Sports bets on prediction markets ruled to be "swaps," exempt from state laws

Key Points:

• A federal appeals court ruled 2-1 that New Jersey cannot regulate sports bets on prediction markets operated by Kalshi, as the US Commodity Futures Trading Commission (CFTC) has exclusive jurisdiction over designated contract markets (DCMs) under the Commodity Exchange Act.
• The court majority held that Kalshi’s sports-related event contracts are swaps traded on a CFTC-licensed DCM, preempting New Jersey’s gambling laws and constitutional prohibitions on collegiate sports betting, while the dissent argued these contracts closely resemble traditional sports wagers and should be subject to state regulation.
• The ruling is the first appeals court decision on this issue but is unlikely to end legal debates, as multiple cases across various states continue to address federalism, preemption, and statutory interpretation concerning sports betting on prediction markets.
• The CFTC has actively defended its exclusive regulatory authority by filing lawsuits against states attempting to regulate prediction markets, while bipartisan legislation has been introduced in Congress aiming to restrict CFTC-registered entities from offering contracts resembling sports bets or casino games.
• The case highlights the broad statutory definition of swaps under the Dodd-Frank Act, which includes event contracts, but the dissent warns that a literal interpretation could lead to absurd outcomes by classifying nearly all wagers as swaps, raising concerns about the balance between federal and state regulatory powers.