Kalshi and Coinbase v. Illinois: A Federal Court Reads the Swap Definition as Congress Wrote It
By R Tamara de Silva | De Silva Law Offices, LLC | October 5, 2026
Who should regulate prediction markets, the CFTC or the states? Illinois says a contract on whether the Cubs will win the World Series is a sports bet that requires a state gaming license. Kalshi says it is a swap traded on a federally regulated exchange, and that the Commodity Exchange Act (CEA) gives the CFTC exclusive jurisdiction over it. On October 2, a federal judge in Chicago sided with Kalshi on that central question. Her opinion is worth reading closely, because it shows how courts should settle this fight: by applying the CEA as Congress wrote it, not by rewriting it. Reading the statute any other way leaves a market the CFTC already regulates open to a patchwork of state rules.
The Honorable Martha M. Pacold of the Northern District of Illinois decided three consolidated cases brought by Coinbase, Kalshi, and the United States and the CFTC (Coinbase Fin. Mkts., Inc. v. Raoul, Nos. 1:25-cv-15406, 1:26-cv-03659, 1:26-cv-07363 (N.D. Ill. Oct. 2, 2026)). She held that Kalshi’s sports contracts are likely swaps and that Illinois’s licensing laws likely conflict with the CEA.
The result is a significant, if partial, win for Kalshi and Coinbase. The reasoning is the better story. Several courts in this litigation have leaned on statutory purpose, and on the intuition that these contracts are just gambling. Judge Pacold started with the words Congress wrote and stayed with them.
How Illinois Tried to Regulate Kalshi and Coinbase
Shortly after Kalshi began listing sports contracts, Illinois sent it a cease-and-desist letter under the Illinois Sports Wagering Act. The letter threatened action against Kalshi and against anyone affiliated with its operations. That reached Coinbase, which had partnered with Kalshi so that its users could trade Kalshi contracts with cryptocurrency held at Coinbase. Coinbase sued first. The United States, the CFTC and Kalshi followed.
The licensing regime Illinois wanted to apply is extensive. A licensee may not accept anyone under 21, may accept wagers only from people physically located in Illinois, and is subject to limits on which sporting events and data sources it may use. Illinois also makes it a crime to operate an internet site that lets people wager on the result of a game, and it threatened to use that provision too.
Then, after the court heard argument, Illinois changed the law. Its Fiscal Year 2027 budget imposed a new fee on every “exchange wager,” a term defined to include any swap offered on a prediction market and tied to a sporting event. The fee is 1.75% on an exchange’s first five million exchange wagers in a fiscal year and 3.5% on the rest. It sits on top of an existing 15% fee on gross sports wagering receipts and a per-wager fee of 25 or 50 cents.
Judge Pacold granted the motions for preliminary injunctions in part. The licensing requirements, and the criminal provision behind them, likely conflict with the CEA. On the new fees, she withheld judgment and called for further briefing.
She also kept the ruling narrow. Courts generally decide only the questions the parties put before them, a rule known as the party presentation principle. The parties argued the case through a single representative contract, “will the Chicago Cubs win the 2026 World Series?”, so that is the contract the court decided.
How the Court Explained Prediction Markets in Plain English
The opinion begins with the product, not the statute. Before any law, it explains how a Kalshi contract works, using a contract on whether LeBron James would sign with the Miami Heat. That contract traded at around 10 cents. When James signed with the Philadelphia 76ers instead, it settled at zero, and holders of the 76ers contract collected $1. Prices, the court explains, are set by traders buying and selling, not by a house setting odds.
Only then does the opinion turn to the CEA, and it quotes the relevant provisions in full before saying anything about what they mean. A reader who has never traded a derivative can follow every step.
The legal analysis starts in the right place, too. Before reaching the swap question, the court identified what the Seventh Circuit had already settled. That court has held that the CEA neither expressly preempts state law nor occupies the entire field (Effex Capital, LLC v. National Futures Ass’n, 933 F.3d 882, 894 (7th Cir. 2019)). That left one question, known as conflict preemption: whether Illinois law stands in the way of what Congress set out to accomplish. The opinion also flags, with a “but see,” that the Ninth Circuit reads the statute differently.
Are Sports Event Contracts Swaps Under the CEA?
Under the CEA, a swap includes any contract that pays out based on “the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence” (7 U.S.C. § 1a(47)(A)(ii)). Whether Kalshi’s sports contracts fit that language decides the case, and Judge Pacold took it one phrase at a time.
