During oral arguments on April 16, judges from the Ninth Circuit Court of Appeals raised doubts about whether sports event contracts in prediction markets are significantly different from traditional sports betting. This discussion took place in a consolidated case involving North American Derivatives Exchange Inc. (Crypto.com), Robinhood, and Kalshi against the state of Nevada.
The judges probed whether these contracts could be classified as federally regulated “swaps” under the Commodity Exchange Act (CEA), questioning if such a classification would override state gambling regulations. They also examined how the Commodity Futures Trading Commission’s (CFTC) Rule 40.11 relates to these products.
U.S. Circuit Judge Ryan Nelson expressed skepticism about the industry's claims that their products are distinct from gambling, stating, “This is sophistry to the nth degree… It’s still the house.” He challenged the argument presented by Crypto.com’s attorney, Shay Dvoretzky, asking for clarification on the difference between a sports bet at Caesars and one in a prediction market. Nelson remarked, “The waters have been muddied, but that happens all the time.”
Kalshi’s attorney, William Havemann, contended that sports event contracts are not the same as gambling bets found in casinos. However, Nelson countered, asserting that the actions involved are often identical. He emphasized that states have historically regulated these types of activities.
The plaintiffs' legal team highlighted the structural differences between prediction markets and traditional sportsbooks. Despite this, Judge Nelson maintained that setting odds and betting on outcomes are fundamentally similar, questioning how the two could be considered different.
In comparing exchange-based contracts to a roulette bet, Nelson suggested that the underlying activities remain consistent regardless of how the transactions are structured. He stated, “It’s the same ball, it’s the same roulette table, it’s the same guy putting it around.”
While Havemann acknowledged the similarities in outcomes, he argued that trading in prediction markets involves participants rather than a house, and also serves a price discovery function. Nevertheless, the court seemed unconvinced that these structural differences could alter the nature of the transactions.
Nevada's attorney, Nicole Saharsky, argued that not all forms of gambling necessitate a house, countering the exchanges' claims. She pointed out that market makers can function as the house for certain contracts.
Prediction market attorneys heavily referenced the CEA’s definition of swaps, asserting that it encompasses event-based contracts. Dvoretzky began the hearing by referencing the Dodd-Frank Act.