Is It a Trade or Is It a Bet? New Jersey Asks the Supreme Court to Decide Who Regulates Prediction Markets

For years, American sports betting had a reasonably understandable regulatory structure.

If you wanted to take bets on the Yankees, Chiefs, Lakers, or your increasingly regrettable five-leg parlay, you generally needed a state gambling license.

Then prediction markets arrived and asked a very clever question:

What if we call the bet a derivative?

The answer may now come from the Supreme Court.

On September 2, New Jersey formally asked the Justices to hear its fight with prediction-market operator Kalshi, escalating what had already become one of the most important regulatory disputes in the sports industry.

The question sounds technical.

It is not.

At bottom, the case asks whether a company regulated by the federal Commodity Futures Trading Commission can offer customers across the country contracts paying out based on who wins sporting events—even in states where the same transaction would ordinarily require a sports-betting license.

Or, put slightly less delicately:

Can Congress turn a sportsbook into a financial exchange simply by changing the vocabulary?

Two federal appellate courts are now pointing in materially different directions.

New Jersey wants the Supreme Court to pick one.

Kalshi operates what is known as a prediction market.

Users buy and sell contracts tied to the outcome of future events.

Will a candidate win an election?

Will inflation exceed a particular number?

Will the temperature reach a certain level?

And increasingly:

Will the Eagles beat the Cowboys?

Will the Yankees win tonight?

Will a team cover a particular outcome?

The mechanics look different from a conventional sportsbook.

Instead of telling DraftKings:

“$100 on Ohio State.”

a Kalshi customer might purchase contracts paying $1 if Ohio State wins and nothing if it loses.

Kalshi says that distinction matters enormously.

It is registered with the CFTC as a designated contract market, and it argues that its event contracts are financial derivatives governed by the federal Commodity Exchange Act.

States see something rather different.

They see sports betting wearing a Bloomberg terminal costume.

New Jersey regulators issued Kalshi a cease-and-desist demand, arguing that the platform was offering sports wagers without complying with the state's gaming laws.

That matters in New Jersey for obvious reasons.

The state regulates sportsbook operators.

It imposes licensing requirements.

It regulates age eligibility.

It restricts certain college sports wagering.

It requires responsible-gaming protections.

It taxes gambling revenue.

Kalshi does not participate in that state regime.

Its argument is that it does not have to.

According to Kalshi, once the CFTC regulates its contracts under federal commodities law, states cannot impose a second layer of gambling regulation.

That gave rise to the litigation now knocking on the Supreme Court's door.

In April, a divided Third Circuit upheld a preliminary injunction preventing New Jersey from enforcing its gambling laws against Kalshi.

The majority concluded that Kalshi had shown a sufficient probability of ultimately proving that its sports-event contracts qualify as “swaps” under the Commodity Exchange Act.

That conclusion matters because the Commodity Exchange Act gives the CFTC exclusive jurisdiction over certain transactions traded on designated contract markets.

If Kalshi's sports contracts fall inside that federally occupied field, New Jersey's gambling laws may be preempted.

The Third Circuit majority also found sufficient support for both field-preemption and conflict-preemption theories at the preliminary-injunction stage.

Judge Jane Roth dissented.

Her basic concern will sound familiar to practically every state regulator in America:

These look an awful lot like sports bets.

The mere fact that someone structures a wager as a tradable contract does not necessarily transform gambling into something Congress intended to remove from traditional state oversight.

For a few months, Kalshi had the most important federal appellate decision in the country on its side.

Then Nevada happened.

On August 28, the Ninth Circuit ruled in Kalshi's Nevada litigation.

Nevada's Gaming Control Board had taken essentially the same position as New Jersey:

If Kalshi wants to offer sports wagering to people in Nevada, it needs to comply with Nevada gaming law.

Kalshi again argued that federal commodities regulation displaced state authority.

This time, the appellate court was not persuaded.

The Ninth Circuit affirmed the dissolution of a preliminary injunction that had prevented Nevada from enforcing its gaming rules against Kalshi's sports-event contracts.

The panel concluded that Kalshi had not established the federal preemption theory necessary to keep Nevada regulators away.

The court was particularly unwilling to treat the CFTC's role as creating a nationwide gambling regulator through the back door.

The practical result is remarkable.

A prediction-market operator now faces materially different appellate law depending on where it operates.

Third Circuit:

Federal commodities law may keep New Jersey out.

Ninth Circuit:

Nevada may enforce its gambling regime.

For a platform designed to operate nationally, that is not much of a regulatory system.

It is a map.

New Jersey filed its Supreme Court petition only days after the Ninth Circuit decision.

That was not accidental.

One of the strongest reasons the Supreme Court grants review is disagreement among federal courts of appeals over an important question of federal law.

New Jersey's petition therefore emphasizes the newly crystallized division.