She began with the word "event." Illinois argued that the event is the game itself, not who wins it. Like the Sixth Circuit, she found nothing in the statute that leaves outcomes out. The words around "event" point the same way. The definition covers "the occurrence, nonoccurrence, or the extent of the occurrence" of an event. As a federal court in Arizona explained, "If 'occurrence' and 'nonoccurrence' capture whether an event happens, 'the extent of the occurrence' extends to how an event resolves" (KalshiEX LLC v. Johnson, 832 F. Supp. 3d 954, 961 (D. Ariz. 2026)).
Illinois's reading also leads to odd results. Judge Pacold showed this with two contracts made before a Cubs game against the Reds. The first pays if the Cubs win. The second pays if the Cubs' season record improves, which can only happen if they win. The two contracts pay out in exactly the same situation. Yet Illinois would treat only the second as a swap. As the court put it, "statutes do not usually draw lines so capriciously."
She then turned to the rest of the definition: whether the event is "associated with a potential financial, economic, or commercial consequence." The consequence can be financial, economic or commercial, and a potential one is enough. The clause, she wrote, "reads about as broadly as it could."
But "broad does not mean unlimited," she added. The Supreme Court has cautioned against "uncritical literalism" in reading phrases like "associated with." Read literally, almost anything is associated with something. So the link between the event and the consequence has to be concrete and articulable. Speculation will not do. The words "financial, economic, or commercial" add a second limit: the consequence has to be material.
Two examples from the opinion show where the line falls. Suppose a team leads the NBA Finals three games to none. A contract on whether a fifth game will be played qualifies, because an extra game means real money for broadcasters and arenas. A contract on the color of the sports drink dumped on the coach after a Bears win does not. Coinbase conceded that point at oral argument. In the court's view, no narrower limit "has a persuasive hook in the law."
Why the Court Rejected an “Inherently Economic” Limit on the Swap Definition
Illinois’s main argument was that the definition should reach only events that are inherently economic. That is close to the reading the Sixth Circuit adopted a week earlier. Judge Pacold rejected it on a basic rule of statutory interpretation. When a statute defines a term, courts follow the definition, even when it departs from the term’s ordinary meaning (Van Buren v. United States, 593 U.S. 374, 387 (2021)). The everyday sense of the word “swap” could matter only if the definition were ambiguous, and the court found that it is not.
The CFTC has pressed the same point. In its amicus brief in United States v. Van Dyke, the first federal insider trading prosecution involving event contracts, the agency noted that the statute itself names weather swaps and emissions swaps, and that neither weather nor emissions is inherently economic. A limit that would read out contracts Congress listed by name, the CFTC argued, cannot be the right one. We discussed that brief in August.
Illinois also offered a story about legislative purpose. Dodd-Frank, the argument goes, was a response to the credit default swaps behind the 2008 financial crisis, so the swap definition should reach only instruments of that kind, that is the same instruments that led to the 2008 financial crisis. The court found a different account at least as plausible. The crisis grew out of risks nobody had anticipated, and a broad definition would let the law reach dangerous instruments that did not yet exist.
The court’s account is the better reading of the history. Illinois’s version treats Dodd-Frank as if Congress were legislating against a single instrument, the one that happened to fail in 2008.
The deeper problem in 2008 was structural. Much of the risk at the center of the crisis was endogenous, meaning it was created inside the financial system by its own participants rather than imposed from outside. Firms wrote enormous volumes of credit default swaps, many of them tied to mortgage-backed securities and CDOs, in a market with no clearing, no dealer registration and little reporting. Neither regulators nor counterparties could see how much risk had built up, or where it sat. When the losses came, they traveled through the same web of private contracts that had created them.
Credit default swaps were the form that risk took in 2008. There is no reason to expect it to take the same form next time. Endogenous risk grows out of leverage, opacity and interconnection, and Wall Street can build it with many kinds of instruments, particularly ones that move risk outside a regulated, transparent market. A statute aimed only at the last crisis’s instrument would have been out of date almost as soon as it was signed.
This view is not new. In 2012, after JPMorgan disclosed a trading loss of more than $2 billion, the author wrote that Wall Street’s risk models keep failing because they treat extreme events as nearly impossible, and that systemic crises recur when “the unexpected and un-modeled occurs.” A year later, writing about the government’s suit against Standard & Poor’s, the author described how AAA ratings were placed on CDOs and mortgage-backed securities that neither the rating agencies nor the banks’ own audit committees fully understood.
