing number of cases could lead to additional conflicting rulings before the Supreme Court decides whether to take up the question.

What the Ruling Means for Prediction Markets

The immediate impact is most direct in Nevada, where Kalshi cannot rely on its CFTC registration alone to avoid state gaming oversight. The broader risk is that other states will use the decision to support cease-and-desist orders, licensing demands and enforcement actions against prediction platforms offering sports markets.

That could weaken one of the industry’s main competitive advantages over regulated sportsbooks. Prediction markets have expanded rapidly by offering sports contracts nationally under a federal framework, including in jurisdictions where online sports betting is restricted or unavailable.

If more courts follow the Ninth Circuit, operators may be forced to geofence states, seek gaming licenses or remove certain markets. They could also face state-level rules governing age limits, responsible gambling, advertising and taxation that do not currently apply in the same way under federal commodities regulation.

The decision also adds pressure on the CFTC, which has supported the argument that federally registered exchanges fall under its exclusive jurisdiction. The Ninth Circuit’s reasoning challenges that position by drawing a line between oversight of financial markets and the states’ longstanding authority to regulate gambling.

For Kalshi and the wider prediction market sector, the ruling turns the regulatory question into an increasingly urgent operational issue. Until the Supreme Court or Congress provides a clear national answer, platforms may have to navigate a state-by-state market where the legal status of the same contract changes across jurisdictional lines.