Kalshi and Polymarket failed to block state-level gambling enforcement actions in Nevada and Washington, with the Ninth Circuit Court of Appeals ruling that federal derivatives regulation does not provide immunity from state gaming laws.
The prediction market platforms argued that oversight by the Commodity Futures Trading Commission under the Dodd-Frank Act preempts state gambling statutes. The court rejected this preemption claim, finding that federal derivatives authority does not automatically shield these platforms from state-level regulation.
This decision fundamentally shifts the regulatory landscape for prediction markets operating in the United States. Both Kalshi and Polymarket have faced aggressive enforcement from Nevada and Washington state authorities who classify prediction markets as illegal gambling operations under state law. The platforms had sought preliminary injunctions to halt these cases while they pursued appeals.
The Ninth Circuit's stance suggests that prediction markets cannot rely on federal CFTC jurisdiction as a defense against state gaming regulators. Nevada and Washington have taken aggressive positions, arguing that binary outcome prediction contracts constitute gambling regardless of CFTC oversight. The court agreed with this logic.
Kalshi, which trades binary options contracts on events including elections and commodities, operates under CFTC oversight but faces continued pressure from states viewing its products as gambling rather than derivatives. Polymarket, the larger prediction market by volume, similarly operates in a regulatory gray zone where it claims to follow federal rules while facing state-level enforcement threats.
The decision creates two distinct regulatory frameworks. Federal derivatives laws govern product structure and disclosure. State gambling laws govern distribution and consumer protection. Platforms cannot choose which framework to follow.
This ruling likely accelerates state-level crackdowns on prediction markets. Other states could cite the Ninth Circuit's decision to justify enforcement actions against Kalshi, Polymarket, and similar platforms. The prediction market sector faces growing uncertainty about whether it can operate legally within U.S. borders without state-by-state licensing arrangements.
Platforms must now engage in expensive state-level compliance or restructure operations to avoid triggering state gambling definitions. The path to mainstream adoption becomes steeper.