Congress’s response shows that it understood this. Dodd-Frank’s stated purpose is to promote financial stability “by improving accountability and transparency in the financial system” (Pub. L. No. 111-203, 124 Stat. 1376 (2010)). Title VII did not ban credit default swaps. It brought swaps generally into the open, through central clearing, exchange trading, trade reporting and the registration of swap dealers. Congress also wrote the definition to keep pace with the market. One clause reaches any contract that “is, or in the future becomes, commonly known to the trade as a swap” (7 U.S.C. § 1a(47)(A)(iv)), and the CFTC and the SEC have authority to further define the term as markets change (15 U.S.C. § 8302(d)(1)). Even the Sixth Circuit acknowledged that this clause reflects Dodd-Frank’s purpose “to ensure that new forms of swaps were regulable as soon as they emerged, without requiring Congress to amend the Act” (Schuler, 2026 WL 2884087).
The structure of the definition points the same way. Credit default swaps appear in one subpart of one clause of a long definition. The rest reads, in the court’s words, “more like a broad-spectrum regulatory intervention than a surgical response to the 2008 crisis.”
The court gave similar treatment to the rule against surplusage, the principle that courts should avoid readings that leave some words of a statute with nothing to do. That rule is not absolute, the court noted, and it carries little weight in a definition that overlaps with itself by design. We examined these competing readings of the definition in February, when the court heard argument.
Are Prediction Markets Gambling? Why the Court Asked Whether They Are Swaps
The states' most persistent argument is an intuition about what Congress could have intended. Gambling has traditionally been a matter for the states. The swap definition came from Dodd-Frank, Congress's response to the 2008 financial crisis. It is hard to believe, the argument goes, that Congress used that law to federalize gambling and make the CFTC the country's only sports betting regulator. As the Supreme Court has put it, Congress does not "hide elephants in mouseholes" (Whitman v. American Trucking Ass'ns, 531 U.S. 457, 468 (2001)).
The argument comes in several legal forms. One is the presumption against preemption, which assumes that Congress does not lightly displace state law in areas the states have traditionally regulated. Another is the absurdity doctrine, which lets a court avoid a reading that would produce an absurd result. A third is the major questions doctrine, discussed below.
Judge Pacold acknowledged that the intuition "has some appeal, especially in an area of traditional state police power." But she found it "an odd fit" with the CEA.
The court also explained why sports contracts can serve the same purpose as other swaps. Real businesses have money riding on how games turn out. Broadcasters earn more advertising revenue when a championship series runs longer. The opinion cites a 2001 ESPN estimate that a four-game NBA Finals would cost NBC $25 million to $35 million compared with a seven-game series. Arenas and concession companies are often paid a share of game-day sales, so they also earn more when there are more games. Sponsors do better when the players they endorse perform well.
Each of them could hedge that exposure, just like the farmer buying a weather swap. A network worried about a sweep, for example, could buy a contract that pays if the series ends in four games. In the court's words, "To them, the contracts would work similarly to the credit default swaps involved in the 2008 crisis: both reduce financial exposure." The opinion even points to a real example. A New York bar promised free drinks if the Knicks won, and its owner used Kalshi to hedge the cost.
Finally, the court addressed the major questions doctrine. It is a rule the Supreme Court applies when a federal agency claims power over a question of vast economic and political significance. In those cases, the Court expects Congress to have granted that power clearly. The leading case is West Virginia v. EPA, 597 U.S. 697 (2022). There, the Court refused to read a provision about the "best system of emission reduction" as authority to force a nationwide shift away from coal. The argument here is that regulating sports betting nationwide is that kind of question.
Judge Pacold explained why this case is different. In the major questions cases, an agency took old, ancillary language and found new, broad power over an existing industry. Here, it was the market that changed. When Congress gave the CFTC exclusive jurisdiction over swaps in 2010, Kalshi did not exist, and most sports bets were placed with sportsbooks. Sports contracts came to CFTC-regulated exchanges later. That does not change what the 2010 statute means. As the Supreme Court has put it, "[t]hat a statute can be applied in situations not expressly anticipated by Congress does not demonstrate ambiguity. It demonstrates breadth" (Pa. Dep't of Corr. v. Yeskey, 524 U.S. 206, 212 (1998)).
Why Illinois’s Licensing Law Likely Conflicts With the CEA
Once it found the contracts were likely swaps, the court asked whether Illinois law conflicts with the CEA. Here it relied on a case that began at the Chicago Board of Trade. In 1989, the Board issued an emergency order in its soybean futures market and was then sued under state law. The Seventh Circuit held those claims preempted in American Agriculture Movement, Inc. v. Board of Trade of City of Chicago, 977 F.2d 1147 (7th Cir. 1992). It drew a clear line. State laws that "directly affect trading on or the operation of a futures market" are preempted. Laws that affect only the relationship between brokers and investors are not (id. at 1156).
