Kalshi court split could fragment US prediction markets: expert

With 38 active cases across 21 states, conflicting federal rulings over Kalshi have raised the risk that U.S. prediction-market access will fragment by location and trading venue, Kalshinomics co-founder Aaron Courtney has told crypto.news.
Summary

• New Jersey has asked the Supreme Court to resolve opposing federal rulings involving Kalshi.
• Courtney said state restrictions could weaken liquidity first in local political and event markets.
• Washington proxy data has not shown a clear statewide liquidity shock after Kalshi restricted access.
• Casino.org counts 38 pending prediction-market cases across 21 states and enforcement in 10 jurisdictions.

Courtney, who co-founded prediction-market analytics platform Kalshinomics, said the legal system is dividing access faster than trading data shows any separation in prices or liquidity.

"The legal system is already moving in that direction faster than the price data," Courtney said in comments shared with crypto.news.

New Jersey filed a petition for a writ of certiorari on Sep. 2, asking the U.S. Supreme Court to review a Third Circuit decision that favored Kalshi. The petition came four days after the Ninth Circuit reached a different conclusion in the company's Nevada case.
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Kalshi rulings have produced conflicting state rules

As previously reported by crypto.news, New Jersey wants the Supreme Court to decide whether the Commodity Exchange Act prevents states from applying sports-gambling laws to contracts traded on a Commodity Futures Trading Commission-registered market.

Kalshi operates a CFTC-regulated designated contract market and argues that its event contracts fall under federal derivatives law. New Jersey considers its sports products wagers that remain subject to state licensing, age limits, and consumer-protection rules.

In April, a divided Third Circuit panel upheld a preliminary injunction that stopped New Jersey from enforcing its gambling laws against Kalshi's sports contracts. The panel found that Kalshi had shown a reasonable chance of succeeding on its claim that the contracts qualify as swaps under the Commodity Exchange Act.

The decision did not settle the underlying lawsuit. It assessed Kalshi's likelihood of success while preserving the injunction during litigation.

On Aug. 28, however, the Ninth Circuit rejected Kalshi at the same preliminary stage. Its unanimous panel found that the company's sports contracts were likely bets rather than swaps, allowing Nevada regulators to enforce state gaming rules while the case continues.

"The CFTC is not a national gambling regulator," Circuit Judge Ryan Nelson wrote in the Ninth Circuit opinion.

New Jersey's petition points to the opposing appellate decisions as a reason for Supreme Court review. The filing itself does not mean the justices have agreed to hear the case, and Kalshi will have an opportunity to respond before the court decides whether to accept it.

Courtney said the unresolved divide could leave traders with different products depending on their home state and the federal circuit covering it.

"Until there is a uniform answer, prediction-market access could increasingly depend on which state and federal circuit a trader happens to live in."

Prediction-market litigation now covers 21 states

According to Casino.org's Prediction Market Litigation Tracker, 38 active cases are pending across 21 states, while exchanges have received cease-and-desist letters in at least 10 jurisdictions.

The tracker lists New York, Minnesota, Nevada, and Arizona among the states mounting the strongest challenges. Regulators generally argue that sports event contracts operate as unlicensed gambling products, while exchanges rely on federal registration and the CFTC's authority over designated contract markets.

Court disputes also involve tribal gaming rights, state taxes, and local enforcement powers. Casino.org identifies New York, New Jersey, Minnesota, and California as several of the main venues for litigation.

Separate state orders are already creating different access rules. A Michigan court ordered Kalshi to keep sports contracts unavailable to residents under a Sep. 1 preliminary injunction. The Michigan geofencing requirements carry possible fines of $500,000 for each day the court finds Kalshi out of compliance.

Washington has imposed restrictions covering sports, elections, politics, entertainment, culture, technology, and science contracts. Commodities, climate, economics, and financial markets remain available to users in the state.

The Washington court order required Kalshi to introduce initial geofencing by Aug. 19 and a system using several location sources by Sep. 2. Kalshi maintains that federal law prevents states from regulating contracts offered on its CFTC-registered exchange.

Washington data shows no clear liquidity shock

Because Kalshi's public application programming interface does not identify each trader's location, Courtney said outside researchers cannot directly calculate Washington-only volume. He instead used Seattle-linked contracts as proxies for local participation.

The analysis compared the 48 days before the initial Aug. 19 geofence with the following 18 days. Courtney examined Seattle Mariners game contracts against contracts involving the other 29 Major League Baseball teams, along with Seattle's daily temperature markets against 19 other U.S. cities.

Mariners' contract volume performed 2.8% better relative to the rest of MLB after the cutoff, placing Seattle near the league's midpoint. Seattle weather volume declined by 17.7% compared with the other cities.

Courtney said the weather decline remained within normal variation because Philadelphia and Phoenix each fell by more than 30% during the same period without a similar geofence. Median MLB volume per game also dropped 29.6% across the league.

"My takeaway is that any Washington effect is currently smaller than the ordinary seasonal and cross-market noise visible in Kalshi's public data. That isn't the same as saying the impact was zero."

Public data also cannot show whether affected Washington users stopped trading, reduced their activity, or moved to another platform. Seattle weather contracts, which remain available in the state, did not record an increase after Kalshi removed sports and political markets.

Courtney said the evidence did not support a one-for-one move into permitted categories. In his view, sports traders may not consider inflation, finance, or climate contracts suitable replacements for Seahawks game markets.

Washington presents another complication because the state agreed in August to refrain temporarily from enforcement against OG while related appeals proceed, Courtney said. Formerly known as Nadex and operated by Crypto.com, OG also uses a CFTC-designated contract market.

The arrangement offers a possible alternative for displaced traders, although Courtney said account-level information from Kalshi and competing platforms would be needed to measure where their activity went.

Local Kalshi markets face the highest liquidity risk

For heavily traded national contracts, Courtney said excluding Washington alone is unlikely to cause a major disruption. The state accounts for about 2.3% of the U.S. population, while professional market makers and arbitrage traders support many national markets.

Trader quality may matter more than the raw number of excluded accounts, according to Courtney. Removing one active market maker or well-informed participant can affect liquidity and price discovery more than losing several occasional retail traders.

Local markets appear more exposed. In a Sep. 7 snapshot, Courtney found that two Kalshi markets covering Washington Supreme Court races had spreads of about 20 cents, with only one contract traded between their quoted prices. Major MLB and National Football League game markets generally showed spreads of around 1 to 1.5 cents.

According to Courtney, state restrictions can remove residents who have the strongest reason to follow local races and events. Thin local markets may then experience larger spreads, shallower order books, and less dependable market-implied probabilities.

Access restrictions do not yet appear to have separated prices across the largest venues. Courtney compared eight MLB moneyline contracts available on Kalshi and Polymarket on Sep. 7. Five carried identical prices to the cent, while the other three differed by one tick, producing a mean absolute price difference of 0.38 cents.

Courtney said evidence of true fragmentation would include persistent price gaps of several cents between equivalent contracts after accounting for fees and minimum price increments. He would also monitor bid-ask spreads, order-book depth, slippage, active-trader counts, market-maker concentration, and volume by state and exchange.
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