A Bet by Any Other Name

Prediction markets have discovered an impressive modern business formula: take an old-fashioned wager, dress it in Wall Street vocabulary and introduce it to the public as an “event contract.” A federal appeals court has now warned that, at least when sports are involved, changing the label may not change the product.

In a unanimous decision issued Friday, August 28, the Ninth U.S. Circuit Court of Appeals ruled that Kalshi had not shown that federal commodities law prevents Nevada from enforcing its gambling regulations against the company’s sports contracts. Kalshi is registered with the Commodity Futures Trading Commission as a designated contract market and argues that its products are federally regulated financial derivatives—not wagers subject to state gaming laws.

The judges were unconvinced. They noted that Kalshi customers can trade on game winners, point spreads, player performances, exact scores and multi-event combinations resembling sportsbook parlays. The court also pointed to Kalshi’s own advertising, which promoted the platform as an application for legal sports betting nationwide.

In other words, the judges concluded that a bet does not become a sophisticated financial instrument merely because the betting slip arrives wearing a necktie.

“The substance of the sports event contracts offered on Kalshi’s exchange is sports gambling,” the court wrote. It called Kalshi’s attempt to deny the similarity “disingenuous” and concluded that the federal Commodity Exchange Act probably does not override Nevada’s traditional authority to regulate gambling.

The ruling is significant, but it does not immediately settle the law for the entire United States.

The Ninth Circuit’s decisions are binding on federal courts in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington, along with Guam and the Northern Mariana Islands. Within that region, states now have powerful legal support for applying their gaming laws to sports-based prediction contracts.

Even there, however, each state must rely on its own statutes and enforcement procedures. The decision does not automatically outlaw every prediction platform, nor does it declare every event contract to be gambling.

Elsewhere, the legal picture is strikingly different. In April, the Third Circuit Court of Appeals sided with Kalshi in its dispute with New Jersey. That court concluded that federally traded sports contracts qualify as “swaps” and fall under the CFTC’s exclusive jurisdiction, preventing New Jersey from regulating them as gambling. That precedent applies in New Jersey, Pennsylvania and Delaware.

America therefore has the regulatory equivalent of two referees making opposite calls on the same play. This split between federal appeals courts makes Supreme Court review increasingly possible, although Kalshi could first seek reconsideration by a larger Ninth Circuit panel. Kalshi has already said it will pursue further review.

The Nevada ruling is also technically an appeal involving a preliminary injunction, not the final resolution of every issue in the lawsuit. It specifically addresses sports contracts. Nevada’s challenge to Kalshi’s election-related contracts was returned to the trial court for additional consideration. Markets involving inflation, interest rates, weather or other economically significant events were not broadly classified as gambling by this decision.

Despite their futuristic image, prediction markets are not especially new. Political wagering existed long before smartphones, cryptocurrency or financial apps. The first modern American prediction market, the Iowa Presidential Stock Market—now the Iowa Electronic Markets—was established at the University of Iowa in 1988 as a small academic experiment. Participants traded contracts tied to election outcomes, allowing researchers to study whether prices produced by crowds could forecast results.

The CFTC permitted that nonprofit experiment to continue under limited conditions. In 2004, it approved the first designated contract market offering binary options, and Congress later addressed event contracts through the 2010 Dodd-Frank financial reforms. Kalshi received federal designation as a contract market in 2020. Blockchain-based Polymarket helped popularize the concept online, while the enormous attention surrounding the 2024 presidential election pushed prediction-market odds into everyday political coverage.

The basic product is simple. A contract asks a yes-or-no question: Will a team win? Will inflation exceed a certain level? Will an actor receive an Oscar? A “yes” contract might trade for 65 cents and pay $1 if the event occurs—or nothing if it does not. Its price is often interpreted as the market’s estimated probability of that outcome.

That can serve a legitimate economic purpose. A farmer, airline or other business might use an event contract to offset a real-world weather or price risk. Markets can also collect scattered information and sometimes produce useful forecasts.

But buying a sports contract is not the same as investing in a company. A stock represents an ownership interest in a business that may produce goods, earn profits and grow over time. A sports contract creates no productive asset. Money is transferred among participants based on an uncertain outcome, with the exchange collecting fees. For most consumers, that is speculation—and when the question is whether the Raiders cover the spread, the Ninth Circuit says it looks remarkably like gambling.

Prediction markets may eventually become a recognized financial industry, a regulated branch of gambling or an uncomfortable mixture of both. For now, the fog has not entirely lifted. But one point is clearer: the word “market” is not a magic wand, and calling a wager an investment does not guarantee that state gambling regulators must look the other way.