Kalshi’s fight over sports betting is hurtling towards the Supreme Court—and the future of gambling is at stake

Prediction markets Kalshi and Polymarket claim to be truth machines that offer insights into everything from elections to interest rates. But they are also something else: Massive sports betting platforms. Recent reports have found that sports wagers accounted for over 85% of all bets on Kalshi and that, during one four-day stretch, the platform made $25 million in fee revenue from March Madness alone. Prediction markets may have all sorts of promising applications but, for now, sports are clearly the young industry’s golden goose—a goose that faces the very real possibility of being killed.

The threat comes from state governments and Native American tribes, which have filed a flood of legal challenges to claim Kalshi is running an unlicensed gambling operation. Judges in at least three states have agreed with this argument, but others have sided with Kalshi and held instead that its sports wagers are a unique type of contract allowed by federal law.

Earlier this month, a federal appeals court ruled on the issue for the first time, siding with Kalshi over the state of New Jersey. But this week, a different set of judges heard arguments in an appeal out of Nevada, and made comments that suggested they will come to a different conclusion. If that occurs, or if another appeals court rules against Kalshi, the issue will be teed up for the Supreme Court by next year, according to gaming industry lawyers, who believe this is a likely outcome.

So how might the Supreme Court rule on a sports prediction market industry expected to grow to around $200 billion in volume this year? For now, observers regard the outcome—which turns on state versus federal power as well as how to apply a law created in the wake of the 2008 financial crisis—as a true jump ball. Meanwhile, the legal scuffles have also prompted members of Congress to take sides in a fight that will decide not just the fate of the upstart prediction market industry, but the future of gambling in America.

When is gambling not gambling?

“Basic abductive reasoning tells us that if it looks like gambling, talks like gambling, and calls itself

gambling, it’s gambling,” wrote U.S. Circuit Judge Jane Roth, siding in dissent with the New Jersey Division of Gaming Enforcement in this month’s ruling by the Third Circuit.

Unfortunately for the New Jersey regulators, Roth was outvoted by two other appeals court judges, who pointed out that while the wagers on Kalshi might look like gambling, they are technically “events contracts” which are classified as swaps under federal law.

The idea of a swap is familiar enough but the word took on a very specific meaning following the financial crisis of 2008. That’s when a huge stack of credit default swaps—insurance deals between giant financial firms invisible to the broader market—imploded, triggering a meltdown across Wall Street. In response, Congress passed a series of reforms known as Dodd-Frank, which included a rule that made swaps a new form of derivative under the oversight of the Commodity Futures Trading Commission.

In the eyes of the Third Circuit majority, Kalshi had obtained a so-called Designated Contracts Market license fair and square, which means it has the right to operate a swaps forum where users enter wagers with each other on nearly anything, including sports.

The other big question for the Third Circuit, and over a dozen other courts in the country, is whether Kalshi’s status as a swap operator, which is a subset of futures trading, means it can blow off state gambling authorities. Those agencies enjoy so-called police powers reserved to the states by the Constitution, and have long used that authority to oversee or ban gambling.

The problem for New Jersey and other states is the concept of pre-emption, a doctrine that says the federal government, when lawfully exercising its powers, takes precedence over state agencies operating in the same field. Common examples are fields like immigration or pharma regulation, which have seen the feds totally pre-empt state authorities.

The case of Kalshi is less cut-and-dry, but the Third Circuit at least concluded that the platform’s status as a swap operator means New Jersey gambling authorities are pre-empted from regulating it too. The dissenting judge, however, didn’t buy this premise and accused her colleagues of buying into “acts of alchemy” that transformed old-fashioned sports betting into futures trading.

The game score so far

“Right now it IS the industry,” says Dustin Gouker, describing how much sports betting contributes to the prediction markets industry. Gouker, who publishes a newsletter devoted to the sector, believes that other categories, including wagers related to politics and crypto prices, will make up a greater share of prediction market bets over time. But for now, sports is the only game in town, pun intended, and has helped Kalshi and Polymarket justify eye-popping valuations of $22 billion and $20 billion respectively.

Needl