Kalshi’s Latest Court Loss Could Threaten More Than Two States
Key Facts
- The Second Circuit denied emergency protection for Kalshi in New York and Kalshi and Coinbase in Connecticut, allowing state enforcement efforts to continue while the appeals proceed.
- Judges questioned whether sports event contracts qualify as federally regulated swaps, although a final decision remains outstanding.
- New York is pursuing broader remedies that could affect non-sports contracts, while Connecticut is focused on unlicensed sports trading.
- Conflicting appellate rulings, new CFTC rules and a pending Supreme Court petition are putting the nationwide future of prediction markets in question.
Second Circuit Denies Kalshi and Coinbase Protection Against State Enforcement
The U.S. Court of Appeals for the Second Circuit dealt Kalshi another legal setback on November 3, denying emergency requests to prevent gambling regulators in New York and Connecticut from enforcing state laws against sports event contracts.
The two-page order covers three appeals: Kalshi's challenges to both states and a separate Connecticut appeal brought by Coinbase Financial Markets, which provides customers access to event contracts. Judges John M. Walker Jr., Dennis Jacobs and Joseph F. Bianco concluded that the companies had not demonstrated entitlement to temporary protection.
The order does didn't explain the court's reasoning or require either platform to immediately discontinue trading. The underlying appeals remain unresolved, but both states can continue pursuing enforcement without the additional restrictions Kalshi and Coinbase sought.
The stakes extend well beyond two states. Kalshi's nationwide sports trading model relies heavily on its argument that federal commodities regulation prevents individual states from treating its contracts as gambling products. However, that argument has been encountering increasingly serious resistance in federal courts.
Judges Question Whether Sports Contracts Qualify as Federally Regulated Swaps
The judges' questioning during oral argument offered a clearer indication of their concerns than the written order.
Walker and Bianco challenged whether sports event contracts satisfy the Commodity Exchange Act's definition of a swap, which includes certain contracts tied to events with potential financial, economic or commercial consequences.
Kalshi argues that the definition is deliberately broad and encompasses sports contracts traded on federally registered exchanges. The company also distinguishes exchange trading, where customers buy and sell positions, from conventional wagers accepted by sportsbooks.
The judges appeared concerned about how far that interpretation could extend. Sports outcomes have financial consequences for broadcasters, sponsors and other businesses, but those consequences also exist for ordinary sportsbook wagers. If such indirect economic effects are sufficient to establish federal commodities jurisdiction, the statutory definition could encompass an enormous range of gambling transactions.
That leaves a difficult question for Kalshi to answer: what legally distinguishes a sports event contract from a conventional wager when both depend on the same outcome?
New York Poses a Broader Threat Than Connecticut
The two states are pursuing different enforcement strategies, and New York's approach presents potentially greater consequences for Kalshi.
In July, U.S. District Judge Analisa Torres denied Kalshi's preliminary injunction request even while assuming, without deciding, that its sports contracts qualified as swaps. She concluded that Kalshi had not established that federal commodities law prevented New York from enforcing its gambling regulations.
That reasoning exposes a second vulnerability in Kalshi's legal position. Even if sports contracts qualify as swaps under federal law, courts could still conclude that state gambling requirements apply. Federal classification alone might not guarantee nationwide market access.
New York Attorney General Letitia James has also filed a separate lawsuit seeking an injunction, restitution, forfeiture of gains and financial penalties. Its scope reaches beyond sports contracts into other event categories, including culture and elections.
The CFTC has characterized that lawsuit as potentially threatening Kalshi's nationwide operations, a particularly consequential possibility given that the exchange is headquartered in New York. Chairman Michael S. Selig defended federal oversight in an August statement, arguing that Congress never intended derivatives exchanges to operate under a patchwork of state gaming laws.
Connecticut's legal challenge is more focused. U.S. District Judge Vernon Oliver rejected preliminary relief in August, finding that Kalshi's sports contracts were unlikely to qualify as swaps and that federal preemption had not been established even if they did.
Attorney General William Tong subsequently pursued a separate enforcement action targeting unlicensed sports trading, emphasizing age restrictions, consumer protections and the state's tribal gaming agreements.
