Court Defeat: Prediction Markets Ruled as Illegal Gambling in the US

In the world of online gambling, there are constant attempts to bypass strict regulation through creative product design. A prominent example is so-called prediction markets or sports betting exchanges, which claim they are not bookmakers but merely marketplaces for event contracts. The Court of Appeals for the Ninth Circuit in San Francisco has now clearly rejected this line of reasoning. In a landmark ruling, the judges confirmed that the state of Nevada has the right to regulate such platforms as gambling providers. The decision affects well-known companies like KalshiEX, the North American Derivatives Exchange, and Robinhood Derivatives, which had jointly sued against state oversight.

The providers attempted to place their sports betting contracts as swaps or derivatives under the exclusive supervision of the federal agency Commodity Futures Trading Commission (CFTC). By doing so, they aimed to avoid the strict and often costly requirements of state gambling authorities. However, the judges were not swayed. During the oral hearing in April, one judge already described the companies' arguments as sophistry to the nth degree. The now-published 50-page ruling reinforces this skepticism and clarifies that a label change is not enough to obscure the core of the activity: betting on the outcome of sporting events.

Numbers and facts

The ruling by the three-judge panel was unanimous. U.S. Circuit Judge Ryan Nelson, a Donald Trump appointee, wrote the opinion. Two other shorter rulings on the same Friday also favored Nevada. KalshiEX had previously obtained a preliminary injunction that prohibited the state from regulating sports and election event contracts. This injunction has now been dissolved. A particularly poignant point was a KalshiEX advertisement in which the company called itself the first app for legal sports betting in all 50 US states. Judge Nelson used this self-description directly against the company to prove the gambling nature of the product.

"We conclude that Kalshi has not shown a likelihood that the [Commodity Exchange Act] preempts state gaming regulations as applied to its sports-event contracts and that the district court did not abuse its discretion by dissolving the injunction." - Ryan Nelson, U.S. Circuit Judge for the Ninth Circuit

Background

The conflict centers on the distinction between financial instruments and gambling. KalshiEX and its partners argued that their contracts should legally be considered swaps under the Commodity Exchange Act (CEA). Nelson strongly disagreed, stating that the mere fact that contracts are traded on a designated contract market does not automatically remove them from state control. He compared buying a contract on the app to making a bet at a Las Vegas casino: in both cases, the user pays an amount and receives more money back if their team wins. Whether this is called a swap or a bet does not change the nature of the transaction.

Robinhood has already announced its intention to appeal the ruling. A spokesperson for the company emphasized that every eligible customer should have access to these markets, which are federally regulated by the CFTC. For the industry, this is a severe blow, as providers had hoped that CFTC approval would grant them nationwide market access without having to deal with the individual laws of each US state.

Why it matters for German players

For players in Germany, this ruling is a confirmation of the clear line also taken here. The State Treaty on Gambling 2021 (GlüStV 2021) leaves no room for gray area products disguised as financial bets. Anyone wishing to offer sports betting or casino games in Germany requires a license from the Gemeinsame Glücksspielbehörde der Länder (GGL). This whitelist is the only seal for legal and safe play. German players benefit on licensed sites from strict protective measures, such as the cross-provider deposit limit of 1,000 euros per month and the central lockout system LUGAS.

Platforms attempting to launch via financial market regulations face a tough time in Germany. The US ruling shows that courts worldwide are increasingly evaluating the actual content of an offer rather than just its legal shell. German users should therefore always ensure that the provider has a GGL license to guarantee that winnings are actually paid out and that player protection, such as the 1 euro per spin limit for slots, is maintained.

What it means for GGL-licensed casinos

For serious providers with a GGL license, this news is positive. It protects the legal market from competitors seeking an unfair advantage through regulatory loopholes. While licensed casinos pay high taxes and meet strict technical requirements, prediction markets often try to avoid these costs. The Ninth Circuit decision strengthens the position of state regulatory authorities worldwide to draw clear boundaries. In Germany, this continues to mean planning security for operators who adhere to the rules of the GlüStV 2021 and have connected their systems to LUGAS and OASIS.