The Ninth Circuit Court of Appeals has ruled that Kalshi's efforts to prevent Nevada gaming regulators from intervening in its operations have been thwarted. A three-judge panel determined that federal laws governing commodities trading do not override a state's authority to regulate gambling.
This ruling stands in stark contrast to a decision made by the Third Circuit Court of Appeals about five months ago, which favored Kalshi in its legal battle against the New Jersey Division of Gaming. As a result, the issue of whether federally regulated prediction markets can engage in trades based on sporting event outcomes is likely to escalate to the U.S. Supreme Court.
In a comprehensive 36-page opinion, U.S. Circuit Judge Ryan D. Nelson criticized Kalshi's interpretation of the Dodd-Frank Act, stating that it was excessively broad. He emphasized the need to consider not only the text of the law but also its context and historical implications.
For years, the regulations governing commodity exchanges have explicitly prohibited prediction markets from trading any transactions associated with activities deemed illegal under state or federal law, including gambling. Judge Nelson noted that the term 'shall' in legal contexts is typically understood as a mandatory requirement.
He remarked, "It is difficult, then, to conclude that Congress intended to upend its decades of careful regulation of gambling based on broad definitions of the words used in a Wall Street Reform Bill."
Judge Nelson also pointed out that Kalshi has a significant issue with gambling, as it markets its sports contracts as legal gambling options. However, Kalshi argues that its event contracts are distinct from traditional wagers made through sportsbooks.
Nelson dismissed this argument as implausible, stating that Kalshi's operations resemble those of a sportsbook, which takes opposing bets and profits when a bettor loses. He noted that Kalshi's trading affiliate acts as a market maker, which raises further questions about its business model.
In a notable development, Donald Trump Jr. became an advisor to Kalshi shortly after his father, President Trump, began his second term. Reports suggest that he received a $300,000 stake in the company, which has seen its valuation soar to $22 billion following a $1 billion venture funding round this spring.
The Ninth Circuit's ruling sharply contrasts with the Third Circuit's earlier opinion, where Judge David J. Porter highlighted that the Commodity Futures Trading Commission (CFTC) has opted not to enforce regulations against Kalshi's sports markets.
New Jersey, which was unsuccessful in the Third Circuit, has until next Thursday to determine if it will seek Supreme Court review of the case. Earlier this year, the commission suggested new rules that would allow prediction markets to offer contracts on sporting events, with certain restrictions in place.