Ruling on Kalshi Poses Threat to CFTC’s Regulations on Prediction Markets
On Aug. 28, a federal appeals court determined that Kalshi had not provided sufficient evidence that Nevada’s oversight of its sports-event contracts would likely be overridden by federal commodities law.
Summary
- Ninth Circuit judges concluded that Kalshi is unlikely to prevent Nevada regulation of sports-event contracts through preemption.
- The ruling did not negate CFTC rulemaking nor did it settle any future challenges under the Administrative Procedure Act.
- A conflicting decision from the Third Circuit enhances the likelihood of Supreme Court involvement in Kalshi’s cases.
- The challenge regarding Nevada’s election contracts will return to district court, while the enforcement of sports contracts can proceed during ongoing litigation.
- The CFTC has proposed a ninety-day review for specific event contracts that include gaming activities nationwide.
This unanimous decision permits Nevada gaming regulators to uphold state requirements while legal proceedings are ongoing.
Additionally, the Ninth Circuit opinion raised issues under the major-questions doctrine but did not invalidate the Commodity Futures Trading Commission’s proposed event-contract regulations or determine if a forthcoming final rule would withstand challenges under the Administrative Procedure Act.
Kalshi ruling upholds Nevada’s sports-betting jurisdiction
Kalshi contended that its sports-event contracts fell under the definition of swaps as outlined in the Commodity Exchange Act. Because Kalshi operates a designated contract market regulated by the CFTC, it argued that federal authority superseded Nevada’s gaming legislation.
However, the Ninth Circuit dismissed this claim at the preliminary-injunction level, highlighting that the contracts likely did not fit within the definition of “swap” as they acted as sports bets. The panel subsequently rejected Kalshi’s explicit conflict and field-preemption arguments.
Circuit Judge Ryan Nelson stated that “the CFTC is not a national gambling regulator.” The court noted that Kalshi’s broader interpretation lacked appropriate limitations and did not align with the relevant statutory framework.
As reported by crypto.news, the unanimous 3-0 decision upheld the lifting of a previous injunction that had shielded Kalshi from Nevada’s enforcement actions. The panel also redirected Nevada’s separate election-contract claims back to district court for further examination.
Major-questions commentary doesn’t halt CFTC rulemaking
Gaming attorney Daniel Wallach posited that the CFTC’s rulemaking was “DOA” due to the court’s major-questions assessment. He anticipated APA litigation emerging in a California federal court in a post dated Aug. 29.
This expectation goes beyond the court’s direct ruling. The opinion noted that Kalshi’s extensive interpretation of “swap” “could raise concerns under the major-questions doctrine.” However, it did not assert that the doctrine entirely precludes the CFTC from overseeing prediction markets.
Ripple’s former CTO David Schwartz challenged Wallach’s interpretation, stating, “This seems to be incorrect to me.” He suggested that Congress could create a federal structure for exchange-traded contracts without undermining traditional state-regulated sportsbooks.
It’s important to note that Schwartz’s comments reflect his viewpoint and do not represent Ripple’s corporate stance or any judicial finding. The ruling assessed whether Kalshi adequately demonstrated a likelihood of success on its preemption argument.
CFTC proposal is pending but faces new challenges
The CFTC’s proposal from June aims to amend Rule 40.11, which oversees event contracts related to gaming, terrorism, assassination, war, and unlawful actions under federal or state laws.
Under this proposal, a 90-day review process would be established, clarifying the agency’s definitions of “gaming” and the circumstances under which a contract “involves” specified activities. The CFTC would individually assess covered contracts using outlined public-interest criteria.
The comment period for the Federal Register notice ended on July 27. After reviewing public feedback, the agency can choose to revise, finalize, or withdraw the proposal.
A finalized rule might face an APA challenge regarding statutory authority, procedural issues, or agency rationale. Wallach predicted such litigation, but no corresponding complaint had been confirmed as the dialogue unfolded.
Circuit split raises potential for Supreme Court involvement
The Ninth Circuit’s ruling stands in contrast to a Third Circuit decision favoring Kalshi in its conflict with New Jersey. This divergence enhances the chances of Supreme Court review, though such review is not assured.
According to Reuters, New Jersey had until Sept. 3 to pursue further review of the Third Circuit decision. Kalshi may also opt for a rehearing in the Ninth Circuit or petition the Supreme Court, though such actions have yet to be confirmed.
The jurisdictional conflict extends beyond Nevada. As previously detailed in crypto.news coverage of the prediction market dispute, various states categorize sports contracts as gambling products necessitating local licensing. Kalshi asserts that federal derivatives regulation preempts these state requirements.
At this stage, Nevada retains the authority to enforce its gaming regulations against Kalshi’s sports contracts. While the CFTC proposal remains active, the Ninth Circuit ruling equips potential challengers with additional arguments against any final rule that claims extensive authority over sports-event markets.