Prediction Markets Lost Another Appeal, Then Asked for Leverage

On Friday, September 25, a unanimous three-judge panel of the U.S. Court of Appeals for the Sixth Circuit ruled that Ohio and Tennessee can enforce their gambling laws against Kalshi's sports event contracts. Writing for the panel, Judge Julia Smith Gibbons held that Kalshi had not shown those contracts are 'swaps' under federal law, and that even if they were, the Commodity Exchange Act does not preempt state gambling statutes, according to reporting by CoinDesk and The Hill. The court affirmed an Ohio district judge who had refused to block the state, and reversed a Tennessee judge who had sided with the company.

That ruling was the loudest event in a week that captured the whole industry's contradiction. Prediction markets are growing faster than almost any corner of finance, their operators are asking federal regulators for tools borrowed from institutional derivatives, and at the same moment the legal ground they stand on is getting narrower, not wider.

The circuit split is now hard to ignore

Kalshi's appellate record is now one win and two losses, per The Block's tally. The Third Circuit sided with the company 2-1 against New Jersey in April. The Ninth Circuit rejected its Nevada challenge on August 28. The Sixth Circuit has now joined the states. A Fourth Circuit appeal over Maryland is still pending.

The reasoning in the Sixth Circuit opinion matters more than the scorecard. CoinDesk reports the panel concluded that Kalshi's sports contracts fail the statutory swap definition because the underlying events lack an associated financial, economic, or commercial consequence. That goes to the core of the business model: if a bet on a football game is not a swap, the CFTC's exclusive jurisdiction argument has nothing to attach to, and every state gaming regulator is back in the picture.

New Jersey Attorney General Jennifer Davenport already asked the Supreme Court on September 2 to review the Third Circuit's pro-Kalshi decision, according to The Block. With federal appeals courts now openly disagreeing on the same question of preemption, the conditions that typically pull the justices into a dispute are in place. Kalshi spokesperson Dani Lever told The Block the law does not require a swap to carry intrinsic financial consequences, and argued that a state-by-state patchwork cannot work for national markets.

New York goes after Polymarket, and Polymarket sues back

A day earlier, on September 24, New York Attorney General Letitia James and Governor Kathy Hochul sued Polymarket's U.S. arm, alleging it runs an unlicensed gambling operation. The governor's office says the platform never obtained a license from the state Gaming Commission, avoided the taxes licensed operators pay, and let 18- to 20-year-olds trade even though New York requires mobile sports bettors to be 21. The state is seeking forfeiture of gains, penalties equal to three times those gains, and restitution, and Betting News reports it also seeks up to $100,000 per violation. New York filed a similar suit against Kalshi roughly two months earlier.

Polymarket answered within hours with its own suit in federal court in Manhattan against James and the Gaming Commission, arguing that Congress gave the CFTC exclusive authority over federally regulated derivatives exchanges and that New York is forcing an impossible choice between state and federal compliance, per Al Jazeera. Polymarket has used the same playbook against Massachusetts, Michigan, and Minnesota. Al Jazeera notes the company is valued at more than $20 billion and has Trump family ties through a 1789 Capital investment and advisory board seat, which adds a political layer to a case that is otherwise about statutory text.

The problem for Polymarket is timing. It filed its preemption argument in the Second Circuit's territory one day before a third appellate court rejected the same theory.

The CFTC draws a line at 'mention' markets

The federal regulator the industry wants as its sole overseer is not waving everything through either. On September 22 the CFTC's Division of Market Oversight issued a staff advisory warning that 'mention' contracts, which settle on what a named person says, where they appear, or whom they meet, carry heightened manipulation risk and can be listed only in limited circumstances, according to The Block. Exchanges must file contract-specific analysis and show that the person who controls the outcome faces real legal or professional deterrents, backed by surveillance and trading controls.

The advisory was not hypothetical. The Block cites two enforcement cases: a White House teleprompter operator ordered to pay about $172,000 for trading Kalshi mention markets with advance access to President Trump's speeches, and former Rep. George Santos, who settled for $35,000 after public statements about State of the Union attendance moved contract prices.

Kalshi wants margin anyway

Also on September 22, Kalshi's clearinghouse, Kalshi Klear, asked the CFTC to allow margin trading on event contracts, which today must be fully collateralized. PYMNTS reports access would be limited to self-clearing members that meet capital thresholds, with sports, culture, and mention markets excluded from the initial rollout, and with requirements rising as contracts near expiration. PYMNTS notes Kalshi already offers margin on its perpetual futures.

The pitch is institutional. Longer-dated contracts on rates, elections, or macro events are awkward to hedge if every dollar of exposure must be posted upfront. Carving sports out of the proposal is also a tell: Kalshi is steering the leverage request toward the contracts least likely to be called gambling.

Why the volume makes this urgent

The money involved has outrun the legal certainty. Pew Research Center, using data from The Block, found combined monthly volume on Kalshi and Polymarket rose from about $26 billion in May to $53 billion in July, measured as notional taker volume. Sports drove it: $58 billion on Kalshi and $22 billion on Polymarket across June and July alone. Volume eased to $47 billion in August after the World Cup.

By Flux's math, that July figure is roughly 26 times the $2 billion the two platforms did in July 2025. Most of that growth sits in exactly the category the Sixth and Ninth Circuits now say states can regulate as gambling. Election and economic contracts, which none of these rulings reached, sit on firmer federal ground, but they are a fraction of the book.

The industry's strategy has been to grow fast enough that federal preemption becomes a fact on the ground. This week showed the courts are not cooperating, the CFTC is setting boundaries of its own, and the next decisive move likely belongs to the Supreme Court. Until then, the largest part of the prediction market business runs on a legal theory that has lost two of its last three appellate tests.