Ninth Circuit Clears the Field for Nevada’s Gaming Laws Enforcement
The US Ninth Circuit Court of Appeals ruled on Friday that the sports event contracts of Kalshi, an innovative prediction market, do not fall under the definition of swaps according to the Commodity Exchange Act (CEA). This vital ruling rolls out a clear path for the state of Nevada to enforce its gambling regulations against the prediction market.
The Critical Turning Point
The whole decision hinges on a crucial query that carries significant commercial implications. Are the contracts offered by Kalshi defined as swaps? If they are considered swaps, the Commodity Futures Trading Commission (CFTC) would have absolute jurisdiction over them, and states would not have any influence. However, the verdict reported on August 28 in the case KalshiEX LLC vs. Assad indicates they are not swaps. Hence, the Nevada gaming laws are applicable.
This outcome imposes a predicament on Kalshi. The ruling means that the firm’s activities in Nevada are now subjected to state gaming enforcement. Interestingly, the same product’s operation in New Jersey remains federally protected. This discrepancy arises from the fact that the Third Circuit court had previously provided a contrary ruling in April.
CEA Definition of Swap
The CEA defines a swap as an agreement that is contingent on the occurrence or non-occurrence of an event or the extent of the event’s occurrence. Kalshi’s defense was that their sports contracts meet this CEA definition, which would protect them from Nevada’s jurisdiction due to the exclusive oversight of the CFTC.
Rejecting Kalshi’s assertion, the court stated that the occurrence or non-occurrence of an event refers to an event like the Super Bowl taking place. Results such as which team wins the championship are considered the consequence of the event, not the event’s occurrence or non-occurrence. The panel added that Kalshi’s wide interpretation is devoid of a limiting principle as anything can be defined as an event under it.
Designated Contract Market
No party contested the fact that the contracts in question are traded on a designated contract market. However, the court still upheld that they do not classify as swaps. This case was heard by Judges Ryan Nelson, Bridget Bade and Kenneth Lee, with Judge Nelson penning the decision and Judge Lee filing a concurring opinion.
The CFTC Regulation
Substantiating its decision, the panel also relied on section 40.11(a) of Act 17 of the Code of Federal Regulations, a rule by the CFTC that specifically forbids contracts that involve or are correlated to gaming. Kalshi initially bypassed CFTC approval by listing the sports contracts through a self-certification process. The court deemed this action unlawful, asserting that the self-certification contravened both the CEA special rule and the CFTC regulation for event contracts.
Judge Lee, who agreed with the majority’s interpretation of the text, wrote separately to emphasize that it appears as though the special rule affords the CFTC discretion over the outright prohibition of gaming contracts. He concluded that this matter does not warrant immediate attention because section 40.11 currently interdicts them.
Contradiction in Federal Appeals Courts
Meanwhile, the Third Circuit’s verdict in KalshiEX LLC vs. Flaherty contradicted the same statutory text interpretation from the Ninth Circuit. The Third Circuit determined that sports outcomes are tied to potential financial, economic, or commercial consequences, qualifying them as swaps. This contradiction in interpretation between federal appeals courts over the same company’s product typically opens the window for Supreme Court intervention.
Regardless of these contradictory appeals court decisions, there is no definitive resolution to the primary lawsuits. Both appeals evaluated the preliminary injunctions and the likelihood of whether Kalshi’s activities would be successful at an early stage, not a final judgment.
What’s Next for Kalshi?
The Ninth Circuit’s decision is confined to sports contracts, and has returned the challenges faced by Kalshi’s election contracts from Nevada to the district court for re-evaluation following the new verdict. Meanwhile, Kalshi continues to expand its horizons beyond event contracts and into cryptocurrency derivatives. The CFTC recently passed its bitcoin contract, and days later Kalshi filed for the addition of perpetual futures on 12 different altcoins. Furthermore, the company is making deeper inroads into blockchain technology through a partnership with oracle provider RedStone.