That line comes from history. In the early 1970s, commodity trading surged, food prices rose quickly and a costly trading scandal made headlines. Those pushing for reform worried that the states would step in and regulate the futures markets themselves, subjecting a national market to "conflicting regulatory demands." Congress's answer was to put every exchange under the same set of rules.
Judge Pacold applied that precedent with care. She did not read it to shield everything listed on a CFTC-regulated exchange. If listing a contract were enough to trigger preemption, she reasoned, an exchange could widen federal preemption just by self-certifying a new contract. The CFTC could do the same by leaving a contract in place. So preemption reaches only the instruments Congress named, such as swaps and futures, when they trade on the exchanges Congress named.
Illinois's licensing rules fall on the preempted side of that line. They do more than set duties between brokers and their customers. They govern the market itself: who may trade, where traders must be, and which games and data sources the contracts may use. Criminal penalties back them up. As the court put it, compliance would force Kalshi "to build a market solely for Illinoisans."
The opinion is just as careful with the fees. Drawing on the Supreme Court’s ERISA decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645 (1995), Judge Pacold observed that a state can often impose a cost on an activity without regulating it. A fee heavy enough to dictate how the market operates, however, could still be preempted. In her words, “What defendants cannot do overtly, they cannot do covertly.” She asked for targeted briefing before deciding which kind of fee Illinois has imposed.
How the Sixth Circuit’s Kalshi Ruling Differs From the Illinois Decision
A week earlier, the Sixth Circuit reached the opposite result, holding that Ohio and Tennessee may enforce their gambling laws against Kalshi (KalshiEX LLC v. Schuler, 2026 WL 2884087 (6th Cir. Sept. 25, 2026)). The two courts agree on more than the outcomes suggest. Both held that an event can include an outcome. Both recognized that some contracts, the sports-drink contract among them, fall outside the swap definition.
Where they part ways is the source of that limit. The Sixth Circuit read “associated with” to mean “inherently associated with,” and required that hedging the event be commonly understood as beneficial. Neither requirement appears in the statute. Judge Pacold found her limits in the words Congress used.
They also differ on preemption. The Sixth Circuit concluded that state gambling laws only incidentally burden an exchange. Judge Pacold, bound by Seventh Circuit precedent that does not bind the Sixth Circuit, found that Illinois’s licensing regime regulates the market itself.
Why the CFTC, Not the Courts, Should Answer the States’ Concerns
The states’ concerns about age limits, problem gambling and the integrity of games are real. The question is who addresses them, and the CEA answers it.
If the swap definition reaches too far, Congress gave the CFTC and the SEC authority to further define the term (15 U.S.C. § 8302(d)(1)). If an event contract involves gaming and is contrary to the public interest, the CFTC may bar it under the CEA’s special rule for event contracts (7 U.S.C. § 7a-2(c)(5)(C)). And if Congress decides that sports contracts belong with the states, it can amend the statute.
Judge Pacold left those choices where Congress put them. Illinois argued that Kalshi's sports contracts already break the CFTC's own rule against listing gaming contracts. If so, Illinois said, its laws could not interfere with trading that was never allowed in the first place. The court allowed that Illinois "may have a case." But the CFTC has "an immense amount of discretion" over what exchanges may list. It has never found Kalshi's contracts to be prohibited gaming contracts or ordered them removed, and it supports Kalshi in this case. It would be "odd indeed," the court concluded, to accept Illinois's claim that its rules and the CFTC's are consistent.
Illinois also warned that unregulated sports wagering is "particularly addictive and especially attractive to young people." The court's answer was brief: "Congress assigned those considerations to the CFTC, not the courts."
That restraint matters because when a court narrows a federal definition on its own, the narrowed version governs one circuit, after years of litigation. When the CFTC defines a term by rule, the definition applies nationwide, after public comment. The CFTC has begun that work.
On September 28, the CFTC sent two rules to the White House for review, one defining “swap” to include event contracts and one excluding casino-style gambling products.
Those rules would also answer a question the CFTC left open earlier this year. In its Ninth Circuit amicus brief in North American Derivatives Exchange v. Nevada, the CFTC said it did not need to decide where swaps end and wagers begin, a gap we examined in Law360 in March. That answer belongs with the agency Congress charged with defining the term.
Prediction Markets and the History of Futures Trading
Much of the commentary on prediction markets treats them as something new and alarming. The history of the futures markets suggests some humility about that reaction.
