Kalshi has won an important legal battle in its fight with New Jersey over sports event contracts on Monday.
A three-judge panel of the U.S. Court of Appeals for the Third Circuit ruled 2-1 that New Jersey regulators cannot stop the prediction market platform from offering those contracts in the state.
The decision adds fresh weight to the larger question of who should regulate prediction markets in the United States.
The court said the Commodity Futures Trading Commission, or CFTC, has exclusive authority over these contracts. Therefore, New Jersey gaming regulators cannot take action against Kalshi over those products.
What Kalshi does
Kalshi is a prediction market platform that launched in 2018.
It received approval from the CFTC in 2020 to operate as a designated contract market. Users can trade contracts tied to real-world events on Kalshi.
Since last year, the company has expanded those contracts to cover major sports events, including the Super Bowl, the Stanley Cup, and NCAA tournaments.
Kalshi does not take the opposite side of users’ trades. Instead, it earns revenue by charging fees when people buy and sell contracts. But states like New Jersey argue that this looks like unlicensed gambling.
On 27 March, New Jersey’s Division of Gaming Enforcement sent Kalshi a cease-and-desist letter, saying its sports contracts broke state law.
Regulators also said the contracts conflicted with rules that ban betting on college sports and limit gambling to people aged 21 and older.
In response to New Jersey’s notice, Kalshi sued the state regulator.
The company said its contracts are not normal sports bets. Instead, it argued they are “swaps,” which are financial derivatives. Kalshi also said that swaps traded on a CFTC-licensed platform come under federal control, not state regulation.
On 28 April, U.S. District Judge Edward S. Kiel ruled in Kalshi’s favor. He said the company was likely to win because its event contracts appear to fall under the CFTC’s exclusive authority.
New Jersey later appealed the decision to the Third Circuit, which heard oral arguments on 10 September.
Appeals court backs Kalshi’s federal argument
In the decision issued Monday, Judge David Porter said Kalshi’s sports contracts are swaps traded on a CFTC-licensed platform. Because of that, he said federal law likely overrides New Jersey’s attempt to regulate them.
Judge Porter, writing for the majority, said, “New Jersey frames the issue broadly (regulating all sports gambling) rather than narrowly (regulating trading on federally designated contract markets)”.
“The text of the Act suggests that the narrow framing is the better reading. The Act preempts state laws that directly interfere with swaps traded on DCMs. Kalshi’s sports-related event contracts are swaps traded on a CFTC-licensed DCM, so the CFTC has exclusive jurisdiction,” he added.
New Jersey failed to convince the full panel. In a dissenting opinion, Judge Jane Richards Roth said Kalshi’s contracts looked much like standard sports betting products offered by online sportsbooks.
“The Majority [holds] that Kalshi’s registration as a DCM and branding of its wagers as sports-event contracts are acts of alchemy that transmute its products from sports gambling to futures trading,” Roth dissented.
New Jersey Attorney General Jennifer Davenport said the state is now reviewing its next steps.
She warned that the ruling could let some companies offer sports wagering in the state without following the same rules that apply to licensed gaming operators. The state can still ask the full Third Circuit to review the case again.
“Congress gave the CFTC exclusive jurisdiction over trades on DCMs, and this decision affirms the goals of Congress,” said CFTC spokesperson Brooke Nethercott welcoming the decision.
Kalshi CEO Tarek Mansour also praised the favourable calling it a major win for the industry and its users.
Mansour said in a post on X, “People use prediction markets because they’re more fair, transparent, and reward being right. Free markets work. We should keep them that way.”
Wider legal fights are still ongoing
Even after this win, Kalshi’s legal battle is not over. Similar cases are still moving ahead in other states.
In Nevada, a judge recently extended a ban on Kalshi’s event contracts in the state. In Massachusetts, a ruling against Kalshi is still tied up in the appeals process.
On the other hand, the CFTC is currently suing Arizona, Connecticut, and Illinois for attempting to take action against prediction markets.
Due to increasing political and legal pressures on Kalshi, it has recently hired former Obama advisor Stephanie Cutter as its policy advisor. The company said Cutter will help strengthen its public message and expand its reach in Washington.