A federal appeals court ruled on Friday that states can regulate prediction markets, dealing a blow to Kalshi in its battle with Nevada. The U.S. Court of Appeals for the Ninth Circuit in San Francisco rejected Kalshi's request for relief against Nevada's gambling laws, after the state sued the company in February for "unlicensed operations."

Prediction markets, notably Kalshi, have surged in popularity this year, attracting billions in trades on topics like elections, sports, and reality TV. However, this growth has prompted pushback from states. Now, 20 states are involved in litigation over whether these markets fall under gambling laws.

The core debate is whether prediction markets offer swaps, which are regulated only at the federal level, or sports bets, which states can regulate. Judge Ryan Nelson wrote that Kalshi's "sports event contracts were not 'swaps' because they were sports bets," subject to state law. This contradicts a Third Circuit decision in April that deemed them swaps under the Commodity Exchange Act.

The Ninth Circuit's ruling creates a circuit split, prompting the Commodity Futures Trading Commission (C.F.T.C.) to call for Supreme Court review. Zach Fulton, a C.F.T.C. spokesman, said the court "erred today" and invented a new exception. Nevada's Attorney General Aaron Ford praised the decision, stating that "sports betting does not become something else simply because a company calls it an 'event contract.'" Kalshi's spokeswoman Dani Lever said the company will seek further review. Similar cases are pending in the Second, Fourth, Sixth, and Seventh Circuits.