The future of prediction markets in the United States faces a critical juncture following a contentious hearing before the United States Court of Appeals for the Ninth Circuit. On April 16, a three-judge panel heard oral arguments in a consolidated case featuring some of the largest names in the burgeoning event-contract industry—North American Derivatives Exchange Inc. (owned by Crypto.com), Robinhood, and Kalshi—against the State of Nevada. At the heart of the dispute is whether sports-based event contracts are sophisticated financial instruments regulated at the federal level or merely a digitized form of traditional sports betting subject to state-level gambling prohibitions. Throughout the proceedings, the judges expressed significant skepticism toward the industry’s attempts to distance its products from the legal definition of gambling, setting the stage for a ruling that could redefine the boundaries between federal commodities regulation and state police powers.
The Core Legal Conflict: Swaps versus Wagers
The legal battle stems from the interpretation of the Commodity Exchange Act (CEA) and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The plaintiffs—Crypto.com, Robinhood, and Kalshi—contend that their event-based contracts qualify as "swaps" under federal law. By classifying these contracts as swaps, the exchanges argue that they fall under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC). If this interpretation holds, federal law would preempt Nevada’s ability to regulate or ban these activities as "unlicensed gambling."
Nevada, however, maintains that these contracts are nothing more than sports bets rebranded for a digital trading environment. The state argues that if the exchanges’ logic is accepted, it would effectively strip states of their historical right to regulate gaming within their borders, a power protected by the Tenth Amendment and the McCarran-Ferguson Act in related contexts.
Judicial Resistance and the "Sophistry" Critique
The hearing was marked by sharp exchanges between the bench and the industry’s legal representatives. U.S. Circuit Judge Ryan Nelson emerged as a particularly vocal critic of the exchanges’ arguments. When Shay Dvoretzky, representing Crypto.com, attempted to explain the structural differences between an exchange-traded contract and a sportsbook wager, Judge Nelson interrupted with a blunt assessment of the industry’s rhetoric.
"This is sophistry to the nth degree," Nelson remarked, suggesting that the industry was using complex terminology to obscure a simple reality. "It’s still the house." He challenged the notion that a prediction market differs in substance from the sportsbooks found in major Las Vegas casinos like Caesars Palace. Nelson noted that while the "waters have been muddied" by modern technology and financial engineering, the underlying activity—putting money at risk based on the outcome of a future event—remains fundamentally the same.
William Havemann, counsel for Kalshi, attempted to pivot the argument toward "market structure." He argued that unlike a casino, where a player bets against the "house," a prediction market facilitates trades between independent market participants. This structure, Havemann argued, allows for "price discovery," where the fluctuating value of a contract provides a real-time data point on the likelihood of an event occurring. Judge Nelson remained unconvinced, comparing the mechanism to a roulette wheel. He suggested that whether the transaction is structured as a peer-to-peer trade or a bet against a bookmaker, the "ball," the "table," and the "outcome" remain identical.
The Role of CFTC Rule 40.11
A significant portion of the oral argument focused on the technical application of CFTC Rule 40.11. This regulation prohibits registered entities from listing contracts that involve certain "excluded" activities, including terrorism, assassination, war, and "gaming." The interpretation of what constitutes "gaming" has become a central battleground in the litigation.
The exchanges argued that "gaming" should be narrowly interpreted to mean casino-style games like blackjack or slots, rather than sporting events. However, Judge Nelson pointed to the plain language of the rule, which he noted requires a rigorous 90-day review and approval process for any contract that might touch upon these sensitive areas. He questioned why the exchanges, with "billions of dollars on the line," did not seek prior approval under Subsection C of the rule before listing their products.
Antony Ryan, representing Robinhood, argued that Rule 40.11 allows for "self-certification," a process where an exchange notifies the CFTC of a new product and begins trading unless the agency affirmatively steps in to stop it. Judge Nelson expressed disbelief at this reading, stating, "The language says it can’t go up. I don’t know how you can read it differently." This focus on the procedural requirements of Rule 40.11 suggests the court may be looking for a way to rule against the exchanges on administrative grounds rather than tackling the broader constitutional questions of state vs. federal power.
Chronology of the Prediction Market Legal Saga
To understand the weight of the Ninth Circuit hearing, one must look at the timeline of events that led to this confrontation:
- 2010: The Dodd-Frank Act expands the definition of "swaps" under the CEA, giving the CFTC broader authority over financial derivatives.
- 2021-2022: Kalshi and other platforms gain traction, seeking to list contracts on a wide array of events, including economic data and political outcomes.
