Prediction Markets: Ninth Circuit rulings and the clash between Swaps and Gambling
- The Ninth Circuit has ruled that sports event contracts are gambling and not financial derivatives (swaps), legitimizing state regulation.
- A 'circuit split' is created between the Third and Ninth Courts of Appeal, making intervention by the US Supreme Court almost inevitable.
- 44 States contest the exclusive jurisdiction of the CFTC, claiming the right to tax and regulate these platforms as betting houses.
- Kalshi, Crypto.com, and Robinhood risk operational blocks in Nevada and other states within the Ninth Circuit's jurisdiction.
The landscape of prediction markets in the United States suffered a fundamental shock on August 28, 2026. A unanimous (3-0) ruling by the Ninth Circuit Court of Appeals redefined the boundary between financial instrument and gambling, hitting the business model of platforms such as Kalshi, Crypto.com, and Robinhood hard. The decision does not concern only a technical dispute, but the very essence of prediction market regulation: are they financial derivatives under federal aegis or bets subject to the laws of individual States?
The clash between 'Swaps' and Betting: why the Ninth Circuit dismantled Kalshi's thesis
The heart of the legal dispute lies in the technical classification of the products offered by Kalshi. The platform, supported by the Commodity Futures Trading Commission (CFTC), argued that its 'event contracts' are actually 'derivative swaps', namely derivative contracts regulated at the federal level. This classification would allow platforms to operate under federal licenses, bypassing the rigid and varied state gambling laws.
However, the panel of three judges appointed by Donald Trump (Ryan D. Nelson, Bridget S. Bade, and Kenneth K. Lee) categorically rejected this thesis. In the ruling, the Court stated that 'The substance of the sports event contracts offered on Kalshi’s (exchange) is sports gambling, regardless of whether Kalshi calls them swaps'.
Strategic Analysis: The court applied the principle of 'substance over form'. For fintech entrepreneurs, this represents a dangerous precedent: it is no longer sufficient to label a product as a 'financial instrument' to evade local regulations if the user experience and the underlying asset (in this case, the outcome of a sporting event) exactly mirror the betting model.
The geography of the conflict: the 44 rebel States against the CFTC
The conflict is not limited to Nevada, but reflects a systemic tension between federal authority and state administrations. On one side, the CFTC claims exclusive jurisdiction over all event contracts, even going as far as suing nine States to defend this primacy.
On the other side, a block of 44 States maintains that these platforms are, for all intents and purposes, gambling services. The reasons for this opposition are twofold:
- Fiscal: Recognition as gambling allows States to apply specific betting taxes.
- Regulatory: It allows Gaming Control Boards to monitor operations to prevent fraud and protect consumers according to local rules.
The specific case arose in Nevada, where the Nevada Gaming Control Board sent a cease-and-desist letter to Kalshi in March 2025, accusing it of operating an unlicensed sports pool in violation of the Nevada Revised Statutes.
Circuit Split: the legal short-circuit between the Third and Ninth Courts of Appeal
The Ninth Circuit ruling has created what is known in American legal jargon as a 'circuit split', a divergence of interpretation between different federal courts of appeal. This scenario is the classic prelude to an intervention by the Supreme Court.
| Court of Appeal | Decision | Main Thesis | Implication |
|---|---|---|---|
| Third Circuit (April 2026) | In favor of Kalshi | All event contracts are 'swaps' regulated by the CFTC. | Prevalence of federal law over state law (e.g., New Jersey). |
| Ninth Circuit (August 2026) | In favor of Nevada | Sports contracts are bets, not derivatives. | States can regulate and tax prediction markets. |
Internal Geopolitical Analysis: The scope of the Ninth Circuit's decision is massive as it includes California, the largest market in the USA where traditional bookmakers are illegal, but where Kalshi, Polymarket, and DraftKings Predictions have built a flourishing business based precisely on the financial contracts thesis.
