THE SWAP DEFENSE FALLS APART

• The Sixth Circuit says Kalshi's sports contracts are ordinary bets, not federally protected swaps.
• Ohio and Tennessee can now enforce their gambling laws against the company.
• The ruling deepens a three-way circuit split that's pushing this fight straight toward the Supreme Court.

By Samuel López | USA Herald

Kalshi just lost again, and this one stings. A three-judge panel on the Sixth Circuit ruled Friday that the company's sports-related contracts don't meet the legal definition of a swap, which means Ohio and Tennessee are free to regulate them as gambling under state law. A three-judge panel of the U.S. Court of Appeals for the Sixth Circuit unanimously held that Kalshi has not shown those contracts meet the legal definition of a swap. That single word — swap — is the whole ballgame here, and it's worth breaking down before anything else. The Block

A swap, in plain terms, is a financial contract where two parties exchange payments tied to some underlying variable — an interest rate, a currency value, a commodity price. Congress handed the Commodity Futures Trading Commission exclusive authority over these instruments after the 2008 crash, largely through Dodd-Frank. If a contract counts as a swap, states can't touch it. That's the loophole Kalshi has been leaning on since it started listing sports contracts in January 2025. Bet on whether the Chiefs win, structure it as a "contract" traded on a CFTC-registered exchange, and suddenly it's supposed to live outside state gambling law entirely.

The Sixth Circuit wasn't buying it. Circuit Judge Julia Smith Gibbons, writing for the panel, pointed to something damaging buried in Kalshi's own prior filings — the company had previously conceded its sports contracts carry no real economic weight beyond the bet itself. That admission gutted the swap argument from the inside. The court also went a step further, holding that even if these were swaps, the Commodity Exchange Act still wouldn't preempt Ohio's or Tennessee's gambling statutes. Two reasons to lose instead of one.

Practically, this vacates the injunction Kalshi had won in Tennessee back in February and leaves Ohio's earlier denial standing. Kalshi is now exposed in both states, with no federal shield left to hide behind there.

Here's where it connects to what we reported on this week out of New York. Attorney General Letitia James sued Polymarket's U.S. arm Thursday, accusing it of running an unlicensed gambling operation and demanding triple its profits plus penalties for every illegal wager offered in the state.

Polymarket fired back within hours, suing James and the state gaming commission, arguing its event contracts are swaps and that New York has no business regulating them. Sound familiar? It's the identical legal theory the Sixth Circuit just shredded. James filed a nearly identical suit against Kalshi back in July, so both major players in this industry are now fighting the same battle on two fronts — Kalshi in the appellate courts, Polymarket in New York — and both are leaning on a ‘we're swaps, not bets’ defense that keeps losing outside the Third Circuit.

That's the real story underneath all this. The Third Circuit sided with Kalshi in April on its New Jersey case, ruling the contracts likely are swaps. The Ninth Circuit went the other way in August on Nevada's case. Now the Sixth Circuit has joined the Ninth. Two circuits say gambling law applies, one says federal preemption wins, and a Fourth Circuit appeal is still pending. New Jersey has already asked the Supreme Court to step in, and Robinhood and Crypto.com — who face the exact same exposure as Kalshi wherever it operates — have pushed the justices to settle this nationally. Every state loss adds pressure. Every state loss also invites more attorneys general to file the same kind of suit James just brought against Polymarket.

Nobody in this industry gets to relax until the Supreme Court decides whether to take it up.

ABOUT THE AUTHOR
Samuel López is a reporter and news correspondent for USA Herald, where he has covered legal and regulatory affairs since 2022. López built his background in the legal and insurance sectors over more than two decades, analyzing state and federal litigation and working complex legal matters. That background is exactly what this prediction-markets fight demands, since the entire dispute turns on how federal commodities law and state gambling statutes collide.

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