Is a bet by any other name still a bet?

A panel of Ninth Circuit judges on Friday ruled 3-0 that Kalshi’s event contracts related to sports are a form of sports betting. 

This seems self-evidently true. What is buying an event contract on, say, how many points will be scored in a football game if not betting?

Even Kalshi seems to think so:  

The above post from its Facebook account is cited in the very first sentence of the Ninth Circuit’s ruling in favor of the state of Nevada: “KalshiEX, LLC advertises itself as ‘the first app for legal sports betting in all 50 states’,” Judge Ryan Nelson wrote.   

If there were ever an opportunity for a one-sentence legal opinion, that would seem to be it. Sports betting is regulated by the states and Kalshi says it offers sports betting in all 50 of them. Therefore, Nevada — being a state — can regulate Kalshi.

Case closed!

Just kidding. There is far too much at stake — for both sides — for that to be the final word.

If Kalshi were to concede that its sport-related event contracts are a form of betting, it would have to obtain licences to offer them in each state, comply with state-by-state rules, and pay state taxes and fees. It would also have to cease offering its services in the 20 states where online sports betting remains illegal.

This represents an existential risk to Kalshi: Sports has accounted for 72% of its business so far.

The stakes are not much lower for the state of Nevada, which has no individual or corporate income tax: Taxes and fees on gambling account for roughly 17% of the state’s revenue. The broader hotel-casino industry is estimated to account for as much as 37%.

The average temperature in Las Vegas for the month of July is 107 degrees Fahrenheit, which no one is going to put up with if they also have to pay income taxes.

So there’s a lot riding on whether sports betting on prediction markets, as the Ninth Circuit ruled, is simply sports betting.

As tautological as that sounds, the Third Circuit disagrees.

In April, the Third Circuit (which meets much further away from Nevada) agreed with Kalshi’s reasoning that its event contracts are “swaps” — a kind of financial derivative regulated only by the CFTC.

The Commodity Exchange Act defines a swap as “any agreement, contract, or transaction…dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”

Like the winner of a game, for example: The Seahawks winning the Super Bowl is an event that occurred, Kalshi says.

Or a point spread. The Seahawks winning the Super Bowl by 15 is “the extent of the occurrence of an event.”

Therefore, Kalshi argued, event contracts on what happens in sporting events are swaps and rightly regulated by the CFTC.

The Ninth Circuit said this defies common sense.

In ordinary usage, Judge Nelson wrote the Super Bowl itself is an “event.” The Seahawks winning is the “outcome” of the event. (The Seahawks winning by 15 is an additional outcome.)

A contract tied to the outcome of an event is simply a bet, the court ruled, whatever you choose to call it.

“The substance of the sports event contracts offered on Kalshi’s DCM is sports gambling, regardless of whether Kalshi calls them swaps,” Nelson wrote (invoking Shakespeare’s rose).

Actual swaps have a function beyond gambling: They hedge exposure to events that have real-world financial consequences — interest rates going up, say, or stocks going down. 

Kalshi’s event contracts, by contrast, “do not help institutions or investors hedge against risk,” Nelson wrote. Instead, “they create risk, largely for ordinary consumers, where none previously existed.”

Creating risk where none previously existed is the definition of gambling — and what separates it from investing, insurance, or hedging.

Kalshi notes that sports outcomes do have economic consequences beyond speculation. Like a soccer team betting against itself to hedge the financial risk of relegation, and a bar betting on the Knicks to hedge the risk of a drinks promotion. 

I can imagine a few others, like a hotel hedging the risk that a local team fails to advance in the playoffs.

But no business has a natural financial exposure to a team winning a game by 15 points instead of 10, for example. Or whether Taylor Swift will be in attendance. Or how long the national anthem will be.

Should Kalshi appeal the Ninth Circuit’s ruling, then, my guess is it’ll have to base its defense on how to parse the exact wording of the Commodity Exchange Act. 

If so, some of the world’s most important jurists might soon be litigating the difference between “outcome” and “event.”

Polymarket odds suggest there’s a 52% chance that it happens by the end of the year.

Now that is a swap.

(Kalshi doesn’t offer it.)

— Byron Gilliam

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