The marketing misunderstanding: the 'disingenuous' evidence that condemned the platforms
A crucial element that influenced the judges' judgment was the analysis of Kalshi's commercial communication. While in court the company insisted on the financial and technical nature of its 'swaps', the judges found a clear discrepancy with the marketing material used to acquire users.
The Court defined as 'disingenuous' Kalshi's attempt to deny that its products were sports bets, given that the company had used exactly such terminology in its advertising campaigns. This 'behind the scenes' reveals a strategic positioning error: having tried to attract the betting public using betting language, while attempting to protect itself legally with financial language.
Kalshi, Crypto.com, and Robinhood: who risks an operational blackout in Nevada
The ruling did not only hit Kalshi, but extended its effects to several platforms offering event contracts, denying them the injunctive relief requested to continue operating while the trial proceeds.
| Platform | Exposure | Legal Request Status | Operational Risk |
|---|---|---|---|
| Kalshi | High (Core business on event contracts) | Request for injunctive relief denied. | Total block of sports contracts in Nevada and Ninth Circuit. |
| Crypto.com | Medium (Prediction markets integration) | Request for injunctive relief denied. | Suspension of unlicensed sports betting offers. |
| Robinhood | Medium (Event contracts on trading platform) | Request for injunctive relief denied. | Risk of having to remove sports contracts for Nevada users. |
Towards the Supreme Court: the legal steps to define the future of prediction markets
The legal path that will lead to the final definition of the matter will likely follow this timeline:
- August 2026: Ninth Circuit ruling validating the power of States to regulate prediction markets as gambling.
- September - December 2026: Appeal phase by Kalshi and possible filing of a Petition for Writ of Certiorari to the Supreme Court of the United States.
- 2027 (Scenario A): The Supreme Court accepts the case to resolve the 'circuit split'. Verifiable indicator: Publication of the order 'granting certiorari'.
- 2027 (Scenario B): The Supreme Court refuses the case. Verifiable indicator: 'Denial of certiorari'. In this case, the law of the Ninth Circuit would prevail in its states and that of the Third Circuit in others, creating a fragmented regulatory mosaic.
Predictive betting and EU regulation: between gambling risk and the protection of financial markets
The US case offers fundamental points of reflection for the European Union and Italy. Although the EU does not have a similar 'circuit split' system, the distinction between 'financial instrument' and 'gambling' is equally critical.
For Italian companies and the EU, the main implication lies in the supervision of the nature of fintech products. If a prediction market application were launched in Italy, the Customs and Monopolies Agency (ADM) could apply reasoning similar to that of the Ninth Circuit: if the product is marketed as a bet, it will be treated as such, regardless of the technical structure of 'swap' or 'derivative'.
Furthermore, the integration of these markets with AI (for predictive analysis) could lead to an intersection with the AI Act, especially if such systems were used to manipulate markets or influence democratic processes (such as elections, a point that the Ninth Circuit deferred to a more specific examination). In summary, for the European entrepreneur, the lesson is clear: regulatory compliance must be consistent between the marketing aimed at the user and the legal structure presented to regulators.
FAQ
Why is the Ninth Circuit ruling so important for business?
Because it establishes that States can ignore CFTC federal licenses and tax/regulate prediction markets as gambling, eliminating the competitive advantage of operating as 'financial exchanges'.
What is the difference between a 'swap' and a 'bet' in this context?
Technically, a swap is a financial derivative regulated at the federal level (CFTC); a bet is a gambling contract regulated by state laws. The Court established that, in sports contracts, the difference is only nominal.
Which platforms are directly affected?
Kalshi, Crypto.com, and Robinhood have had their requests to continue operating in Nevada denied while the legality of their products is discussed.
What happens now in California?
Being under the jurisdiction of the Ninth Circuit, California could now apply its own anti-gambling laws to these platforms, despite the lack of traditional legal bookmakers in the State.
Sources: Qz, CNN, CNBC, Californiaglobe · by glacom.news AI
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