Attorneys say states cannot regulate federal event contracts

Panelists at the Next Predict Summit in New York said states should not apply their gaming laws to sports event contracts traded on federally regulated designated contract markets. The panel discussion, titled "The Jurisdiction Gap: One ruling, Two Very Different Markets," took place on Friday. The industry position is that the contracts are federally regulated derivatives, and that the Commodity Exchange Act gives the Commodity Futures Trading Commission explicit jurisdiction over the transactions.

States, tribes and gaming regulators have argued that placing money on a sports event constitutes sports betting, and that Congress did not intend the Commodity Exchange Act to remove states' traditional authority over gambling. The source reports that courts have divided on the question. In April, the U.S. Court of Appeals for the Third Circuit sided with Kalshi against New Jersey, finding that sports event contracts qualify as swaps under the Commodity Exchange Act and that the CFTC has exclusive jurisdiction, which blocked New Jersey's efforts to regulate the contracts as gambling. In August, the U.S. Court of Appeals for the Ninth Circuit reached the opposite conclusion in Kalshi's case against Nevada, finding that sports event contracts are likely not swaps.

The Sixth Circuit, in a ruling issued last month, held that sports event contracts qualify as swaps while also indicating that state gaming laws would probably survive pre-emption even under that classification. Two more courts have yet to weigh in: the U.S. Circuit Court of Appeals for the Fourth District and the Massachusetts Supreme Court. Kalshi's brief in the New Jersey matter, now before the Supreme Court, is due 9 November, and New Jersey wants the justices to hear the dispute. Separately, the CFTC has floated a proposed rule that would expressly classify event contracts as swaps, a category it describes as covering sports, political, cultural and weather contracts.

According to Javalin Dedaj, who leads litigation at Kalshi, the litigation itself grew out of the practical problem of running a nationwide business. Kalshi's position, he said, is that the trading occurs on a designated contract market and that only the CFTC should oversee it, an argument he traced to the statutory text of the Commodity Exchange Act rather than to improvisation. Facing 50 separate state regulators, in his view, is the central force behind the lawsuits, and he added that Kalshi has followed every court order and decision so far.

Brigitte Weyls, general counsel with Gemini Titan, shared Dedaj's view that these contracts sit within a federal regulatory framework. In her telling, sports event contracts were always part of what the derivatives world envisioned, and she pointed to the CFTC's 2004 licensing of Hedge Street, which is now Crypto.com. A commission memo that remains on the CFTC's website, she noted, carries a footnote saying the platform would not offer sports contracts. Weyls described these markets as long-standing and said they are here to stay.

The panel also included Bill Pascrell III, a partner at Princeton Public Affairs Group, Milbank partner Josh Sterling, and Bloomberg Intelligence litigation analyst Elliot Stein as moderator. Sterling, asked how he guides clients through the legal and regulatory fog, replied that it varies by client but that the aim is straightforward: win. Sterling, who serves as outside counsel to Kalshi and once led the CFTC's markets participation division, suggested prediction market firms might branch into additional financial products or build out other offerings even if the Supreme Court rules the other way. Weyls, for her part, said exchanges are already moving toward securities products and talking about single-stock futures, and she expected prediction markets to survive a loss to the states, possibly by becoming more regionalised for different user groups.

Dedaj said Kalshi keeps rolling out new products as it pursues clarity, and he stressed that an adverse Supreme Court ruling would not close off its options. Stein, in a recent research note, wrote that Kalshi's 25 September defeat in the Sixth Circuit at the hands of Ohio and Tennessee raises the odds of Supreme Court review, and he favours Kalshi and its prediction-market peers in that forum. The prediction markets, in his assessment, make the stronger case that such contracts can fit the Commodity Exchange Act's broad definition of swaps, a view he said federal trial courts in Arizona, Illinois, Minnesota, New Jersey and Tennessee have adopted. Stein expects the Supreme Court to decide in late 2027.