A landmark April 2026 ruling by the U.S. Third Circuit Court of Appeals in KalshiEX LLC v. Flaherty established that prediction markets licensed by the Commodity Futures Trading Commission (CFTC) are federally preempted from state gambling regulations. The court held that New Jersey could not regulate Kalshi’s sports-event contracts as unauthorized gambling because these contracts are swaps traded on a federally licensed designated contract market (DCM), placing jurisdiction with the CFTC rather than states. This decision marks the first major appellate-level recognition that federal law governs this new class of wagering products, challenging state efforts like Kentucky’s HB 904, which attempts to restrict prediction market affiliations through licensing conditions.

However, the ruling has intensified legal conflicts rather than resolving them, as other circuits have ruled differently, creating a circuit split likely headed for Supreme Court review. States like Nevada and Maryland have upheld state enforcement actions against Kalshi, contrasting with the Third Circuit’s federal preemption stance. For Kentucky, the ruling casts doubt on HB 904’s Section 25, which prohibits licensed entities from affiliating with prediction markets nationally, potentially violating federal preemption principles. More broadly, the ruling underscores the growing influence of federally licensed prediction markets as a competitive alternative to traditional pari-mutuel wagering in horse racing, pressing the industry to either engage with these products or risk losing relevance outside its established economic framework.