Three federal appeals courts have reached conflicting rulings over Kalshi’s sports contracts, raising the prospect of a Supreme Court showdown over state gambling regulation.
“I think there’s a very good chance you get Supreme Court review,” former CFTC general counsel Daniel Davis told Benzinga.
But even Supreme Court intervention may not end the uncertainty.
“A Supreme Court ruling would answer a lot, but I don’t think it settles everything,” Davis said.
Davis served as the CFTC’s general counsel from 2017 to 2021 and now co-chairs Katten’s Financial Markets and Regulation practice.
Why the Supreme Court May Step In
At the heart of the dispute is whether Kalshi can offer sports prediction contracts nationwide under federal financial regulation, or whether individual states can regulate them as gambling.
Kalshi argues that federal law gives the CFTC exclusive authority over its contracts. State regulators maintain that sports contracts must comply with their gambling laws.
The courts are divided. The Third Circuit backed Kalshi in New Jersey in April, while the Ninth Circuit ruled against it in Nevada in August. The Sixth Circuit followed in September, siding with regulators in Ohio and Tennessee.
New Jersey has petitioned the Supreme Court, drawing support from 38 other states, Washington, D.C., and the NFL.
With appeals courts divided, the federal government involved and litigation unfolding nationwide, Davis said the dispute has several characteristics that favor Supreme Court review.
What Could Decide the Fight?
“If [the Supreme Court] sticks to the language of the Commodity Exchange Act, the CFTC has a good shot at exclusive jurisdiction,” Davis said.
“But if it focuses on the states’ traditional role in regulating gambling, the odds shift toward the states.”
The Sixth Circuit held that state gambling laws could apply even if Kalshi’s contracts qualified as swaps, a type of financial derivative.
If the Supreme Court agrees, “exchanges would have to figure out where they can keep offering them, and the same is true for the brokers and other firms that give customers access,” Davis said.
He argued that this would recreate the fragmented state regulation Congress sought to avoid when it gave the CFTC exclusive jurisdiction over derivatives markets in the 1970s.
The stakes are particularly high for Kalshi. Sports contracts accounted for 84% of its trading volume in the 30 days through Oct. 6, according to Volume Race.
That heavy reliance on sports “really undermines” Kalshi’s argument against state gambling regulation, former CFPB adviser Brad Lipton previously told Benzinga.
New CFTC Rules May Not End the Fight
On Oct. 9, the CFTC proposed defining sports and other event contracts as swaps, while separately issuing an interim final rule excluding traditional sportsbook and casino wagers.
But the Sixth Circuit’s separate finding on state gambling laws suggests the proposed definition alone may not settle the dispute.
Davis said a future administration could pursue a more restrictive approach to event contracts, though finalized rules would be harder to reverse and congressional legislation would provide greater durability.
The outcome could reshape where Robinhood Markets Inc. (NASDAQ:HOOD), which offers Kalshi contracts, and DraftKings Inc. (NASDAQ:DKNG), which operates DraftKings Predictions, can offer sports contracts.
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Kalshi and Benzinga have an existing data collaboration agreement.
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