TLDR
- Over 85% of bets on Kalshi are sports-related, and the platform made $25 million in fees during just four days of March Madness
- A federal appeals court sided with Kalshi over New Jersey, ruling its sports bets are “event contracts” classified as swaps under federal law
- A different panel of judges in a Nevada appeal signaled they may rule against Kalshi, which could send the case to the Supreme Court
- The prediction market industry is expected to hit $200 billion in volume this year, with Kalshi valued at $22 billion and Polymarket at $20 billion
- States and Native American tribes argue Kalshi is running an unlicensed gambling operation, and the legal outcome remains uncertain
Prediction markets platform Kalshi is heading toward a potential Supreme Court showdown that could reshape how sports betting and event contracts are regulated in the United States.
The company, along with rival Polymarket, positions itself as a platform for information-based event contracts. But recent data tells a different story about what users are actually doing on the platform.
Over 85% of all bets placed on Kalshi are tied to sports. During March Madness alone, the platform collected $25 million in fees over just four days.
Sports betting is the main revenue driver for the prediction market industry right now. Analyst Dustin Gouker, who covers the sector, has described sports as “the industry right now.”
Federal Courts Are Split on Kalshi’s Legal Status
The legal trouble for Kalshi comes from multiple directions. State governments and Native American tribes have filed legal challenges claiming the platform is operating as an unlicensed gambling business.
Judges in at least three states have agreed with that argument. Other judges have sided with Kalshi, ruling that its sports bets qualify as event contracts permitted under federal law.
Earlier last month, a federal appeals court ruled in Kalshi’s favor over New Jersey. It was the first time an appeals court weighed in on the matter.
Two of the three judges on the Third Circuit panel found that Kalshi’s contracts are classified as swaps under federal law. Swaps fall under the Commodity Futures Trading Commission’s oversight thanks to the Dodd-Frank Act passed after the 2008 financial crisis.
The dissenting judge, U.S. Circuit Judge Jane Roth, was not convinced. She wrote that “basic abductive reasoning tells us that if it looks like gambling, talks like gambling, and calls itself gambling, it’s gambling.”
She accused her fellow judges of “acts of alchemy” that turned traditional sports betting into futures trading.
This week, however, a different panel of judges heard arguments in a Nevada appeal. Their comments suggested they may reach a different conclusion than the Third Circuit.
If that happens, the split between appeals courts would likely push the case to the Supreme Court as early as next year.
Billions in Valuation Hang on the Outcome
The financial stakes are massive. The prediction market sector is projected to reach $200 billion in trading volume this year alone.
Kalshi is currently valued at $22 billion. Polymarket sits at $20 billion.
If courts ultimately rule that Kalshi’s status as a swap operator does not shield it from state gambling regulators, those valuations could take a serious hit.
The legal question centers on federal preemption. This is the principle that federal authority takes priority over state agencies when the federal government is properly exercising its powers.
Immigration and pharmaceutical regulation are areas where federal preemption is well established. The Kalshi case is less clear-cut.
Members of Congress have started taking sides in the dispute. The debate has a long history. During Dodd-Frank discussions in 2010, then-Senator Blanche Lincoln of Arkansas warned that regulated swaps should not cover bets on the Masters or the Super Bowl.
Lincoln is now a registered lobbyist for Kalshi, arguing the opposite position.
Gouker expects categories like politics and cryptocurrency prices to eventually make up a larger share of prediction market activity. But for now, sports remain the only major revenue source for the industry.
The Nevada appeal is still pending, and gambling industry lawyers say a Supreme Court hearing could come as soon as next year if the appeals courts remain divided.
