US appeals court rules against Kalshi, says states can regulate prediction markets

Prediction market platforms must now navigate dual federal and state regulatory frameworks for their contracts.

The U.S. Court of Appeals for the Second Circuit ruled against Kalshi, a platform that offers event contracts similar to financial derivatives, stating that states retain the authority to regulate such prediction markets. This decision overturns a lower court's finding that the Commodity Futures Trading Commission (CFTC) had exclusive jurisdiction. The appeals court determined that Kalshi's contracts constituted unregistered securities or commodities, falling under state oversight. The ruling means that Kalshi, and potentially other similar platforms, will need to comply with individual state regulations in addition to federal oversight by the CFTC, if applicable. The court emphasized that federal law does not preempt state authority in this specific area.

This ruling significantly complicates the regulatory landscape for prediction markets, potentially creating a patchwork of state-specific rules that platforms like Kalshi must adhere to. The decision suggests that regulators are increasingly scrutinizing these markets, viewing their contracts as financial instruments subject to broader securities and commodities laws. Companies operating in this space will face increased compliance burdens and may need to seek licenses or approvals in multiple jurisdictions.

The immediate impact is a potential chilling effect on innovation and expansion for prediction market operators. By affirming state authority, the court opens the door for varied and possibly conflicting regulations across the U.S., making it harder for platforms to offer standardized products nationwide. Investors and participants may also face uncertainty regarding the legality and enforceability of contracts depending on their location and the specific state's rules.