Prediction markets Kalshi and Polymarket claim to be truth machines that offer insights into everything from elections to interest rates. But they are also something else: massive sports betting platforms. Recent reports have found that sports wagers accounted for over 85% of all bets on Kalshi and that, during one four-day stretch, the platform made $25 million in fee revenue from March Madness alone. Prediction markets may have all sorts of promising applications, but for now, sports are clearly the young industry’s golden goose—a goose that faces the very real possibility of being killed.
The threat comes from state governments and Native American tribes, which have filed a flood of legal challenges to claim Kalshi is running an unlicensed gambling operation. Judges in at least three states have agreed with this argument, but others have sided with Kalshi and held instead that its sports wagers are a unique type of contract allowed by federal law.
Earlier this month, a federal appeals court ruled on the issue for the first time, siding with Kalshi over the State of New Jersey. But this week, a different set of judges heard arguments in an appeal out of Nevada, and made comments that suggested they will come to a different conclusion. If that occurs, or if another appeals court rules against Kalshi, the issue will be teed up for the Supreme Court by next year, according to gaming industry lawyers, who believe this is a likely outcome.
So how might the Supreme Court rule on a sports prediction-market industry expected to grow to around $200 billion in volume this year? For now, observers regard the outcome—which turns on state versus federal power, as well as how to apply a law created in the wake of the 2008 financial crisis—as a true jump ball. Meanwhile, the legal scuffles have also prompted members of Congress to take sides in a fight that will decide not just the fate of the upstart prediction market industry, but the future of gambling in America.
When is gambling not gambling?
“Basic abductive reasoning tells us that if it looks like gambling, talks like gambling, and calls itself gambling, it’s gambling,” wrote U.S. Circuit Judge Jane Roth, siding in dissent with the New Jersey Division of Gaming Enforcement in this month’s ruling by the Third Circuit.
Unfortunately for the New Jersey regulators, Roth was outvoted by two other appeals court judges, who pointed out that while the wagers on Kalshi might look like gambling, they are technically “events contracts,” which are classified as swaps under federal law.
The idea of a swap is familiar enough, but the word took on a very specific meaning following the financial crisis of 2008. That’s when a huge stack of credit default swaps—insurance deals between giant financial firms invisible to the broader market—imploded, triggering a meltdown across Wall Street. In response, Congress passed a series of reforms known as Dodd-Frank, which included a rule that made swaps a new form of derivative under the oversight of the Commodity Futures Trading Commission.
In the eyes of the Third Circuit majority, Kalshi had obtained a so-called Designated Contracts Market license fair and square, which means it has the right to operate a swaps forum, where users enter wagers with one another on nearly anything, including sports.
The other big question for the Third Circuit, and over a dozen other courts in the country, is whether Kalshi’s status as a swap operator, which is a subset of futures trading, means it can blow off state gambling authorities. Those agencies enjoy so-called police powers reserved to the states by the Constitution, and have long used that authority to oversee or ban gambling.
The problem for New Jersey and other states is the concept of preemption, a doctrine that says the federal government, when lawfully exercising its powers, takes precedence over state agencies operating in the same field. Common examples are fields like immigration or pharma regulation, which have seen the feds totally preempt state authorities.
The case of Kalshi is less cut-and-dry, but the Third Circuit at least concluded that the platform’s status as a swap operator means New Jersey gambling authorities are preempted from regulating it, too. The dissenting judge, however, didn’t buy this premise and accused her colleagues of buying into “acts of alchemy” that transformed old-fashioned sports betting into futures trading.
The game score so far
“Right now it is the industry,” says Dustin Gouker, describing how much sports betting contributes to the prediction markets industry. Gouker, who publishes a newsletter devoted to the sector, believes that other categories, including wagers related to politics and crypto prices, will make up a greater share of prediction market bets over time. But for now, sports is the only game in town, pun intended, and has helped Kalshi and Polymarket justify eye-popping valuations of $22 billion and $20 billion, respectively.
Needless to say, those valuations would be punctured badly if courts ultimately rule Kalshi’s status as a swap operator doesn’t shield it from state authorities. And there is a distinct possibility that could happen.
