A Second Appeals Court Says Kalshi's Sports Contracts Are Bets, Not Swaps. New York Sued Polymarket the Day Before

What Happened

On Friday, a unanimous panel of the US Court of Appeals for the Sixth Circuit ruled that KalshiEX LLC has not shown that its sports event contracts are 'swaps' under the Commodity Exchange Act (CEA), which gives the Commodity Futures Trading Commission (CFTC) exclusive jurisdiction over derivatives on the exchanges it licenses.

Writing for the panel, Senior Judge Julia Smith Gibbons held that a swap's underlying event must be 'associated with a potential financial, economic, or commercial consequence,' that the link has to be intrinsic to the event, and that 'Kalshi's sports event contracts have only downstream economic consequences, assuming they have the potential to cause economic consequences at all.'

On a second, independent ground, the court held that even if the contracts were swaps, the CEA neither expressly nor impliedly preempts the gambling laws of Ohio or Tennessee. The decision affirms a March denial of a preliminary injunction in the Southern District of Ohio and vacates a February injunction from the Middle District of Tennessee.

The ruling landed a day after New York opened a new front. On Thursday, Attorney General Letitia James and Governor Kathy Hochul filed a petition in New York Supreme Court in Manhattan against QCX LLC, the CFTC-designated contract market that operates Polymarket US, alleging unlicensed sports wagering and mobile sports wagering, traders aged 18 to 20 where New York requires 21, and online solicitation of New Yorkers.

The state asks the court to halt the platform's New York operations, order an accounting that identifies customers and itemizes their bets, their losses, and the company's gains, and impose restitution, disgorgement, a penalty of 3 times Polymarket's gains, and $100,000 for each offer of a sports wager in the state.

Polymarket removed the case to the Southern District of New York the same day and then sued James and state Gaming Commission officials there, calling the petition 'an extraordinary assertion of state power squarely foreclosed by federal law.' CFTC Chairman Michael Selig, whose agency sued New York on April 24, said registered exchanges 'have faced an onslaught of state lawsuits' and that the CFTC 'will not allow overzealous state governments to undermine' its authority.

A federal license was supposed to replace 50 rulebooks with 1. What it created was a defendant every state can name.

The License Was the Shield. Now It Is the Address

Prediction markets spent 2025 building 1 legal theory: register as a designated contract market (DCM), list event contracts as swaps, and the CEA's exclusive-jurisdiction clause displaces 50 state gambling codes at once. Polymarket, whose offshore exchange has been geoblocked for US addresses since a January 2022 CFTC settlement, bought its way onto that theory: $112 million for QCEX in July 2025, an amended order of designation from the CFTC on November 25, a US app in December that launched with sports, and a commitment of up to $2 billion from Intercontinental Exchange, owner of the New York Stock Exchange, at a valuation of about $8 billion before the investment.

The theory won in the Third Circuit on April 6, when a 2 to 1 panel held in KalshiEX v. Flaherty that sports contracts are swaps and that federal law shields them from New Jersey, and again on July 27, when a federal judge blocked Minnesota's law criminalizing prediction markets.

Since then it has lost twice at the same level. On August 28 the Ninth Circuit upheld Nevada's authority 3 to 0, with Judge Ryan D. Nelson writing that 'the substance of the sports event contracts offered on Kalshi's DCM is sports gambling, regardless of whether Kalshi calls them swaps.'

Friday's opinion adds that geofencing may be costly but is not impossible, rejecting Kalshi's claim that a national order book cannot be fenced. The practical result is that the license is no longer a shield in Nevada, Ohio, or Tennessee. It is the thing the petition names. QCX LLC exists because Polymarket wanted a US entity a federal regulator could recognize.

New York's petition is addressed to exactly that entity, and its first demand is a customer accounting that only a know-your-customer (KYC) venue can produce. The offshore polymarket.com, which settles in USDC on Polygon with positions held in self-custodied wallets, never had a New York address to serve.

The regulated one does.

