Second Circuit Panel Questions Swap Status of Sports Event Contracts in Kalshi and Coinbase Appeal
Second Circuit judges appeared during a Tuesday hearing to doubt that sports event contracts could qualify as swaps, but also seemed to search for ways to avoid letting New York and Connecticut ban the products for now. Questions for Kalshi, Coinbase, and the CFTC mostly concerned the merits while questions for the state seemed to deal more with potential harms.
SCCG Take — The panel's focus signals potential limits on federal preemption for prediction markets. Operators face regulatory fragmentation risk if states prevail, while investors must weigh delayed clarity on event-contract legality.
Second Circuit judges expressed doubt Tuesday that sports event contracts qualify as swaps under the Commodity Exchange Act while appearing concerned about the effects of allowing New York and Connecticut to enforce bans against Kalshi and Coinbase.
The U.S. Court of Appeals for the Second Circuit heard arguments in the combined appeal of district court rulings that denied injunctions blocking state enforcement. Kalshi, Coinbase, and the CFTC urged the court to grant an injunction; the states opposed it. Judges John M. Walker Jr., Joseph F. Bianco, and Dennis Jacobs presided.
Judges Skeptical That Sports Bets Fit Swap Definition
Walker directed much of the questioning toward the merits, stating he could not see how sports betting satisfies the CEA text requiring an event associated with potential financial, economic, or commercial consequences.
“I don’t see how sports betting in its entirety is a swap,” Walker said. “Because there has to be an underlying event, and the underlying event has to be associated with potential financial economic or commercial consequences.”
Bianco agreed the definition was written for financial markets and described the application to sports as “trying to fit a square peg into a round hole.” Kalshi counsel Will Havemann and Coinbase counsel Yaira Dubin countered that Congress wrote a broad definition in Dodd-Frank with no sports carve-out and granted the CFTC specific authority over gaming contracts via the special rule.
CFTC counsel Henry Dickman told the panel the agency is actively building an event-contract framework through rulemaking and enforcement actions against insider trading and manipulation. He added that Congress anticipated such contracts when it authorized the CFTC to prohibit swaps involving gaming.
Balance of Harms and Questions on State Enforcement Pause
When state lawyers spoke, the discussion turned to potential harms from enforcement. Walker asked whether New York could simply continue the pause on regulation it had maintained until the district court ruled. He also confirmed the requested relief would affect the exchange nationwide.
Connecticut counsel noted that Kalshi closed a $1 billion funding round last week at a $40 billion valuation, suggesting any harm from losing sports contracts would not be irreparable. Walker questioned whether that valuation was attributable solely to those contracts.
New York is seeking billions in damages in a separate state-court action that is on hold pending the appeal. According to reporting by InGame, the panel took the matter under advisement.
The questions reveal a court wrestling with statutory text that may not support treating game outcomes as swaps while simultaneously recognizing the disruption a state-by-state ban would impose on a federally regulated exchange. The decision will likely turn on whether the judges can locate a path that respects the CEA’s limits without inviting the patchwork regulation the CFTC warns against.
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