A federal appeals court has dealt a significant blow to the prediction-market industry, ruling that states may regulate sports-event contracts as gambling. The decision, issued by a unanimous three-jud panel of the U.S. Court of Appeals for the 9th Circuit, rejects the argument that such contracts are federally regulated swaps and thus immune from state gaming laws. The ruling directly impacts platforms like Kalshi, Crypto.com, and Robinhood, which have sought to offer sports betting under the guise of derivatives trading.

The case centered on whether Nevada could enforce its gambling regulations against Kalshi, a platform that allows users to wager on the outcomes of sports events, elections, and other real-world occurrences. Kalshi had argued that its products are commodity derivatives regulated by the Commodity Futures Trading Commission (CFTC), not gambling. But the 9th Circuit panel, including three judges appointed by former President Donald Trump, unanimously held that sports-event contracts are not swaps under the Commodity Exchange Act.

A Landmark Ruling for State Gambling Laws

The Nevada Gaming Control Board hailed the decision, stating that the 9th Circuit “emphatically reject[ed] the view that the federal Commodity Exchange Act preempts application of Nevada’s gaming laws to sports-event contracts offered by Kalshi, Crypto.com, and Robinhood.” Nevada Governor Joe Lombardo, a Republican, echoed that sentiment: “Prediction markets offering sports-event contracts constitute gambling and must comply with Nevada’s gaming laws and regulatory framework.”

For states like Nevada, which have legalized and heavily regulated sports betting, the ruling is a victory for consumer protection and a blow to unlicensed competition. It also could revive enforcement actions in other states. Arizona, for example, had previously pursued legal action against Kalshi, and that prosecution may now regain momentum.

A Fractured Legal Landscape

While the 9th Circuit’s decision is a major setback for Kalshi, it is not the final word. The legal landscape has become a patchwork of conflicting rulings. In a separate case, the U.S. Court of Appeals for the 3rd Circuit ruled that New Jersey cannot regulate Kalshi’s prediction markets, siding with the company. That decision, combined with the 9th Circuit’s opposite conclusion, creates a clear circuit split—a factor that often prompts the Supreme Court to step in.

Other rulings have added to the confusion. A federal judge in Tennessee ruled in Kalshi’s favor, declaring that sports-event contracts are indeed swaps. In Connecticut, however, a judge ruled that the state can impose its sports betting rules on Kalshi and that the contracts “never qualified as swaps.” Utah also secured a ruling that Kalshi is subject to its anti-gambling law.

Gary Gensler, the former CFTC and SEC chair, weighed in on the debate, arguing that Kalshi is “flat wrong” in its interpretation. “Sports bets are not swaps,” he said. “They are wagers on the outcome of games, and states have a long history of regulating them.” Gensler’s comments highlight the regulatory tension between federal commodities law and state gambling law.

Market Reaction and Industry Implications

The 9th Circuit ruling sent ripples through the financial and gaming industries. Shares of DraftKings soared nearly 10%, while Flutter Entertainment jumped 8%. Investors saw the decision as a competitive advantage for licensed sportsbooks, which must comply with state regulations, over unlicensed prediction-market platforms. If prediction markets are treated as gambling, they face the same licensing, taxation, and compliance burdens as traditional sportsbooks.

Kalshi, meanwhile, faces mounting legal challenges. Connecticut has sued the company, calling its offerings “illegal, unlicensed sports betting.” The state also won a recent ruling denying Kalshi’s request for an injunction. In New Mexico, the attorney general argued that Kalshi’s preemption argument is weak, while the Fourth Circuit has expressed wariness about the company’s sports contracts—though judges there were not convinced they are necessarily illegal.

Forbes noted that the “major-questions doctrine” could play a role in future cases, potentially shifting the focus from whether prediction markets are derivatives to whether they constitute sports gambling. That doctrine requires federal agencies to have explicit congressional authorization for actions with vast economic and political significance.

The Road Ahead

The 9th Circuit’s decision is a pivotal moment, but the fight is far from over. The circuit split makes Supreme Court review increasingly likely, and the platform’s legal strategy appears to be to push for a definitive ruling on whether its products are swaps. In the meantime, states are pressing their authority. Minnesota, for example, has become a battleground in what one report called “Trump’s crosshairs,” as federal agencies under the current administration have tried to shield prediction markets from state oversight.

Critics, including The Atlantic, have argued that companies like Kalshi are “making a mockery of state gambling bans” by repackaging bets as financial derivatives. Supporters counter that prediction markets provide valuable information and liquidity, and that federal oversight is sufficient to protect consumers.

What is clear is that the legal status of prediction markets will be litigated for months or years to come. With conflicting appellate rulings, state enforcement actions, and a potential Supreme Court showdown, the future of sports betting—and the broader prediction-market industry—hangs in the balance.