A federal appeals court ruled Friday that states can regulate Kalshi sports event contracts under their gambling laws, handing the prediction market operator its second major legal defeat in weeks and narrowing the federal preemption argument the industry has leaned on.
The Sixth Circuit Court of Appeals, in a unanimous three-judge panel, sided with Ohio and Tennessee in a pair of lawsuits Kalshi filed against their regulators. The court found the company did not show that its sports-event contracts qualify as swaps under the Commodity Exchange Act, the classification Kalshi used to argue that only the federal Commodity Futures Trading Commission could touch them. Because the contracts are not swaps, they fall outside federal oversight and inside state gambling authority.
The ruling, reported by <a href="https://www.reuters.com/business/finance/us-appeals-court-rules-against-kalshi-says-states-can-regulate-prediction-2026-09-25/">Reuters</a> and <a href="https://www.cnbc.com/2026/09/25/appeals-court-rules-states-can-regulate-sports-prediction-markets.html">CNBC</a>, follows a similar loss at the Ninth Circuit in August, where the court declined to block Nevada enforcement against KalshiEX. Two circuits reaching the same conclusion within weeks shifts the legal balance in a fight that has been running through federal courts all year.
The panel ruled that prediction markets sports-related event contracts are not swaps, and therefore are not subject to federal regulatory oversight, the Sixth Circuit held in its September 25 order.
Why the swap argument matters
Kalshi has built its national footprint on a single legal theory: event contracts are derivatives regulated by the CFTC, so state gambling boards have no jurisdiction. That framing let the company launch sports markets in states that never authorized sports betting, often within days of a new league season. The Sixth Circuit rejected the premise directly. If sports contracts are not swaps, the CFTC exclusive jurisdiction claim collapses, and states are free to treat the markets like any other wagering product.
The practical consequences arrive quickly. Ohio and Tennessee can now enforce their gambling statutes against Kalshi operations, and other states with pending disputes gain a persuasive appellate precedent. Kalshi can seek en banc review from the full Sixth Circuit or petition the Supreme Court, but until then the company faces a patchwork of state rules rather than a single federal regime.
A hard week for the industry in Washington
Regulators elsewhere are watching. Several state attorneys general had held off pending the appellate outcomes, and the Sixth Circuit reasoning gives them a template that does not require new legislation. At the same time, the Commodity Futures Trading Commission has its own review underway: on Thursday it issued guidance limiting mention-based prediction contracts, requiring exchanges to provide contract-specific analysis before listing products tied to statements by public figures. The regulator cited manipulation risk, and the advisory asks exchanges to explain their safeguards contract by contract. Kalshi has continued listing speech markets despite the scrutiny, according to CryptoSlate coverage of the advisory.
The losses also land amid a stalled legislative picture. The CLARITY Act, the market structure bill that would have settled jurisdictional questions for digital assets and event contracts, failed to advance in the Senate. With Congress idle, agencies and courts are filling the gap, and the two appellate rulings suggest the judiciary is comfortable letting states police the space. The Blockchain Association, the main industry lobby, shuffled its leadership this week, another sign that the advocacy playbook built around federal preemption is being rethought.
For crypto-adjacent markets the significance is indirect but real. Prediction platforms have become one of the fastest growing retail venues for event trading, and Polymarket, Kalshi closest rival, operates its own US compliance strategy after acquiring a CFTC-regulated platform earlier this year. A legal environment where state gambling law reaches event contracts raises compliance costs across the sector and could push volume toward platforms with clearer federal standing. Tokenized event positions, which several platforms have begun experimenting with, would inherit the same state-law exposure.
The economics sharpen the stakes. Sports contracts have driven most of the retail volume growth on prediction platforms this year, and the major US sports seasons run through the winter. A ruling that invites state enforcement during peak season puts direct pressure on revenue, and any state that follows Ohio and Tennessee shrinks the addressable market further. DraftKings and FanDuel, the incumbent sportsbooks, have pushed regulators for exactly this outcome, arguing that prediction platforms are sportsbooks wearing a derivatives label.
Kalshi did not immediately announce its next legal step. The company has consistently argued that its markets improve price discovery and that state-by-state licensing would fragment a national product. The Sixth Circuit gave that argument no weight in the swap analysis, leaving the company to make its case on policy grounds rather than statutory ones. Whether the full circuit or the Supreme Court takes a different view may determine whether prediction markets stay a national product or become a state-licensed one.
One more consequence is worth flagging for the crypto market specifically. Prediction platforms and crypto exchanges have been converging on the same compliance questions: who registers, under which regime, and what disclosures attach to a contract. Coinbase has pushed into event contracts, and several tokenized-market projects sit on the same jurisdictional fault line the Sixth Circuit just drew. A court decision that pushes event trading toward state gambling frameworks raises the cost of that convergence and gives crypto exchanges one more reason to keep event products at arm length until the jurisdictional map settles.
| Item | Detail |
|---|---|
| Court | Ninth Circuit, August 2026 |
| Outcome | Declined to block Nevada enforcement against KalshiEX |
| Court | Sixth Circuit, September 25, 2026 |
| Outcome | Sports contracts are not swaps, states can regulate |
| Stakes | Sports event contracts are the fastest growing product line on prediction platforms |