A federal appeals court has let Ohio and Tennessee enforce their gambling laws against Kalshi's sports contracts. The exchange now has to geofence users and follow local rules, even though it is federally regulated.
Kalshi's plan for a single national market in sports prediction contracts has hit a wall. A new federal court ruling gives states the power to enforce their own gambling laws, even against exchanges that answer to federal regulators. The Sixth Circuit Court of Appeals decided that Ohio and Tennessee can make Kalshi block users inside their borders from trading sports contracts. This goes against Kalshi's claim that federal oversight by the Commodity Futures Trading Commission (CFTC) should override state rules.
States keep control over federal exchanges
The court's decision came down on September 25. Kalshi argued that, as a designated contract market, it could not follow a patchwork of state rules. The judges disagreed. They pointed to geofencing-technology that blocks users based on where they are-as a workable fix. The court backed an Ohio order against Kalshi, threw out a protective order in Tennessee, and sent both cases back to lower courts. This ruling now covers federal courts in Ohio, Tennessee, Michigan, and Kentucky.
The Sixth Circuit explicitly rejected Kalshi's argument that federal CFTC oversight preempts state gambling laws, confirming that states retain authority to regulate prediction markets within their borders.
Kalshi said its sports contracts should be regulated only under the Commodity Exchange Act as swaps. But the court said Kalshi did not prove its contracts fit the law's definition. Even if they did, the judges said, federal commodities law would not cancel out state gambling laws. This means that even if Kalshi wins on the swap issue later, it still would not be shielded from state enforcement in the Sixth Circuit.
Geofencing splits the market
Kalshi now has to act fast. It must use geofencing to block users in states where its sports contracts break local law, or face penalties. In Michigan, a state court order already forces Kalshi to keep certain sports contracts off-limits to users in the state. Breaking the order can cost up to $500,000 per day. The Kalshi app still works, but sports markets disappear for anyone inside Michigan.
Eilers & Krejcik Gaming (EKG) says 69% of Kalshi's retail sports demand comes from states without legal online sportsbooks. California and Texas alone make up 44%. Kalshi does not share state-by-state trading data, so these numbers come from outside modeling. EKG's research also shows that in states with strong legal sportsbooks, prediction markets have replaced only 2% to 4% of sportsbook betting. This suggests Kalshi's growth is mostly from users in states where licensed sportsbooks are not allowed.
The Sixth Circuit's ruling highlights the ongoing fragmentation of U.S. prediction markets, where state-level enforcement and geofencing requirements are increasingly shaping the operational landscape for both centralized and blockchain-based platforms.
Ohio and Tennessee both allow and regulate sports betting. But Kalshi's sports contracts do not fit into their licensing, age, tax, or consumer protection systems. The Sixth Circuit pointed out that states collected over $3.2 billion in sports gambling tax revenue in fiscal 2025. Both Ohio and Tennessee have said sports contracts are welcome-if Kalshi follows the same rules as licensed sportsbooks.
The appeals courts are now split. The Third Circuit sided with Kalshi in New Jersey in April, saying federal law might override state gambling rules. The Ninth Circuit ruled against Kalshi in Nevada in August. Now the Sixth Circuit has joined that side for Ohio and Tennessee. A Fourth Circuit appeal in Maryland is still pending. New Jersey has asked the Supreme Court to settle the split. Kalshi's response is due in November, but the Supreme Court has not said if it will take the case.
If the Supreme Court agrees with the Third Circuit, Kalshi could run sports contracts nationwide under one federal system, going head-to-head with DraftKings, FanDuel, and Polymarket. But if the Sixth and Ninth Circuits' logic wins out, Kalshi will face a patchwork of state rules, licenses, taxes, and geolocation checks. This would split up liquidity, force Kalshi to offer different contracts in each state, and take away its main edge-a unified national market.
Market data and competition
Sports contracts are at the heart of Kalshi's business. They make up over 90% of trades and 95% of projected 2025 revenue, according to numbers cited in the Ninth Circuit's August ruling. EKG estimates that if half of Kalshi's non-sportsbook user base were blocked, about 34.5% of modeled retail sports demand would be hit. California, under the Ninth Circuit, is already affected by a negative ruling. Texas, in the Fifth Circuit, is still waiting for a decision.
Kalshi's troubles are part of a bigger problem for crypto and prediction markets in the U.S. State and federal regulators often fight over who is in charge. As reported earlier, even stablecoin issuers face changing rules as regulators debate national and local control. For Kalshi, this latest court loss means the dream of a single, borderless sports prediction market is gone-at least for now. The company now has to deal with a maze of state laws, technical hurdles, and shifting rules. Its future depends on ongoing appeals and maybe a Supreme Court review.
EKG's July 2025 model puts Kalshi's retail sports demand at 69% from states without legal online sportsbooks, with California and Texas alone at 44%. The same research says that in the most competitive legal betting states, prediction markets have replaced only 2% to 4% of sportsbook handle. These numbers show how much Kalshi relies on users in states where traditional sportsbooks are not licensed, and how much state rules could hurt its business.
Geofencing is now central to Kalshi's compliance. This technology is common among online gambling and trading platforms to block users by location. It uses third-party geolocation providers to check where users are and block access to restricted products. Geofencing works, but it can be costly to run and may frustrate legitimate users. For exchanges like Kalshi, splitting markets by state adds complexity and breaks up liquidity, making it harder to offer good prices and deep order books. As more states take control of online prediction markets, exchanges will have to invest in strong compliance systems or risk losing access to key markets.
