Court finds that Kalshi’s sports-related event contracts do not meet the definition of swaps
The US Court of Appeals for the Sixth Circuit has dealt another blow to Kalshi with a ruling that favors gambling regulators in Ohio and Tennessee.
The court issued its opinion on Friday, stating that Kalshi had failed to show that its sports-related event contracts satisfy the statutory definition of a “swap” so as to fall within the scope of the Commodity Futures Trading Commission’s (CFTC) “exclusive jurisdiction”.
The opinion goes on to state that even if Kalshi’s sports contracts were “swaps”, the court would find that the Commodity Exchange Act (CEA) neither expressly nor impliedly preempts Ohio’s or Tennessee’s gambling laws.
The opinion enables the Ohio Casino Control Commission and the Tennessee Sports Wagering Council to pursue enforcement action against Kalshi and other prediction market operators under state gambling laws.
The court said: “While we agree with Kalshi that its sports-event contracts are conditioned on the occurrence of “event[s],” we conclude that Kalshi’s contracts do not depend on events that are “associated with a potential financial, economic, or commercial consequence” within the meaning of the statute.
“Specifically, we hold that for an “event” to be “associated with a potential financial, economic, or commercial consequence,” the event must be intrinsically associated with a financial consequence such that we can reasonably understand why hedging financial risk or ascertaining pricing information for the occurrence of that event would be desired and beneficial.
“Based on this reading, we hold that Kalshi’s sports-event contracts are not swaps under the CEA. Unlike contracts based on financial values or instruments, Kalshi’s sports-event contracts have only downstream economic consequences, assuming they have the potential to cause economic consequences at all,” the court added.
“Thus, they are not “associated” with potential financial, economic, or commercial consequences, even if they may eventually lead to some down the line. Finally, we reject Kalshi’s argument that, even if its contracts are not swaps, they are still subject to the CFTC’s exclusive jurisdiction.”
The Sixth Circuit Court of Appeal ruling adds further weight to the argument that sports and novelty event contracts fall under the definition of gambling and are subject to state regulations.
Two weeks ago, the Ninth Circuit Court of Appeals sided with two Native American Tribes in California who argued that Kalshi’s sports contracts amount to illegal class III gaming on tribal land.
The ninth circuit court also issued a ruling in late-August in support of Nevada’s efforts to prohibit Kalshi’s sports contracts, finding that Kalshi had not show a likelihood that the CEA preempts state gaming regulation of its sports event contracts.
New Jersey is looking to finally resolve the question of whether the CFTC or state gaming regulators have authority over sports event contracts, having filed a petition with the Supreme Court of the United States in early September.