Ninth Circuit Rules Prediction Markets Are Gambling, Setting Up Supreme Court Showdown

On Friday, the Ninth Circuit Court of Appeals handed state gaming regulators a sweeping victory, ruling unanimously that prediction market operator Kalshi cannot block Nevada from enforcing its local gambling laws. The 3-0 decision concluded that Kalshi's sports event contracts are fundamentally sports bets, not federally regulated 'swaps' under the Commodity Exchange Act. By stripping away the federal preemption argument that prediction markets have used to operate nationwide, the court has opened the door for individual states to aggressively police the platforms. The ruling represents a massive blow to an industry that has relied on federal classification to bypass local gaming authorities.[1][2]

Prediction markets have exploded in popularity over the last two years by offering users the ability to wager on the outcomes of real-world events, from elections to pop culture to sports. Platforms like Kalshi built their rapid expansion on a specific regulatory framing: by classifying these wagers as financial derivatives, they claimed exclusive oversight by the Commodity Futures Trading Commission (CFTC). This classification theoretically preempted state-level gaming authorities, allowing the companies to bypass the strict, state-by-state licensing requirements and heavy taxation that traditional sportsbooks must navigate to operate legally.[3][5]

The Ninth Circuit panel firmly rejected this financial framing, applying a skeptical eye to the platform's marketing language. Writing for the court, Judge Ryan Nelson noted that the underlying substance of the contracts is simply sports gambling, regardless of the sophisticated terminology used to present them to regulators and investors. Quoting William Shakespeare's observation that 'a rose by any other name would smell as sweet,' Nelson wrote that it was thoroughly disingenuous for Kalshi to deny its products were sports bets under any reasonable person's understanding of the activity.[1][4]

The court found that federal commodity laws were never intended to strip states of their traditional police power over gambling. Kalshi had argued that because its event contracts were self-certified as swaps and traded on a CFTC-registered designated contract market, state laws were entirely preempted. The Ninth Circuit disagreed with this overly broad reading of the Commodity Exchange Act, noting that the CFTC's own regulations currently prohibit offering contracts related to gaming on prediction markets, thereby eliminating the conflict Kalshi claimed existed between state and federal law.[2][5]

The immediate practical effect of the ruling is the dissolution of a preliminary injunction that had temporarily shielded Kalshi from the Nevada Gaming Control Board. Nevada regulators, who originally issued a cease-and-desist letter in 2025, are now cleared to proceed with civil enforcement actions to shut down the unlicensed wagering within their borders. Control Board Chairman Mike Dreitzer welcomed the decision, stating that it completely vindicates the state's position that the activity is sports betting and must be regulated accordingly.[2][4][6]

The Nevada victory adds momentum to a growing wave of state-level crackdowns against the prediction market industry. Earlier in August, a federal judge in Seattle ordered Kalshi to geofence Washington state users out of its sports and election markets under threat of a $120,000 daily penalty for noncompliance. State attorneys general across the country have increasingly viewed the platforms as unlicensed sportsbooks operating in plain sight, and the Ninth Circuit's reasoning provides a powerful legal template for other states to assert their own jurisdiction.[6]

Most critically, the Ninth Circuit's decision creates a direct and irreconcilable conflict with the Third Circuit Court of Appeals. In April 2026, the Third Circuit ruled 2-1 in Kalshi's favor in a similar dispute against New Jersey. In that case, the court accepted the company's argument that federal commodity law preempted state gaming regulations, effectively granting the CFTC exclusive oversight over the contracts. The stark contrast between the two rulings leaves the legal status of prediction markets entirely dependent on geography.[1][5]

With two federal appeals courts examining the exact same financial products and reaching opposite conclusions regarding federal preemption, legal experts note that a Supreme Court showdown is now almost inevitable. Such circuit splits are the classic trigger for Supreme Court intervention. Kalshi has already indicated it will seek further review of the Ninth Circuit decision, while New Jersey faces a rapidly approaching September 3 deadline to petition the Supreme Court regarding its own loss in the Third Circuit.[4][5][6]

The ultimate resolution of this jurisdictional tug-of-war will dictate the survival of the prediction market industry's current operating model. If the Supreme Court ultimately sides with the Ninth Circuit's interpretation, platforms will be forced to navigate 50 different state gaming frameworks to offer their products legally. For an industry that has relied on a unified federal shield to scale rapidly and process billions of dollars in trades, a fragmented regulatory reality could prove to be an existential threat.[3][5]

State regulators argue this oversight is necessary to protect consumers from the harms of unlicensed gambling and to preserve state tax revenues. Conversely, the platforms maintain that their event contracts serve as legitimate financial hedges, allowing businesses and individuals to mitigate risk tied to real-world outcomes. Until the highest court weighs in to resolve the split, the boundary between a federally regulated derivative and a state-regulated sports bet remains fractured, leaving the multi-billion dollar prediction market sector in a state of profound legal uncertainty.[1][3]