Whether prediction markets concerning sports events are considered gambling could be the most significant industry decision in 2025.
March Madness included some new competition for regulated US sportsbooks this year as, for the first time, it was possible to get financially involved in those two college basketball tournaments in all 50 states.
Kalshi offers prediction markets that are regulated by the Commodity Futures Trading Commission and federally legal throughout the country. It won a ruling in the DC Court of Appeals last September that cleared the platform to offer prediction markets on the US elections in November and has since applied the same thinking to sports predictions.
So far, stakeholders have weighed in, and there will be a CFTC hearing to determine whether the markets constitute gambling. LSR took a closer look at the legal language that could determine an outcome.
Robinhood launch followed by C&D to Kalshi
Robinhood recently announced the rollout of a standalone prediction markets hub via a partnership with Kalshi to allow its users to trade on the outcomes — by taking a “yes/no” position — of future real-world events. At launch, Robinhood’s hub included trading on event contracts relating to the 2025 men’s and women’s college basketball tournaments for individuals located in all 50 states.
Interestingly enough, Robinhood’s announcement follows the Nevada Gaming Control Board’s demand that Kalshi cease all operations within the state by March 14. The order states that “offering ‘event-based contracts’ on sporting events and election outcomes ‘is unlawful in Nevada, unless and until approved as licensed gaming by the Nevada Gaming Commission,’” and that Kalshi’s offering of such contracts is in “violation of Nevada’s public policy.”
Kalshi has received additional time to determine whether it will comply or dispute the NGCB’s claims. The NGCB declined further comment to LSR.
What determines legality of markets?
This is not the first time the legality of Kalshi’s event contracts has been questioned. In September 2024, Kalshi obtained a major legal victory against the CFTC’s attempt to restrict the platform’s offerings when the United States District Court for the District of Columbia held that Kalshi’s election-based contracts “do not involve activity that is unlawful under any Federal or State law, nor do they involve gaming.”
Specifically, the court stated “[b]ecause Kalshi’s congressional control contracts involve elections (and politics, congressional control, and other related topics) and not illegal activities or gaming,” the CFTC did not have the right to prevent them from being listed for public trading. The CFTC filed an appeal, and oral argument was heard on Jan. 17. On Jan. 22, Kalshi self-certified its offering of sports-related event contracts.
The two-fold inquiry that relates to Kalshi’s ability to offer event contracts without prior review and approval from the CFTC relates to whether the contracts: (1) involve activity that is unlawful under federal or state law, or (2) involve gaming.
Regarding whether Kalshi’s election event contracts “involved gaming,” the court stated that because the Commodity and Exchange Act does not define “gaming,” the ordinary meaning of the term must apply — which the court determined meant “the practice of playing games” and “playing games for stakes.”
In doing so, the court rejected the CFTC’s more expansive approach to defining “gaming,” which the CFTC attempted to argue was synonymous with gambling. The court noted that many state statutes define “gaming” as tied to playing games without using the broader meaning of gambling and further rejected the CFTC’s reliance on the definitions of “bet” and “wager” as provided by the Unlawful Internet Gambling Enforcement Act, declaring it an unrelated statute of no importance regarding its interpretation of terms provided in the CEA.
In sum, the court stated it “does not agree that ‘gaming’ under the CEA includes wagering on contests that do not involve or closely relate to a game of some sort.”
Court: Underlying event legality is key
Turning to the remaining issue, the court again rejected the CFTC’s position that Kalshi’s election-based contracts “involved” unlawful activity because certain states prohibit betting on elections. The court explained that the application of this argument would result in an unintended expansion of the CFTC’s power to regulate because it would mean the CFTC could review any event contract as opposed to only those specific categories provided by the CEA:
… under the CFTC’s logic, it could presumably review any event contract, because (1) a person or entity purchasing an event contract is putting money on the outcome of a contingent event and (2) many states define such conduct as “gambling” and make it unlawful. But no one would contend that reading represents a plausible construction of the statute. Not only because the CEA specifically preempts the application of state law over derivative markets…but because it would swallow the [CEA’s] provisions authorizing the CFTC to review only event contracts that relate to specific, enumerated topics…
The only formulation of the interaction between “involve” and “unlawful activity” that actually works, then, is if the contract or transaction’s underlying event relates in some way to activity that is illegal — not if the act of staking money on the contract’s underlying would be unlawful under any state law.
– Page 24, Sept. 12 Opinion
Thus, Kalshi’s offering of election-based contracts did not “involve unlawful activity” because the subject matter of the contracts — i.e., Congress and elections — did not relate to anything unlawful.
Next steps for Kalshi, prediction markets
Kalshi’s ability to self-certify and offer sports-related event contracts depends on the answers to a few questions. First, do Kalshi’s sports-related event contracts involve unlawful activity?
Certain state regulators and other critics believe Kalshi’s sports-related event contracts allow users to participate in unlicensed/unauthorized gambling activity. However, the DC District Court’s decision rejected this argument by stating that the relevant test is whether the “subject matter of the contracts” itself relates to something unlawful. Sporting events, like elections, are not unlawful.
Regulators could argue that the subject matter of the contracts is actually to serve as a subterfuge for the actual betting or wagering on the outcome of the sporting event. However, this argument appears futile based on the DC District Court’s decision and Kalshi’s position as a marketplace wherein users buy and sell contracts among themselves (as opposed to serving as a sportsbook in which users bet against odds provided by the house) could be a tough hurdle to overcome.
What about the gaming issue?
While briefly touched upon, the DC District Court was not tasked with deciding whether the sports-related contracts involve gaming.
Though it was stated that “gaming” should not be defined to include “gambling,” it can’t be ignored that sports-related event contracts rely upon the actual outcome of games.
But is the action of buying and selling contracts offered by a CFTC-regulated exchange the equivalent of playing a game? A similar consideration would mean treating day traders as gamblers and platforms that allow it as casinos.
Kalshi seems to believe the answer is no because its users are only “involved in trading activity.”
Appeals court to weigh in
The DC Circuit US Court of Appeals’ decision will dictate the path forward. A reversal of the District Court’s decision could extend the legal fight, whereas confirmation would result in Kalshi having established legal precedent to rely upon while leaving the CFTC to decide its next steps:
- Further appeal to the US Supreme Court.
- Initiate new legal action as a matter of first impression for the purpose of court’s determining whether offering sports-related event contracts falls within the CFTC’s purview.
- Turn to revising applicable regulatory framework. The latter will be discussed at an upcoming CFTC roundtable tentatively scheduled for the end of March.