Swap or Bet, Depending on the Circuit

The strongest case for the platforms is that the Sixth and Ninth Circuits are reading a 2010 statute against a product Congress did not anticipate, and that the Third Circuit's text-first reading is the kind the Supreme Court's current majority tends to reward. Kalshi has said it does not expect Friday's decision to survive further review; spokesperson Dani Lever said it 'shows exactly why a state-by-state patchwork doesn't work.'

Petitions for certiorari are already on file from New Jersey (September 2, against the Third Circuit), Robinhood (September 9), and Crypto.com (September 15), the latter 2 against the Ninth. If the Court takes 1 and sides with the Third Circuit, the state cases against sports contracts on DCMs fall away, and the CFTC's June proposal to rewrite Regulation 40.

11, which would define sports as 'gaming' the agency itself can bar from registered venues, becomes the only fence that matters.

Either way, the mechanism that matters to a trader is settled, and it has nothing to do with sports. A court order needs a defendant with an address, a rulebook, and a customer file, and the DCM route created all 3 in every state at once. That is why Kalshi agreed to geofence Nevada by August 12 or pay $120,000 a day, why a Michigan judge fenced it out under a $500,000-a-day injunction, and why the CFTC invoked emergency authority on July 15 to stop Kalshi from canceling pending Michigan trades, ordering them settled through the normal process.

The federal regulator that sued New York in April cannot stop a state court from serving a company that, as Polymarket's chief legal officer Neal Kumar put it on Thursday, has 'more than 350 employees' in the city. A jurisdictional contact point is not a flaw in the licensing model.

It is the model.

What This Means for You

If you trade on Polymarket US or Kalshi, know what you hold: a dollar balance at a futures commission merchant (FCM), a full KYC file (government ID, Social Security number, proof of residence), and a trade history the venue must be able to produce to the CFTC and, on New York's theory, to a state attorney general, whose petition asks for exactly that history, itemized by customer.

Treat it as discoverable, because under a licensed model it is. The offshore exchange is the mirror image: a wallet, USDC, no KYC, and a geoblock on US addresses required by the 2022 settlement. A VPN does not turn a New Yorker into an offshore user. It puts you outside the venue's own terms, the ground on which a platform can void trades, and inside the state law the petition is built on.

There are 3 concrete moves. First, keep only working collateral on any venue whose status in your state can change with 1 opinion. Second, export your trade and tax records now, while the interface still serves your state. Third, read the venue's rulebook on restricted jurisdictions and open positions.

The Nevada and Michigan precedents are geofence plus normal settlement, which is the better outcome, but Kalshi's plan in Michigan, under a state court order, was to cancel pending trades, and it took a CFTC emergency order to stop that. If you live in Ohio, Tennessee, Nevada, Michigan, or New York, assume sports contracts are fenced first, and act before the fence rather than after it.

None of this is solved by self-custody. A wallet holding USDC positions on Polygon is beyond the reach of a New York petition, and it has also been off-limits to any lawful US trader since January 2022; when France wanted the same wallet-based design gone in July, it did not sue the contract, it ordered every internet provider to block the site (see 'France Orders Every ISP to Block Polymarket After Its Transaction Ban Failed').

Key control protects the asset. It does not confer the right to trade a contract in a jurisdiction that has decided the contract is a bet. The regulated route trades that reach for legal certainty, and this month's rulings show that the certainty on offer is 50 separate decisions rather than 1.

What to Watch

The Supreme Court's response to the New Jersey, Robinhood, and Crypto.com petitions is the first checkpoint; a grant this term would mean a decision in 2027. Whether Kalshi fences Ohio and Tennessee, and how it treats open positions there, will show whether the Michigan pattern holds without a CFTC order behind it.

In Manhattan, 3 proceedings now turn on the same question: the CFTC's April suit against the state, Kalshi's appeal from Judge Analisa Torres's July denial of an injunction, and Polymarket's new complaint. Any move by Polymarket US to restrict New York users before a ruling would signal that the accounting demand, not the penalty, is what the company fears.

And the CFTC's final rule on Regulation 40.11 will decide whether sports contracts are a federal product at all.

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