- September 2023: The CFTC rejects Kalshi’s proposal to list contracts on which political party would control Congress, citing the "gaming" prohibition in Rule 40.11 and the public interest.
- Late 2023: Nevada and other states begin to increase scrutiny on these platforms, arguing they are operating as unlicensed sportsbooks.
- Early 2024: A series of lawsuits are consolidated in the Ninth Circuit as platforms seek a declaratory judgment that their products are federally regulated swaps.
- April 16, 2024: Oral arguments are held in the Ninth Circuit, with the CFTC surprisingly siding with the exchanges on the jurisdictional question.
The CFTC’s Surprising Stance
In a notable turn of events, the CFTC’s legal representative, Jordan Minot, argued in support of the prediction markets’ jurisdictional claims. Minot told the panel that even if a contract violates specific CFTC rules, it does not cease to be a "swap." Under this logic, the CFTC maintains exclusive authority to penalize or regulate the contract, and states have no business reclassifying it as gambling to assert their own jurisdiction.
The CFTC’s stance is a calculated move to protect its regulatory turf. By arguing that these contracts are swaps, the agency ensures that it remains the primary arbiter of the event-contract market. However, this puts the agency in the awkward position of defending the "swap" status of products that it has, in other contexts, tried to restrict. Minot attempted to draw a fine line, stating that while the agency considers "gaming" to mean casino gambling, it does not believe that individual sporting events fall under that umbrella.
Nevada’s Warning on State Sovereignty
Nicole Saharsky, the attorney representing Nevada, presented a dire outlook for state regulators if the court rules in favor of the exchanges. She characterized the industry’s position as a "severe intrusion on state sovereignty." If every sports-based contract is deemed a federal swap, Saharsky argued, the CFTC would effectively become the "nation’s gaming regulator," a role it is neither equipped for nor legally authorized to hold.
Saharsky further noted that because the CEA requires all swaps to be traded on registered exchanges, a ruling for the plaintiffs could theoretically invalidate all state-regulated sports betting. If a bet on the Super Bowl is a swap, then every local sportsbook in Nevada would be in violation of federal law unless they registered as a Designated Contract Market (DCM) with the CFTC. This "slippery slope" argument appeared to resonate with the judges, although Judge Nelson questioned whether a middle ground could be found—perhaps by distinguishing between a bet on the winner of a game and a "novel" event contract.
Supporting Data and Market Implications
The outcome of this case carries immense financial implications. According to market data from 2023 and early 2024, prediction markets have seen an explosion in volume. Kalshi and Polymarket (which operates outside the U.S. but influences the global market) have seen hundreds of millions of dollars in turnover. During the 2022 midterm elections, prediction markets were often cited as more accurate than traditional polling, highlighting their utility as data tools.
However, from Nevada’s perspective, the data is about tax revenue and consumer protection. In 2023, Nevada’s legal sportsbooks handled over $8 billion in wagers, generating significant tax revenue for the state. If prediction markets are allowed to operate under federal swap rules, they could potentially bypass state taxes and the rigorous licensing fees that traditional operators pay, creating an unlevel playing field.
Analysis of Potential Outcomes
The Ninth Circuit has several paths forward, each with distinct consequences for the industry:
- Affirmation of State Power: If the court rules that these contracts are gambling and not swaps, prediction markets will likely be forced to cease operations in states like Nevada or seek individual state gaming licenses. This would lead to a fragmented regulatory landscape, making it difficult for exchanges to maintain a unified national liquidity pool.
- Federal Preemption: A ruling in favor of the exchanges would cement the CFTC’s role as the sole regulator. This would be a massive victory for Crypto.com, Robinhood, and Kalshi, allowing them to scale rapidly across the country. However, it would likely trigger a legislative response from Congress as states lobby to reclaim their gaming authority.
- The Procedural Middle Ground: The court could rule that while these could be swaps, the exchanges failed to follow the proper approval channels under Rule 40.11. This would send the companies back to the drawing board with the CFTC, delaying their expansion but avoiding a definitive constitutional ruling.
Regardless of the Ninth Circuit’s decision, legal analysts widely expect the case to be appealed to the U.S. Supreme Court. With different circuits currently weighing in on similar issues—including a recent Third Circuit ruling involving Kalshi and New Jersey—a "circuit split" is becoming increasingly likely. As prediction markets continue to merge the worlds of high-finance and popular culture, the judiciary is being forced to decide if a bet by any other name still smells like gambling.