Coinbase's involvement further raises the stakes. Restrictions on brokerage intermediaries could affect how customers access prediction markets even when the underlying exchanges remain federally registered. For both companies, the immediate question is whether regulators pursue restrictions on new trading while the appeals remain pending.
The Second Circuit Joins an Increasingly Divided National Legal Landscape
Kalshi's position is already split across federal jurisdictions.
- The Third Circuit sided with the exchange in April, upholding preliminary protection against enforcement by New Jersey. Its judges concluded, by a 2-1 vote, that Kalshi was likely to succeed in establishing federal jurisdiction over sports contracts.
- The Ninth Circuit reached the opposite conclusion in August, siding with Nevada and finding the contracts unlikely to qualify as swaps.
- The Sixth Circuit followed in September, ruling against Kalshi in disputes involving Ohio and Tennessee. Crucially, it concluded both that sports contracts were not swaps and that state gambling regulations would not necessarily be preempted even if they were.
- Meanwhile, a federal judge in Illinois concluded that sports contracts were likely swaps and granted preliminary injunctions protecting Kalshi, Coinbase and the federal government's interests. Illinois has appealed to the Seventh Circuit. Meanwhile, Washington and Michigan have obtained state-court restrictions on Kalshi's offerings.
The conflicting decisions have placed the issue before the Supreme Court. New Jersey petitioned for review in September, with 39 states and the District of Columbia, gaming regulators, the NFL and tribal organizations supporting intervention.
The justices have not agreed to hear the case, and Kalshi's response deadline is December 7. A Second Circuit ruling would add another influential interpretation to an already fractured legal landscape.
Why This Matters
For bettors, the immediate consequence is uncertainty over market access. Kalshi offers an exchange-based alternative to traditional sportsbooks, with different pricing, the ability to trade positions and potentially attractive opportunities to compare markets.
New York and Connecticut already have legal mobile sports betting, so restrictions on Kalshi would remove a competing format rather than eliminate access to regulated wagering.
Age eligibility is another important factor. Kalshi generally permits trading from age 18, while regulated online sports betting in both states requires customers to be at least 21. Regulators regard that difference as a significant consumer protection concern.
The broader risk is that prediction markets could lose the nationwide accessibility that has made them attractive to customers and investors.
An exchange depends on buyers and sellers participating in the same markets. Excluding customers from additional states could reduce liquidity, widen trading spreads and make some contracts less competitive. Restrictions on brokers such as Coinbase could further complicate distribution, while state-by-state geolocation and compliance requirements would increase operating costs.
The federal government is attempting to address part of the problem.
On October 19, the CFTC implemented an interim final rule excluding conventional licensed sportsbook and casino wagers from the definition of swaps. It simultaneously proposed explicitly including event contracts involving sports, politics, culture and other subjects within that definition.
The measures aim to establish a clearer regulatory boundary between gambling and exchange-traded event contracts. But the proposal remains unfinished, and the agency cannot necessarily resolve the preemption question simply by defining sports contracts as swaps.
That is the most consequential issue emerging from these cases. If federal and state jurisdiction can coexist, prediction market operators may need to comply with both regulatory frameworks. The resulting licensing, product and geographic restrictions could substantially weaken the economics of nationwide sports trading.
There are legitimate interests on both sides. State regulators are defending established gambling protections, including minimum ages, responsible wagering standards and tribal gaming rights. Federally registered exchanges operate under market integrity, surveillance and clearing requirements designed for a different regulatory system.
The central question is whether those systems can coexist without undermining the accessibility, competition and consumer protections that bettors should reasonably expect.
What Happens Next
Cole cut his teeth as a sportswriter in Texas, covering everything from Longhorns games to small-town Friday night lights. A lifelong bettor stuck with offshore books for over a decade thanks to Texas' slow path to legalization, he eventually found his way into the world of social sportsbooks - where he uncovered a fast-growing, community of bettors.
Today, he writes for the millions of Americans in states without legal books, helping them explore safe ways to bet without running afoul of the law.
As editor-in-chief, he aims to keep BettingScanner honest, human, and grounded in what bettors actually care about: fairness, fun, and finding your lane - even when the state won’t give you one.
