New Jersey Urges Supreme Court to Rule on Who Regulates Prediction Markets
New Jersey has submitted a request to the U.S. Supreme Court to clarify whether prediction markets can offer sports-related contracts without complying with state gambling laws, bringing the dispute over federal versus state jurisdiction before the justices.
The core issue is whether sports event contracts traded on designated contract markets registered with the Commodity Futures Trading Commission (CFTC) fall under the swaps regulated exclusively by federal law under the Commodity Exchange Act, or if they are essentially equivalent to sports betting and thus subject to state law. Kalshi argues that a national financial exchange cannot accept fifty different state regulations; New Jersey contends that Congress did not implicitly exempt the sports betting industry from state law.
The Third Circuit Court of Appeals ruled 2-1 in April this year that Kalshi's sports event contracts are swaps and that New Jersey's gambling enforcement agency cannot halt them under state law. Conversely, the Ninth Circuit Court of Appeals ruled on August 28 that sports event contracts are closer to sports betting rather than swaps, allowing Nevada to enforce its gambling laws, resulting in a clear split among the circuit courts.
New Jersey cites the 2018 Murphy v. NCAA case, emphasizing that if Congress does not directly regulate sports betting, states can decide for themselves. Kalshi, on the other hand, packages its products as derivatives traded in federally licensed venues. Opponents argue that its contracts are nearly indistinguishable from sports betting products like DraftKings and FanDuel. Related lawsuits in the Tenth and Sixth Circuits are still ongoing, with dozens of parallel cases across the country.
As a result, similar contracts may be subject to different rules in different jurisdictions: they may be treated as federal swaps in one place while being handled as unlicensed gambling by state regulators in another. Liquidity will be segmented by residence and circuit, with local politics and event lines facing the first pressures.
Mechanically, this is driven by judicial rather than market forces: platforms and market makers buy into a nationally unified entry, while state governments and licensed sports betting operators are focused on taxes and license rents. Funds are temporarily retained in jurisdictions protected by injunctions, slowing the opening of new betting lines. Beneficiaries are platforms that hold CFTC-designated contract market licenses and can withstand multi-state litigation; those under pressure are traditional operators reliant on state gambling taxes and exclusive licenses, as well as national liquidity pools that cannot segment their order books by state.
The Supreme Court has yet to decide whether to hear the case. If it does, the ruling window typically falls before the end of the next term; if not, the split standard will continue to segment the market geographically.
Source: Public Information
ABAB AI Insight
Prediction markets turning sports outcomes into tradable contracts aim to leverage the federal umbrella of the Commodity Exchange Act to bypass state gambling licenses, taxes, and restrictions on college sports events. Kalshi first obtained a designated contract market license and then expanded sports betting across the state; New Jersey countered with a cease-and-desist order, transforming the litigation from state enforcement to a federal priority issue. The Murphy case previously returned sports betting to the states, and now the same state is asking the court to recognize that federal derivatives law cannot reclaim sports betting.
The capital path is license arbitrage. Platforms invest compliance budgets towards Washington's commodity regulation and circuit court injunctions rather than fifty gambling licenses. Traditional operators allocate resources to state legislatures and attorney general coalitions to protect their capitalized license rents. The CFTC in this administrative cycle is more inclined to view event contracts as regulated financial products, while states see the same cash flow as untaxed bets.
A similar structure existed before the legalization of online sports betting, where federal injunctions clashed with state securities laws through federal interpretive letters. The industry's position has shifted from product expansion to jurisdictional control: whoever wins the "is this a swap or gambling" debate decides whether the order book can be shared nationally.
This represents a transfer of pricing power due to regulatory changes: the legal premium of the same contract is no longer determined solely by odds and liquidity, but by the judgments of the circuit in which it resides. The mechanism is that once federal exclusive jurisdiction is recognized, state taxes and licenses become ineffective; once denied, national exchanges must segment by state, immediately revealing liquidity discounts.
ABAB News · Cognitive Laws
Whether a product is called a swap or gambling determines who has the right to tax it.
The day the courts split is the day the market prices by zip code.
The national order book fears not volatility, but fifty sets of rules.