Massachusetts high court puts Kalshi on defense

BOSTON (CN) — The Massachusetts Supreme Court on Monday seemed inclined to allow states to regulate sports gambling in online prediction markets in order to provide safeguards against gambling addiction and other problems, despite the federal government’s claim that it has exclusive authority to do so.

The oral argument marked the first time that a state high court has addressed the issue. One federal appeals court, the Third Circuit, upheld a preliminary injunction in favor of the federal government in a ruling last month, but the Massachusetts court sounded unlikely to follow suit.

“I just feel like you’re swimming upstream here,” Justice Scott Kafker told the lawyer arguing for federal preemption.

The case involves the popular prediction market Kalshi, which derives about 90% of its revenue from sports betting. The company was founded in 2021 and is already worth $22 billion, according to Bloomberg.

Massachusetts won an injunction against Kalshi in February, and the company appealed. The case is being closely watched, with 37 states and dozens of tribal organizations filing amicus briefs in support of the state.

More than a quarter of Americans have an active online sports betting account, including more than half of men under 50. While gambling is simply a pastime for most, roughly 3.5 million Americans have a serious gambling addiction and another 3 million are at risk, studies show.

Kalshi is different from typical “sportsbook," where gamblers place bets against the house. Kalshi allows gamblers to place bets against each other, buying “contracts” with value determined by supply and demand instead of oddsmakers.

This makes them the equivalent of derivative trading exchanges, according to the Commodity Futures Trading Commission, the federal agency that claims exclusive jurisdiction over such exchanges.

“Sports gambling’s huge,” Kafker observed, and gambling is traditionally a matter of state regulation. “If Congress was going to shift it to the CFTC, wouldn’t it do it more clearly and distinctly?”

“I agree with Justice Kafker,” said Justice Dalila Wendlandt. “If Congress was going to take some role in sports gambling, it would have been more explicit.”

This is “an elephant in a mouse hole,” Kafker said. “It’s called the ‘Commodity Futures Trading Commission.’ Sports betting is another thing.”

But Kalshi’s lawyer, Grant Mainland of Milbank in New York, argued that sports betting is “no different from any other derivative,” such as swap contracts in which traders hedge against inflation or other economic risks.

“Is that what’s happening here with sports betting?” Wendlandt asked skeptically.

Mainland conceded that not every sports bettor was hedging risk, “but participation is necessary for hedging.” He said that Kalshi is used by insurance companies with sports exposure, such as those that insure against player performance bonuses.

But Justice Frank Gaziano was doubtful, because so many of the “prop bets” available on Kalshi are designed purely for entertainment and have nothing to do with business risk. “How about whether the chain gang is going to come out and measure for a first down in the Super Bowl?” he asked. “Does the color of the Gatorade have anything to do with it?”

“It’s a bet; it’s not like hedging against inflation,” Kafker said. “I just don’t understand the economic consequences.”

Wendlandt grilled Mainland on whether the CFTC has any particular regulatory expertise in the area of sports betting.

“It has expertise in markets,” he said.

“That’s a different thing,” Wendlandt replied.

The same issue is currently pending in the Fourth, Sixth and Ninth Circuits.

Kalshi is controversial in other parts of the world as well, with more than 50 countries having taken steps to restrict access to it in some way.