A federal appeals court on Friday dealt another significant blow to prediction market platforms, ruling that states can regulate sports-related event contracts on Kalshi, the fast-growing exchange that has argued such products belong under federal commodities law rather than state gambling rules.
In a unanimous opinion, a three-judge panel of the 6th U.S. Circuit Court of Appeals said Ohio and Tennessee are permitted to apply their own gambling laws to Kalshi's sports-linked contracts. The court rejected the company's central argument that the contracts should be treated as swaps under the Commodity Exchange Act, which would place them under the exclusive jurisdiction of the Commodity Futures Trading Commission.
"We hold that Kalshi has not shown that its sports-event contracts satisfy the statutory definition of a 'swap' so as to fall within the scope of the CFTC's 'exclusive jurisdiction,'" the opinion said.
The ruling is the latest development in a widening national battle over prediction markets, a sector that has drawn intense scrutiny as platforms expand offerings tied to elections, sports and other real-world events. Kalshi and similar exchanges say their contracts are financial instruments, comparable to derivatives, and should be regulated uniformly by the federal government. States argue that when the contracts are tied to sports outcomes, they function as wagers and should be governed by local sports betting laws.
That dispute has produced a patchwork of lawsuits across the country. States have sued platforms they say are operating illegal gambling businesses, while exchanges have sued states to block enforcement of local laws that the companies say are preempted by federal regulation. The CFTC has also entered the fray, suing nine states to defend what it views as its exclusive authority over event contracts under the Commodity Exchange Act.
The 6th Circuit panel rejected that position as applied to Kalshi's sports products. "Even assuming that Kalshi's sports-event contracts are swaps, we alternatively hold that the CEA neither expressly nor impliedly preempts Ohio's or Tennessee's gambling laws," the court said.
The decision overturns a Tennessee federal district court ruling that had sided with Kalshi, while reaffirming an Ohio federal district court decision that had supported the states' position. For Tennessee Attorney General Jonathan Skrmetti, the ruling was a clear victory for state authority.
"Kalshi attempted an end run around Tennessee law to avoid any of the rules or taxes associated with sports gambling. They failed," Skrmetti said. He added that "sports wagering is heavily regulated because it can do a lot of harm, and I'm glad we thwarted Kalshi's efforts to remove every safeguard and put Tennessee sports bettors at risk."
Kalshi pushed back sharply, saying the ruling underscored the inconsistency of allowing states to regulate what the company sees as federally governed markets.
"The ruling shows exactly why a state-by-state patchwork doesn't work," spokesperson Dani Lever said. "Courts can't agree on the basics: Some say federal law covers these contracts, and others say it doesn't. Some recognize that sports have real economic impact, while others (incorrectly) claim they don't." She added that "markets can't operate when the rules change at every state line, which is why Congress created a single federal regulator with nationwide rules."
The CFTC did not immediately respond to a request for comment. CNBC also reached out to the Ohio attorney general's office.
Friday's ruling marks the second major appeals court loss for prediction market platforms in recent weeks. Last month, the 9th U.S. Circuit Court of Appeals ruled that Nevada has the right to regulate sports-related event contracts, saying they were sports bets rather than swaps. But the legal landscape remains unsettled: in April, the 3rd U.S. Circuit Court of Appeals ruled against New Jersey and said the CFTC has exclusive authority to regulate all swaps, regardless of contract type.
That split has heightened the stakes for the industry and for regulators. New Jersey has already appealed the 3rd Circuit decision to the Supreme Court, and the broader conflict now appears increasingly likely to reach the nation's highest court. For prediction market platforms, the outcome could determine whether they operate under a single federal framework or face a state-by-state regime that could sharply limit the growth of sports-linked contracts.
For now, the 6th Circuit's ruling strengthens the hand of states that view these products as gambling, not finance, and it adds fresh momentum to regulators seeking to keep sports wagering under traditional state oversight. As the legal fight continues, the industry faces a growing risk that the promise of a nationwide prediction market may collide with the reality of a fragmented and increasingly hostile regulatory map.