Nevada court rules that sports betting markets are not protected by federal law against state laws.

A federal court in Nevada has ruled that contracts based on sports results do not qualify as swaps under the Commodity Exchange Act (CEA). The decision was announced on Wednesday (26) and removes these contracts from the jurisdiction of the U.S. Commodity Futures Trading Commission (CFTC), eliminating the federal protection that prediction markets believed they had against state gambling laws.

The case directly questions the business model of prediction markets, which operated on the premise that CFTC approval provided federal preemption. As detailed in an article by Abdulaziz Fathi published by Finance Feeds, platforms like Kalshi, a federally regulated Designated Contracts Market (DCM), argued that their registration with the CFTC would protect them against state regulations related to gambling.

The court decision came after New York-based Kalshi argued that its prediction markets should be considered CFTC-regulated swaps, not gambling subject to state laws. Judge Andrew Gordon rejected this interpretation, emphasizing that the case also involved protecting Nevada's regulated gaming system.

Prediction market platforms like Kalshi and Polymarket are the most affected by the decision. Their compliance strategies and business models were built on the assumption that federal oversight would supersede state gambling laws.

The case was heard in Nevada, a state known for its strict system of regulation for gambling and sports betting. In his ruling, Judge Gordon emphasized that licensed casinos and sportsbooks in the state have invested in compliance and taxes, investments that would be jeopardized if unlicensed platforms were allowed to offer sports-related contracts under a federal derivatives framework.

The court decision calls into question the business model of prediction markets. If upheld, registration with the CFTC will not protect these platforms from state-level gambling oversight, allowing Nevada to treat Kalshi's sports markets as unlicensed gambling.

Crypto lawyer Aaron Brogan told CoinDesk earlier this year that the entire model was based on the belief that "Once registered at the federal level, states can't regulate it," citing the Commodity Exchange Act's authority over swap markets.

Judge Gordon warned that if Kalshi's interpretation prevailed, licensed Nevada operators could circumvent state rules by becoming federally registered DCMs, which he described as "unregulated gambling," harmful to the state's economy and tax revenue.

Nevada has indicated it will oppose the continued operation of Kalshi if the platform remains accessible to state residents without a state license. Kalshi will file an appeal if it remains accessible to Nevada residents without obtaining a state license.

If the appeals court upholds the decision, prediction markets will face a licensing landscape that varies from state to state, similar to online sports betting. Federal approval will no longer guarantee nationwide access for event contracting platforms, and states with strong gaming lobbies may act to restrict or criminalize access without a state license.

It is not yet clear whether the CEA's definition of a swap can be interpreted broadly enough to bring sports results contracts back under federal derivatives law. A reversal would restore the preemption model and preserve national access to prediction markets.

If the decision is upheld, the sector will enter uncharted territory. Platforms would need to navigate state gaming laws written before the existence of event contract markets, deal with oversight from gaming commissions typically aimed at casinos and sports betting sites, and face potential criminal liability if residents in states like Nevada have access to unlicensed contracts.

The future of prediction markets may depend not only on the CFTC, but on each state deciding whether these contracts should be included in their gaming structures. For an industry built on the premise that federal approval was sufficient, Nevada's decision indicates that this may be just the first step in a more complex regulatory journey.