Federal Preemption Has Been Barking For Years: Is Kalshi’s Latest Setback in Nevada Justified?
Our call for economic purpose—not jurisdiction—as prediction markets march their way to a SCOTUS showdown
The full decision has dropped in Nevada (dissolution of Kalshi’s preliminary injunction) and it’s a doozy.
On one hand, Judge Gordon delivers the sharpest rebuke yet of Kalshi’s shifting positions, reversals and inconsistencies. It’s refreshing to see those records preserved not just in our blogs, Gouker’s writings, or Dan Wallach’s X posts, but now in the record itself. That’s a win for transparency.
On the other hand, the ruling creates more questions than it answers. We don’t believe APA is as toothless as Judge Gordon thinks, his excluded commodity analysis seems ripe for reversal on appeals and his distinction between “events” and “outcomes” feels tenuous. Most troubling, the ruling frames the issue as binary, a choice between state-regulated sports gambling and federally regulated sports gambling–conflating jurisdiction with regulation. This is what happens when jurisdiction is examined in isolation. The real limiting principle isn’t jurisdiction; it’s the economic purpose prong of the trilogy and precisely why all three questions must be on the table.
At bottom, Judge Gordon recognizes the absurdity of Kalshi’s position, one he himself embraced just a few months ago. As prediction markets have grown more aggressive, Kalshi’s stance appears even more untenable, while the state’s stance appears less extreme. Yet the outcome here is equally absurd. Consider the implications: If contracts on sports outcomes fall outside CFTC jurisdiction, then what about election contracts? Are those beyond the scope of the CFTC, too? What is the limiting principle that pushes sports event contracts to the states and election event contracts to the CFTC?
Here’s the extraordinary twist: Just as Kalshi’s own arguments and Quintenz’s statements could be combined to conclude that sports gambling is prohibited everywhere, Judge Gordon’s opinion can be read similarly. Stitch together his reasoning and you arrive at a startling conclusion: Under current law, there cannot be sports gambling in America.
There is absurdity on both sides and Judge Gordon resolves it in favor of the states by choosing what he believes is less absurd. We resolve it in favor of the public: Reintroduce economic purpose as the primary filter. Our conclusion may not be commercially desirable, and it remains to be seen whether it is politically achievable, but it’s certainly legally tenable.
To see how Judge Gordon’s analysis unravels, we need to revisit the foundation–his Nadex opinion (PDF):
The factual distinctions Crypto makes between itself and a typical casino sports book do not distinguish Crypto’s event contracts from sports wagers at Nevada casinos when considered under the statutory definition of a swap. But casinos have openly operated sports books and accepted sports wagers on the outcomes of sporting events in this state and others both before and after the 2010 amendments to the CEA. And no one, including Congress and the CFTC, has suggested those bets are “swaps” that had to be conducted on a DCM. (emphasis added)
Much of Judge Gordon’s Kalshi decision rests on that paragraph. If this premise falls, the jurisdiction issue shifts and the analysis then points to federal regulation of sports gambling, an absurd result. Judge Gordon, seeing the absurdity, opts for state jurisdiction. We conclude on federal jurisdiction and avoid the absurdity (on both sides) by bringing economic purpose back inside the framing.
Why This Assertion Is Incorrect
Daniel Wallach has been trying to advance a similar point:
We reminded Wallach that this couldn’t be true because we raised that very issue with the Supreme Court, he simply missed it.
Wallach wasn’t the only one with this line of thinking. Ryan Rodenberg, revisiting Murphy v. NCAA, noted that the Supreme Court never discussed prediction markets, event contracts or swaps in the seven years of PASPA litigation. His takeaway:
Perhaps the absence of evidence will itself be revealing.
But this is the classic confusion between absence of evidence and evidence of absence.
Sometimes the dog doesn’t bark because it recognizes the visitor–Sherlock Holmes inference in Silver Blaze. Other times, the dog barks but isn’t heard. Sports event contracts and federal preemption fall into the latter example.
Even if SCOTUS didn’t raise the issue in PASPA, that doesn’t mean it won’t next time. Rob Schwartz is correct in making the same point:
Is it not more than that, though? The public record shows the federal preemption “dog” has been barking for decades–from Congress to the CFTC, from legal practitioners to academia.
2004: The First Alarm Bell Tolls
When the CFTC designated HedgeStreet as a contract market (designation memorandum), it included this footnote:
However, Division of Market Oversight staff understands that the contracts HedgeStreet intends to list for trading would be similar in design to contracts offered by “event markets.” In this regard, as discussed above, the contracts are binary options. HedgeStreet has stated, however, that it intends to list only contracts that have a legitimate economic purpose and does not intend to list for trading contracts based on terrorist activity or gambling activities, such as the outcome of sporting events (emphasis added).
This is one of the earliest pieces of evidence that sports event contracts were squarely on the CFTC’s radar. Fittingly, more than twenty years later, HedgeStreet’s successor, NADEX,1 now under the crypto.com umbrella, became the first to self-certify sports event contracts (excluding the ErisX attempt in 2021 which was later withdrawn).
Timing is everything. The CFTC’s warning came:
Four years before the CFTC’s Event Markets Concept Release;
Six years before the infamous colloquy;
Six years before Dodd-Frank’s special rule;
Six years before swaps entered the CEA;
Fourteen years before Murphy v. NCAA; and
Twenty-one years before Judge Gordon ruled against Kalshi.
Judge Gordon may hang his hat on sports event contracts not being swaps, but the CFTC was concerned about them long before swaps even entered the conversation.
If 2004 appeared to be an isolated incident, it certainly wasn’t.