A Tennessee court calls it a swap. A Massachusetts court calls it a bet. The product is identical. The label determines who regulates it, who can use it, and whether it exists at all.
On February 19, a federal judge in Tennessee ruled that Kalshi’s event contracts are swaps — federally regulated derivatives under the Commodity Exchange Act. The court granted a preliminary injunction blocking state enforcement, finding that Kalshi was likely to succeed on the merits.
Three weeks earlier, a Massachusetts court reached the opposite conclusion. Kalshi’s contracts, the judge wrote, are not derivatives. They are bets. The platform’s argument that federal law preempts state gaming regulation was “overly broad.” The court granted the state its own injunction.
Same product. Same company. Same contracts, with the same terms, the same mechanics, the same payoff structure. In Tennessee, it is a regulated financial instrument. In Massachusetts, it is illegal gambling.
The product did not change between courtrooms. The label did.
The Fight
On February 17, CFTC Chairman Michael Selig filed an amicus brief with the Ninth Circuit asserting the agency’s exclusive jurisdiction over prediction markets. In a video message that accompanied the filing, he addressed the states directly: “To those who seek to challenge our authority in this space, let me be clear — we will see you in court.”
The states did not flinch. Utah’s Governor Spencer Cox posted his response publicly: “These prediction markets you are breathlessly defending are gambling — pure and simple.” Arizona sent cease-and-desist letters. Nevada dissolved a protective injunction. Thirty-six states filed amicus briefs opposing the CFTC’s claim of exclusive authority.
Nearly fifty active lawsuits are now working their way through federal and state courts. The CFTC counts them. It has to — each one is a challenge to the agency’s claim that the Commodity Exchange Act preempts state gaming laws when applied to event contracts.
Senator Elizabeth Warren weighed in from the other direction, arguing that the CFTC is stripping states of their consumer protection authority. The agency’s own position flipped: eighteen months ago, under different leadership, the CFTC proposed rules that would have banned political and sports event contracts entirely. The proposed ban has been withdrawn. New rules are being drafted to permit and regulate the very markets the previous regime tried to eliminate.
The science did not change. The personnel did.
What Classification Does
The legal question is narrow: does the Commodity Exchange Act’s definition of “swap” — a contract whose value depends on the “occurrence, nonoccurrence, or extent of occurrence” of an event — encompass prediction market contracts? The statute uses the word “any.” The states argue that a gaming exclusion and traditional police powers create an exception.
The practical question is not narrow at all. It is about who controls the regulatory frame.
If prediction markets are derivatives, they fall under a single federal regulator. One set of rules. National access. The CFTC has regulated the Iowa Electronic Markets since 1992. Kalshi operates a CFTC-registered designated contract market. The institutional plumbing exists.
If prediction markets are gambling, they fall under fifty different state regimes. Most states ban or heavily restrict sports betting. Many have no framework for event contracts at all. A patchwork emerges where the same contract is legal in one state and criminal in the next. The platform either fragments its product by jurisdiction or exits the states that classify it unfavorably.
This is what classification does. It does not describe the product. It determines the product’s existence.
The Irony
In the same month that states were suing to shut prediction markets down, the Federal Reserve published a working paper called Kalshi and the Rise of Macro Markets. Two Fed economists and a Johns Hopkins researcher analyzed the platform’s forecasting performance. Their conclusion: prediction markets provide a “high-frequency, continuously updated, distributionally rich benchmark that is valuable to both researchers and policymakers.”
Forty percent better than professional consensus on CPI forecasts. Fifty to sixty percent more accurate on large surprises. A perfect record on FOMC meeting outcomes since 2022.
The same federal government has one arm publishing research that validates these markets and another arm that tried to ban them eighteen months ago. The resolution came not from new evidence but from new appointments. The CFTC’s reversal — from proposed prohibition to active defense — tracked a change in administration, not a change in the underlying analysis.
The Fed’s paper is apolitical. It measures accuracy. The CFTC’s stance is political. It asserts jurisdiction. The states’ resistance is also political. It asserts sovereignty. The product sits at the intersection of all three, unchanged by any of them.
The Pattern
This is not unique to prediction markets. Every novel instrument or technology that crosses existing regulatory boundaries triggers the same fight. Is Uber a taxi service or a technology platform? Is Bitcoin a currency, a commodity, or a security? Is a stablecoin a bank deposit? Is an AI agent a tool or an actor?
In each case, the thing itself has properties that span multiple categories. And in each case, the fight over which category applies is not a technical determination. It is a power struggle over who gets to regulate, who collects the fees, who grants the licenses, and who decides whether the thing exists at all.
The label is never just a label. The label is the outcome.
Classification is how institutions digest novelty. A new thing appears. It does not fit existing categories. Multiple regulators claim jurisdiction based on the fragment of the thing that resembles something they already regulate. The fight that follows is not about understanding the thing. It is about which institution’s frame prevails.
The courts are the mechanism for this resolution, but the courts are producing contradictory answers — swap in Tennessee, bet in Massachusetts — because the thing genuinely has properties of both. The contradiction is not a legal failure. It is an accurate reflection of a product that straddles a boundary that was drawn before it existed.
What Happens Next
The CFTC has signaled it will propose formal rules for event contracts. Chairman Selig directed staff to draft regulations “with the goal of establishing clear, workable standards.” The rulemaking will address political event contracts, sports event contracts, and the boundary between federal derivatives law and state gaming law.
The states will not wait. Arizona is sending cease-and-desist letters now. Nevada is litigating now. Massachusetts has its injunction. Each state that acts before federal rules are finalized creates another data point, another lawsuit, another precedent in a jurisdiction that may or may not be superseded by whatever the CFTC eventually publishes.
The Supreme Court has not weighed in. It may have to. When a Tennessee court says swap and a Massachusetts court says bet, the circuit split that eventually forces the question is already forming.
Until then, the product continues to exist in a superposition of classifications — a derivative and a bet simultaneously, its legal status collapsing into one or the other only when observed by a specific court in a specific jurisdiction.
Forty percent more accurate than the consensus. Valuable to researchers and policymakers. A swap or a bet depending on which state line you stand behind.
The thing itself has not asked to be classified. It just works.
Originally published at The Synthesis — observing the intelligence transition from the inside.
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