According to the state, the disagreement has enormous practical consequences because it determines whether what New Jersey describes as a multibillion-dollar gaming industry can operate beyond state sports-gambling regulation simply by conducting its transactions through federally regulated exchanges.

New Jersey Attorney General Jennifer Davenport summarized the state's position starkly:

Companies like Kalshi, she argues, claim the ability to offer sports betting nationwide while refusing to comply with the gambling laws of any state.

That is the policy question hiding inside the statutory one.

Welcome to the strange place where sports law meets derivatives regulation.

The Commodity Exchange Act defines “swap” broadly.

The definition can include agreements in which payment depends upon an event or contingency associated with a potential financial, economic, or commercial consequence.

Kalshi argues that sports-event contracts fit.

Sports obviously have economic consequences.

Teams make money.

Broadcasters make money.

Sponsors make money.

Cities experience economic effects.

Companies have exposure to sporting outcomes.

And a contract tied to that event can therefore fall within Congress's expansive derivatives language.

The Third Circuit found enough merit in that position to protect Kalshi while litigation continues.

States respond that this interpretation proves too much.

Virtually every sporting event has some economic consequence.

That does not necessarily mean Congress quietly federalized the regulation of betting on who wins it.

If I wager $100 that the Browns will win the Super Bowl, the fact that a Browns championship would have economic consequences for bars in Cleveland does not intuitively turn my wager into sophisticated risk-management activity.

Particularly if I am a Browns fan.

Then it is probably better characterized as charity.

There is another statutory provision looming over the case.

CFTC regulations address event contracts involving topics including gaming, terrorism, assassination, war, and other potentially contrary-to-the-public-interest subjects.

That raises an uncomfortable interpretive question.

If Congress and the regulatory regime specifically contemplate “gaming” event contracts, what did lawmakers intend?

Kalshi argues that the existence of federal authority over event contracts confirms the CFTC's central role.

States argue that federal commodities statutes were never intended to annihilate their centuries-old police power over gambling.

Both sides can point to text.

Both can point to structure.

Both can point to regulatory history.

Which is usually how lawyers politely describe a statute before nine Justices get involved.

Sports lawyers should immediately see another interesting wrinkle.

In Murphy v. NCAA, the Supreme Court struck down the federal Professional and Amateur Sports Protection Act and effectively opened the door to state-by-state legalization of sports wagering.

That decision produced the current American model.

Nevada regulates Nevada.

Ohio regulates Ohio.

New Jersey regulates New Jersey.

Some states permit online sportsbooks.

Others do not.

Each can impose different taxes, licensing requirements, college-prop restrictions, age limits, advertising rules, integrity requirements, and consumer protections.

Prediction markets potentially scramble that entire framework.

If Kalshi's theory is correct, a federally regulated exchange may offer sports-event contracts in jurisdictions whose legislatures specifically chose not to legalize conventional online sports wagering.

That produces a fascinating regulatory paradox.

After Murphy, states regained enormous control over sports betting.

Prediction-market federal preemption could take a meaningful portion of it away again.

Not because Congress passed a new sports-betting statute.

Because of the Commodity Exchange Act.

That is not necessarily wrong.

But it is certainly unusual.

Traditional sportsbooks are watching closely.

DraftKings and FanDuel operate through costly state-by-state systems.

They obtain licenses.

Pay state taxes.

Submit to gaming regulators.

Implement state-specific restrictions.

Comply with responsible-gaming regimes.

Respect minimum-age requirements.

Adjust offerings based on local rules.

Prediction markets can potentially offer functionally comparable sports products without carrying many of those same obligations.

That difference creates enormous competitive consequences.

Imagine two companies selling nearly identical economic experiences.

Company A pays millions for state licenses and substantial gaming taxes.

Company B says:

We're a derivatives exchange.

That is either brilliant regulatory arbitrage or exactly the loophole the states claim Congress never created.

The Supreme Court may eventually tell us which.

Traditional regulated sports betting generally requires participants to be 21 in many jurisdictions.

Prediction-market structures can operate under different requirements.

States worry that this allows younger customers to obtain exposure to products that look and behave economically like sports wagers without the same protections imposed on sportsbooks.

The same concern applies to:

responsible gaming;

self-exclusion;

problem-gambling monitoring;

college-athlete prop bets;

source-of-funds requirements;

advertising;

integrity reporting;

and state tax collection.

Again, Kalshi's response is that these are policy objections to a regime Congress placed under federal law.

If lawmakers dislike the result, Congress can change it.

Courts do not get to rewrite the Commodity Exchange Act because a financial product resembles an activity historically regulated by states.

That is a serious argument.

The sports industry itself has not spoken with one voice.

Some leagues have explored or entered relationships with prediction-market companies.

Others have expressed concern about integrity and regulatory treatment.

