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Federal judge rules that event contracts fit the definition of 'swaps' under U.S. law
The scope of legal prediction markets has seen a positive development for operators in the space as a district judge's opinion offers limited protection.
The state of Tennessee is barred from taking action against the prediction market platform Kalshi, and the outlook for companies like Kalshi in the United States court system has become less daunting after a federal judge deemed event contracts part of a regulated system for "swaps." The ruling is a deviation from what has otherwise been negative news for platforms in the courts and could point to a need for Congress or the United States Supreme Court to intervene to settle the issues.
Judge says event contracts are "swaps" under federal law
A ruling from Middle Tennessee District Judge Aleta A. Trauger in KalshiEx LLC v. Orgel, et al, granted Kalshi's motion for a preliminary injunction against the Tennessee Sports Wagering Council taking action against Kalshi for what the Tennessee Sports Wagering Council deemed unlicensed gambling. While Tennesseans cannot legally access the best online casino apps, online sports wagering is legal with licensed operators in the state.
Trauger determined that Kalshi's event-based contract trading platform does not fit the state's definition of gambling because Kalshi customers "bet against each other, rather than the house," and because Kalshi "has no interest in who wins." Traeger did remark on similarities between contracts based on sporting events and traditional sports betting apps, but pointed out another key distinction.
Traeger added that the contracts fit the definition of "swaps" in the US code and that such transactions are regulated by the US Commodity Futures Trading Commission. Therefore, precedent indicates that federal statutes preempt Tennessee laws.
As the award is simply a preliminary injunction, Traeger has not ruled on the merits of the case but rather on whether Kalshi has a good likelihood of prevailing in a future trial. This injunction merely bars law enforcement in Tennessee from taking action against Kalshi for now.
The opinions of various courts have muddied the legal status of prediction markets online in the United States. An act of Congress or the US Supreme Court could clarify the situation.Â
Other court cases have gone against Kalshi
While Tennessee can't take action against Kalshi for now, that's just one of 20 states that have gone to court to resolve questions over the freedom that prediction markets have to accept trades within their borders. The story has been different for Kalshi in Nevada, for example.
On Tuesday, the Ninth Circuit Court of Appeals issued an order for Kalshi to stop writing contracts in an appeal of a lawsuit brought against the platform by the state of Nevada. The next and potentially final destination for an appeal would be the United States Supreme Court.
Differing opinions on a similar subject from different courts across the US is typically an indication that the Supreme Court will take up a case. However, Congress could act prior to that and shift the paradigm.
As just one example, US Rep. Ritchie Torres has introduced legislation that would bar insider trading and ban event contracts based on political outcomes. Torres' bill would not affect sporting event-based contracts, though, which have been the center of the disputes in most courts.
Some of the fastest payout online casino brands in Michigan, New Jersey, Pennsylvania, and West Virginia have launched prediction markets of their own. This has not been universal, though, as the best way to play on apps like Borgata in NJ is using the Borgata Casino promo code for new bettors.
Without intervention from Congress or the US Supreme Court, the legality of events-based contracts will be murky. Should Congress rest on the issue, Thursday's ruling out of Tennessee could push the debate closer to the Supreme Court chambers.
