Prediction Markets: Ninth Circuit Ruling and the Gambling Risk
- The Ninth Circuit Court of Appeals has ruled that contracts on sporting events from platforms such as Kalshi are gambling and not financial derivatives.
- The 3-0 ruling (Trump-appointed judges) allows States to regulate and tax these platforms according to gaming laws.
- A legal conflict (circuit split) is created with the Third Circuit decision, making Supreme Court intervention almost certain.
- 44 States argue that these platforms evade gambling rules by defining bets as CFTC-regulated swaps.
The Kalshi Case: The Ninth Circuit Ruling and the Blow to Prediction Markets
On August 28, 2026, the United States Court of Appeals for the Ninth Circuit issued a ruling that redefines the legal boundaries between financial instruments and gambling. With a unanimous 3-0 vote, a panel of three judges appointed by Donald Trump established that States have the authority to regulate prediction markets as gambling activities, rejecting the thesis that such platforms operate under exclusive federal jurisdiction.
The heart of the legal dispute concerns the nature of so-called event contracts. Platforms such as Kalshi, Crypto.com, and Robinhood have argued that their products are actually swaps, namely a type of financial derivative regulated at the federal level by the Commodity Futures Trading Commission (CFTC). However, the Court rejected this interpretation, stating that contracts linked to sporting events are not swaps, but disguised bets.
Key facts and figures
- Actors involved: Kalshi, Crypto.com, Robinhood (platforms) vs Nevada Gaming Control Board and 44 United States.
- Legal outcome: Rejection of requests for injunctive relief to block Nevada's action.
- Position of the States: 44 States argue that these platforms are gambling activities subject to state laws and taxes.
- Origin of the conflict: A cease-and-desist letter sent by Nevada to Kalshi in March 2025, followed by a civil lawsuit in February 2026.
Legal Context: The Clash between the CFTC and State Regulators
To understand the scope of the ruling, it is necessary to analyze the strategy adopted by prediction markets. These platforms operate as regulated stock exchanges, obtaining licenses from the CFTC to offer contracts on events ranging from sports to culture, from movie awards to the value of gold, and up to elections.
The business strategy was based on federal preemption: the idea that, since the contracts were classified as swaps by the CFTC, state gambling laws could not be applied. The CFTC even sued nine States to defend this exclusive jurisdiction. However, the Ninth Circuit judges described Kalshi's argument as disingenuous, noting that the company itself had used betting-related terms in its own marketing materials, going so far as to advertise itself as the first legal sports betting app in all 50 states.
The substance of the sports event contracts offered on Kalshi’s exchange is sports gambling, regardless of whether Kalshi calls them swaps.
Positions of the Actors: A War of Definitions
The conflict sees three power blocs with divergent interests facing each other:
1. The Platforms (Kalshi, Crypto.com, Robinhood)
They argue that their products are federally approved financial instruments. The goal is to avoid the regulatory fragmentation of 50 different state legislations and the application of specific gaming taxes, which would erode operating margins.
2. State Regulators (Nevada and 43 other States)
Led by the Nevada Gaming Control Board and Governor Joe Lombardo, the States claim the right to police gambling within their own territory. For Nevada, allowing Kalshi to operate without a gaming license means permitting the existence of an illegal betting pool that evades the state regulatory framework.
3. The Federal Authority (CFTC)
The CFTC has supported the platforms, arguing that all event contracts are swaps. This position aims to centralize the regulation of prediction markets under a single federal entity, facilitating the growth of the sector as a financial asset class.
Market Impact and Strategic Analysis
[ANALYSIS] This ruling is not just a matter of legal labels, but has systemic implications for the Fintech and Betting sector. The Ninth Circuit covers crucial territories, including California, which is the largest US market without legal sportsbooks. Until now, Kalshi and Polymarket have built a flourishing business in California by exploiting the regulatory vacuum of prediction contracts; this ruling could lead to the immediate blocking of such operations in the most populous market in the USA.
The immediate impact is divided into three areas:
- Operational Risk: Platforms may have to apply for gambling licenses in every single State in which they operate, drastically increasing compliance costs.
- Taxation: The shift from swap to gambling entails the application of state gambling taxes, modifying the revenue sharing model and costs for the end user.
- Reputation: The judicial denial of the financial nature of these products could alienate institutional investors who avoid exposure to the gambling sector.
What it means for a Tech and Fintech Entrepreneur
[ANALYSIS] For the entrepreneur operating in frontier sectors (AI, DeFi, Prediction Markets), the Kalshi case offers a fundamental lesson on Regulatory Arbitrage. Attempting to bypass established regulations (such as those on gambling) simply by renaming the product (from bet to swap) is a high-risk strategy that can collapse as soon as the volume of activity becomes too significant to be ignored by regulators.
The strategic implications are:
- Model Validation: Approval from a federal entity (CFTC) is not enough if the product impacts competencies reserved for the States.
- Marketing vs Legal: There is a concrete danger in using aggressive marketing language (e.g., sports betting) while arguing the exact opposite in court (e.g., financial instruments). Consistency between commercial communication and legal defense is critical.
- Geographic Diversification: Dependence on a single federal regulatory framework in a dual system like the USA is a point of vulnerability.
Future Scenarios: Towards the Supreme Court
The current situation is characterized by a circuit split: while the Ninth Circuit ruled in favor of Nevada, the Third Circuit, in an April decision, had established that all event contracts are CFTC-regulated swaps, ruling in favor of Kalshi against New Jersey.
[ANALYSIS] When two courts of appeal from different circuits reach opposite conclusions on the same point of law, the road inevitably leads to the Supreme Court of the United States. The possible scenarios are:
- Victory for the States: The Supreme Court confirms the Ninth Circuit. Prediction markets legally become gambling. Result: market fragmentation, massive licensing costs, and possible closure of some less capitalized platforms.
- Victory for the Platforms: The Supreme Court confirms the Third Circuit. Contracts remain federal swaps. Result: acceleration of sector growth, regulatory standardization, and possible massive integration into traditional trading brokers.
- Hybrid Ruling: The Court could distinguish between contracts on political/economic events (swaps) and contracts on sporting events (gambling), forcing platforms to clearly separate the two product lines.
Kalshi has already stated that it will pursue every avenue of appeal, making the legal clash a war of attrition that will determine whether prediction markets remain a speculative niche or become a pillar of modern finance.
FAQ
Why is the Ninth Circuit ruling so important?
Because it establishes that contracts on sporting events are gambling and not financial derivatives, allowing States to block or tax platforms like Kalshi, especially in key markets like California.
What is a swap in this context?
It is a type of financial derivative regulated at the federal level by the CFTC. Platforms argued that their contracts were swaps to avoid state gambling laws.
What is the difference between the Ninth Circuit decision and the Third Circuit decision?
The Ninth Circuit established that sports contracts are gambling; the Third Circuit had previously established that all event contracts are CFTC-regulated swaps. This contrast will likely bring the case to the Supreme Court.
Which platforms are affected by this decision?
The ruling specifically concerns Kalshi, Crypto.com, and Robinhood, but has implications for the entire prediction markets sector, including Polymarket.
Sources: Qz, CNN, CNBC, Californiaglobe, Arstechnica · dossier by glacom's AI newsroom
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