Federal Appeals Court Reverses Lower Ruling
A federal appeals court has determined that prediction market platforms like Kalshi must comply with Tennessee’s sports-wagering laws when offering contracts tied to athletic events. The decision marks a significant shift in regulatory oversight for digital betting platforms operating within the state.
The three-judge panel of the U.S. Court of Appeals for the 6th Circuit reversed a lower-court ruling that had previously blocked state enforcement actions against Kalshi. The appellate court concluded that contracts based on sports outcomes are functionally equivalent to traditional legal sports bets, rather than financial instruments exempt from state gambling regulations.
Regulatory Dispute Over Contract Classification
Kalshi began offering sports-event contracts in Tennessee in 2025 without registering with the state’s sports wagering council. The company operated under the legal theory that its products constituted “swaps” similar to commodity trading, placing them under the jurisdiction of the U.S. Commodity Futures Trading Commission rather than state gambling authorities.
This classification allowed Kalshi to avoid paying Tennessee sports wagering taxes and licensing fees. However, Senior Circuit Judge Julia Gibbons ruled that sports-event contracts do not meet the definition of a contract swap used to mitigate financial risk.
“Unlike contracts based on financial values or instruments (e.g., interest rates or stock prices), Kalshi’s sports-event contracts have only downstream economic consequences,” Gibbons wrote in the ruling.
State Enforcement and Market Context
The state’s sports wagering council initiated legal action against Kalshi after the company refused to register as a licensed operator. Tennessee legalized sports betting in 2019, with commercial offerings launching the following year. The state imposes no limit on the number of licenses issued but requires operators to pay fees and taxes based on wagered amounts.
The appeals court’s ruling is narrowly tailored to sports betting. It allows Kalshi to continue operating other event contracts in Tennessee, such as those tied to election winners or cryptocurrency prices on specific dates. According to the Financial Times, approximately 90 percent of bets placed on Kalshi involve sports outcomes.
Impact on Prediction Markets
The decision clarifies that prediction markets cannot bypass state gambling laws by labeling sports-related wagers as financial derivatives. While platforms like Polymarket and Kalshi have expanded their offerings to include non-sports events, the 6th Circuit’s ruling ensures that athletic event contracts remain subject to Tennessee’s established regulatory framework.
The ruling does not address other types of prediction contracts, leaving open the possibility for continued operation in areas unrelated to sports. State regulators may now pursue compliance measures against unlicensed operators offering sports betting products through alternative platforms.