That tension makes sense.

Prediction markets can be valuable.

They drive engagement.

They generate data.

They create sponsorship opportunities.

They attract younger audiences.

But every expansion of sports wagering also creates integrity consequences.

More markets mean more opportunities to wager on player performance.

More information becomes valuable.

More participants face temptation.

More monitoring becomes necessary.

The legal classification therefore affects much more than who collects the license fee.

It affects the architecture of sports-integrity regulation itself.

Another stakeholder bears watching closely: tribal gaming.

State and tribal gaming systems frequently operate through carefully negotiated compacts and statutory regimes.

A federally regulated prediction market capable of offering sports-event contracts nationwide potentially bypasses parts of those arrangements.

That creates economic and sovereignty concerns substantially broader than whether Kalshi should obtain a conventional sportsbook license.

If the Supreme Court takes the case, expect tribal interests to participate heavily through amicus briefing.

The ultimate preemption rule could reverberate across gambling law far beyond mobile sports betting.

One important caution.

New Jersey has asked the Supreme Court to hear the case.

The Court has not agreed.

At least four Justices must vote to grant certiorari.

And the underlying Third Circuit decision itself arose from a preliminary injunction, not a final judgment after full merits litigation.

That procedural posture could give the Court reason to wait.

Other prediction-market cases remain active around the country.

The Fourth Circuit has litigation involving Maryland.

Other states are pursuing their own cases.

Additional appellate opinions may arrive.

The Justices could decide that the issue would benefit from more development.

But the argument for review became substantially stronger on August 28.

A live disagreement among federal appellate courts over a major national industry is exactly the sort of problem the Supreme Court exists to resolve.

While courts debate whether prediction markets belong in finance or gambling, the platforms continue expanding.

Sports contracts have become a major part of the industry.

Kalshi CEO Tarek Mansour said this week that further federal regulatory clarification may be coming and that the company expects additional partnerships with major sports leagues.

That creates the classic technology-law problem.

The market moves in months.

Litigation moves in years.

By the time courts finish deciding what prediction markets are, consumers may have already decided for them.

Kalshi happens to be the defendant driving much of the current litigation.

But this is not ultimately a case about one company.

It is about categories.

What counts as gambling?

What counts as a derivative?

And who gets to make that determination?

Those questions will matter to Polymarket and every future competitor.

They will matter to sportsbook companies deciding whether to create prediction-market products of their own.

They will matter to exchanges exploring event contracts in entertainment, politics, awards, weather, and countless other areas.

And they will matter to states deciding whether their carefully constructed gambling regimes still control activity that economically looks almost identical to betting.

The line the Supreme Court eventually draws could create—or close—an enormous regulatory pathway.

There is a deceptively simple principle underlying the states' case.

Calling something a “contract” does not necessarily stop it from being a bet.

Every wager is, in some sense, a contract.

Two people make opposing predictions.

Money changes hands depending on what happens.

Likewise, Kalshi has an equally straightforward response:

Calling something “gambling” does not eliminate Congress's power to regulate it as a financial instrument if it falls within the statutory definition Congress enacted.

Labels therefore do not answer the question.

Structure does.

Statutory text does.

Congressional intent does.

Preemption doctrine does.

Which is why a dispute that begins with whether the Chiefs win on Sunday somehow ends with lawyers parsing the Commodity Exchange Act at the Supreme Court.

Sports law is nothing if not efficient.

New Jersey's September 2 petition marks a major escalation in the prediction-market wars.

The Third Circuit says Kalshi has shown enough likelihood that its sports-event contracts fall within federally regulated swaps and CFTC exclusivity to keep New Jersey regulators away while the case proceeds.

The Ninth Circuit has now allowed Nevada to enforce its gaming regime against Kalshi's sports contracts.

New Jersey wants the Supreme Court to resolve the conflict.

And the answer could reshape American sports betting.

If Kalshi wins, federally regulated prediction markets may possess a powerful route around state sportsbook laws, potentially allowing sports-event trading nationwide under a principally federal regime.

If New Jersey wins, prediction platforms offering sports contracts may face the same state-by-state licensing, compliance, taxation, consumer-protection, and integrity structures governing conventional sportsbooks.

That is an enormous difference.

For decades, the legal question was whether sports betting should be allowed.

After Murphy, the question became which states would allow it.

Prediction markets have now produced the next one:

When two people put money on who wins the game, does it become something other than sports betting because Wall Street calls it a swap?

The Supreme Court has just been asked to answer.

The Game Behind The Game provides commentary and analysis for informational purposes only. Nothing published here constitutes legal advice, creates an attorney-client relationship, or should be relied upon as a substitute for advice from qualified counsel regarding a particular matter.

The views expressed are those of the author and do not necessarily reflect the views of the author’s law firm, its attorneys, or its clients.