On April 6, 2026, the U.S. Court of Appeals for the Third Circuit (“3d Cir”) issued a ruling that considered the issue of whether state gaming and gambling laws apply to designated contract makers (“DCMs”) that are regulated by the Commodity Futures Trading Commission (“CFTC”). Their ruling held that the Commodity Exchange Act (the “CEA”) pre-empts the application of state laws to DCMs. This is an important development in the emerging regulatory framework for prediction markets as it suggests that the role of the states, even for an event contract that is indistinguishable from a sport bet, may be limited (e.g., to common law actions, such as fraud and negligence).
This decision follows the announcement of the CFTC on April 2, 2026 that it has filed lawsuits challenging the action of several states in respect of DCMs and that it “will continue to safeguard its exclusive regulatory authority over these markets and defend market participants against overzealous state regulators”. [1] On March 16, 2026, the CFTC published advance notice of rulemaking and a request for public comments on statutory core principles and CFTC regulations relating to prediction markets (with a comment deadline of April 30, 2026).
While not an issue in Canada (e.g., as the regulation of derivatives/ securities and gaming is not divided between the provincial and federal governments), this development is still worthy of close monitoring as the Canadian regulatory framework for prediction markets continues to develop.
Closer Look & Important Take-Aways
In a 2-1 opinion, the 3d Cir upheld the findings of the District Court (“DC”) in granting KalshiEx LLC (“Kalshi”), a CFTC regulated DCM, a preliminary injunction enjoining the State of New Jersey from enforcing certain provisions of the state’s constitution and gambling laws that prohibit betting on collegiate sports.
States have traditionally been recognized as having longstanding power to regulate gaming and to take actions to protect their consumers. Similarly, in the past, Congress has enacted several statutes that recognizes the states authority over gambling. However here, the 3D Cir found that the text of the CEA clearly pre-empts state law that would otherwise apply to the trading of event contracts on a DCM.
Preliminary Injunction – Not on the Merits
While an important development, it should be reminded that this decision was in the context of granting Kalshi a preliminary injunction. This preliminary injunction was seeking to enjoin New Jersey from enforcing certain provisions of its constitution and gambling laws where violations are punishable as potentially crimes.
The granting of a preliminary injunction in the U.S. is governed by a well-established four-part test (with the first two being the most important threshold factors): (1) reasonable success on the merits for the moving party, (2) irreparable harm for the moving party, (3) balance of hardships, and (4) the public interest. If the two factors are met, the court must balance these against the other two (with these factors merging when the government is the opposing party).
Here, the 3d Cir concluded that Kalshi had a “reasonable chance, or probability, of success on the merits” that the CEA pre-empts state gaming and gambling laws from reaching DCMs. Reasonable does not mean “more likely than not” but it does mean “significantly better than negligible”.
The Dodd-Frank Act implemented a special rule under 7 U.S.C. §§ 7a-2(c)(5)(C)(i) that gives the CFTC discretionary power to review and prohibit event contracts that are contrary to the public interest. This specifically includes event contracts relating to “gaming” or other similar activity determined by the CFTC, by rule or regulation, to be contrary to the public interest.
In 2020, the CFTC certified Kalshi as a DCM. Five years later, Kalshi began offering sport-related event contracts on its DCM. Kalshi’s self-certified compliance with the applicable laws and regulations are presumptively approved under federal law. The CFTC has also not deemed Kalshi’s sport-related event contracts as being contrary to the public interest.
While the dissent for the DC found Kalshi’s event contracts to be “gaming contracts” that are subject to the special rule, the CFTC has chosen not to enforce its regulations against the type of sport-related event contracts at issue here. To the contrary, the CFTC has certified many “sporting events” contracts for listing.
Event Contracts are Swaps
New Jersey unsuccessfully argued that the sport event contracts are not “swaps” covered by the CEA because the outcome of a sport game is not ‘joined or connected’ with a financial, economic or commercial instrument or measure. However, the 3d Cir disagreed and held that sport event contracts “comfortably fit” within the statutory definition of a swap.
CFTC’s Has Exclusive Jurisdiction over DCMs (Field Pre-Emption)
The DC found that the CEA impliedly pre-empts state regulation of DCMs and that at the “very least field pre-emption applies”.[2] The 3d Cir agreed and stated that the CEA grants the CFTC with exclusive jurisdiction over swaps traded or executed on a DCM which includes Kalshi’s sports event contracts.
State Regulation Conflicts with Purpose of CEA (Conflict Pre-Emption)
While the DC limited its analysis to field pre-emption, the 3d Cir also found that conflict pre-emption would apply to restrict the application of the state regulations. [3] In making this determination, the 3d Cir considered the “full purposes and objectives” of the CEA. Here, they found that Congress intended the CEA to be a comprehensive regulatory framework for the trading of futures contracts. Congress specifically created the CFTC and amended the CEA to do away with the patchwork of state regulations and to bring the futures trading on DCMs exclusively under the jurisdiction of a federal regulator.
The 3d Cir also found that allowing New Jersey to enforce its state laws would create an obstacle since it would prohibit a CFTC-regulated DCM from offering sport-related event contracts. These state laws are exactly the patchwork that Congress intended to replace “wholecloth” by creating the CFTC. Because the New Jersey laws directly conflicts with the full purposes and objectives of the CEA, the 3d Cir did not consider it necessary to determine whether it is impossible for Kalshi to dually comply with both federal and state regulations.
[1] https://www.cftc.gov/PressRoom/PressReleases/9206-26
[2] A conflicting state law is field pre-empted when “federal law occupies a ‘field’ of regulation so comprehensively that it has left no room for supplementary state regulation”.
[3] Conflict pre-emption occurs when state law conflicts with federal law such that compliance with both state and federal regulations is impossible, or when a challenged state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of a federal law”.