Sports bets on prediction markets ruled to be “swaps,” exempt from state laws

A significant ruling by a federal appeals court has declared that New Jersey lacks the authority to regulate sports betting on prediction markets, affirming the exclusive jurisdiction of the U.S. Commodity Futures Trading Commission (CFTC). The case centers on Kalshi, a platform registered as a designated contract market (DCM) with the CFTC, which previously secured a preliminary injunction against the New Jersey Division of Gaming Enforcement. This injunction, initially granted by a district court, was upheld by the 3rd Circuit Court of Appeals in a 2-1 decision. The court determined that the CFTC's jurisdiction over DCMs, as outlined in the Commodity Exchange Act, supersedes New Jersey's gambling regulations. The crux of the Kalshi case is whether the CFTC's authority preempts state laws regarding gambling, particularly in the context of collegiate sports betting. The court noted that New Jersey's approach to regulating sports gambling was overly broad, as it sought to regulate all forms of sports betting instead of focusing specifically on trading activities within federally designated markets. Chief Judge Michael Chagares and Circuit Judge David Porter ruled in favor of Kalshi, emphasizing that the text of federal law supports a more narrow interpretation that favors Kalshi's operations. This legal battle began when New Jersey issued a cease-and-desist order to Kalshi, accusing the company of offering unauthorized sports wagers in violation of both state law and the state constitution. The New Jersey Sports Wagering Act mandates licensing for sports wagering, and the constitution prohibits betting on college sports. With this ruling, Kalshi can continue its operations without the restrictions imposed by New Jersey's gambling laws.