At a hearing before the Ninth Circuit this week, reports say, judges appeared to favor the arguments of the state of Nevada over those of Kalshi, as well as Robinhood and Crypto.com, which have launched prediction markets of their own. (Kalshi’s main rival, Polymarket, is not part of the litigation, since for now it is not operating in the U.S.)
A ruling from that appeals court is expected in coming weeks, and if it goes against the prediction market companies, it will create the sort of circuit split that makes a case ripe for the Supreme Court. In the meantime, though, it is likely the top court may wait for further appeals rulings to bubble up in other courts.
“If you are the prediction markets, the goal is to create litigation in as many circuits as possible to expand the runway,” said gaming lawyer Daniel Wallach, explaining that a prolonged legal battle will buy Kalshi and others time to keep offering sports bets.
Meanwhile, the prospect of sprawling litigation on another prediction markets front is already a reality. The Commodity Futures Trading Commission, long a relatively small and obscure agency, has taken the unusual step of seeking court rulings to stave off Arizona, Connecticut, and Illinois (all of which are home to significant gaming interests) from issuing injunctions against Kalshi.
What matters most, of course, is how the Supreme Court might rule, and for now, lawyers say, any outcome appears genuinely uncertain.
“This is a classic case of old tools being applied to cutting-edge technologies, and it’s too soon to say how courts will come out on those questions,” said Austin Evers, a partner at Freshfields in Washington, D.C.
That echoes the view of other attorneys, including Kayvan Sadeghi, partner at Jenner & Block in New York. He notes that, while the Trump administration and some Republicans support the prediction markets, conservative judges are frequently sympathetic to states’ rights arguments—an inclination that could be at play on the heavily conservative Supreme Court.
Lawyers note that Kalshi and its allies will also have to contend with a pair of relatively recent rulings by the top court that are unlikely to help their cause. The first is the 2018 ruling known as Murphy v. NCAA, which struck down the federal government’s exclusive authority over sports betting, which could undermine the CFTC’s claim that its authority over sports-related swaps freezes out the states. The other is a case known as Loper Bright, from 2024, where the justices ruled that courts owe no deference to the expertise of agencies, which could again undercut the CFTC’s position.
Even if the Supreme Court were to rule against Kalshi—not a sure thing by any means—that is hardly the end of the matter. Even as the litigation train barrels toward the top court, another branch of government is taking an interest in prediction markets.
Unusual coalitions
“Pervasive gambling is not good for society. It turns life into a casino, traps people in addiction & debt, surges domestic violence, and fosters manipulation,” Congresswoman Alexandria Ocasio-Cortez (D-N.Y.) wrote on X in response to news from Polymarket that it has secured a partnership with Major League Baseball.
The remark is hardly a surprise given Ocasio-Cortez’s progressive reputation. What is surprising is that numerous conservatives piped up to agree with her, including Daily Wire host Michael Knowles, who wrote: “This is sad: I agree with @AOC.”
While Republicans in Congress typically march in lockstep with President Trump, several members have already sought to corral prediction markets, including Sen. John Curtis (R-Utah), who is cosponsor of a bipartisan bill with Sen. Adam Schiff (D-Calif.) titled the Prediction Markets Are Gambling Act. The bill proposes to close what the legislators deem a CFTC “loophole.”
Evers, the Freshfields lawyer, says that prediction markets are still new enough that overall public opinion has not yet coalesced around how to regulate them and that, even if Democrats take back control of Congress in the midterms, it is not automatic that legislation will follow.
“It’s always easy placing a bet on Congress being unable to pass legislation,” notes Evers. But he adds that prediction markets amount to an important new public policy debate, so lawmakers are likely to be engaged.
Meanwhile, in a sign of the fluidity of opinion around prediction markets, Blanche Lincoln, a senator from Arkansas at the time, warned during the debate over Dodd-Frank in 2010 that regulated swaps should not be extended to cover wagers on the Masters or the Super Bowl. Today, she is a registered lobbyist for Kalshi, arguing the opposite.
As the fate of sports-related prediction markets remains up in the air, there is one tool that could supply valuable insight for whether they will remain legal. Alas, there are currently no events contracts on Kalshi that let users bet on the company’s own fate in Congress or in court.