Futures trading was once condemned as gambling, too. Judge Pacold quotes a 1903 Eighth Circuit decision describing such transactions as “in all essentials gambling transactions” (Christie Grain & Stock Co. v. Bd. of Trade, 125 F. 161, 168 (8th Cir. 1903)). The Supreme Court reversed. Writing for the Court in 1905, in a case about the Chicago Board of Trade, Justice Holmes observed that “[p]eople will endeavor to forecast the future, and to make agreements according to their prophecy,” and that “[s]peculation of this kind by competent men is the self-adjustment of society to the probable” (Bd. of Trade v. Christie Grain & Stock Co., 198 U.S. 236, 247 (1905)). He added that “the natural evolutions of a complex society are to be touched only with a very cautious hand” (id. at 247–48).
Holmes was right about the direction of travel. The markets he was describing grew from grain into metals, energy, currencies and interest rates. Event contracts are part of the same evolution. As the Illinois opinion notes, the CFTC first recognized them in 1992, when it allowed the Iowa Electronic Markets to list contracts pegged to events such as presidential elections.
They are now a substantial market, and most of it has nothing to do with sports. In an April 2026 brief, the CFTC reported that at least eight exchanges had self-certified more than 3,000 event contracts, the great majority tied to outcomes such as interest-rate decisions, GDP releases, temperatures and metals prices. Federal Reserve economists have studied these markets as a real-time source of data for monetary policy (Anthony M. Diercks et al., Kalshi and the Rise of Macro Markets, Fin. & Econ. Discussion Series No. 2026-010 (Fed. Reserve Bd. 2026)).
There is no sign that these markets are going away. The live question is who will regulate them.
The Cost of State-by-State Regulation of Prediction Markets
Illinois shows what state regulation of these markets would look like. Before Kalshi could offer a single sports contract there, it would need a state sports wagering license. It could not accept anyone under 21, or anyone not physically in Illinois. The state would decide which sporting events the contracts could cover and which data sources they could use. Breaking those rules would be a crime. Illinois would also collect three separate fees: its new fee on every exchange wager, a 15% fee on gross receipts and a charge of 25 or 50 cents per wager. In effect, Illinois would decide who may trade on a federally regulated exchange, what they may trade and how much the state takes.
It is also worth asking who would do the regulating. In Illinois, sports wagering falls to the Illinois Gaming Board, which has taken the position that prediction markets are gambling under Illinois law. The state’s approach to crypto is a useful comparison. In 2025, Illinois gave the Illinois Department of Financial and Professional Regulation (IDFPR) authority over digital asset businesses and exchanges. As we wrote at the time, IDFPR has historically overseen professions and financial services and may lack staff with any background in crypto or algorithmic risk. Federal regulators such as the CFTC, and self-regulatory organizations such as the NFA, are staffed with people who have decades of experience in trading, clearing and compliance. Assuming state agencies that regulate dentists can seamlessly replace a federal regulator whose markets have been relatively crisis-free compared with the stock market is a leap of faith too far.
The same question applies to prediction markets. Would you rather have them supervised by state agencies with no history of overseeing derivatives markets, or by a federal regulator that has supervised the futures markets since 1974?
And Illinois is only one state. Ohio and Tennessee set their own age limits and require traders to be physically in the state. New Jersey, Nevada and Maryland have their own rules and their own litigation with Kalshi. An exchange works by bringing buyers and sellers from across the country into one market. Under state-by-state regulation, it would have to split that market apart and rebuild it to each state's specifications. The result would be a set of smaller, thinner state markets in place of one national one.
Michigan has already shown where that leads. In July, a Michigan state court ordered Kalshi to cancel trades that Michigan residents had already made, and the CFTC then ordered Kalshi to honor them. The exchange was left with no way to obey both, as we discussed at the time.
This is the problem the CEA was written to prevent. It is the conflicting regulatory demands the Seventh Circuit described in American Agriculture Movement, arriving half a century later through a new kind of contract.
Meanwhile, the federal framework is doing real work. Under CFTC rules, a designated contract market must provide impartial access, take responsibility for preventing manipulation and publish trading data (17 C.F.R. §§ 38.151, 38.250, 38.400). The CFTC has proposed rules identifying sports contracts that are likely contrary to the public interest, sent two more rules to the White House, and brought its first insider trading case against a corporate employee trading on a prediction market.
In our view, replacing that framework with a patchwork of state regimes would be the worst outcome available, for the market and for the people who trade in it.
What to Watch After the Illinois Prediction Markets Ruling
The fee question is still open, and the court has called for targeted briefing. Illinois can appeal the injunction to the Seventh Circuit, which would then decide whether it reads American Agriculture Movement the way Judge Pacold did. In the Supreme Court, Kalshi’s response to New Jersey’s petition for certiorari is due October 8. The CFTC’s two rules remain under White House review. Our state-by-state map tracks the rest of the litigation.
Judge Pacold ended her opinion with a sentence worth quoting. Many of the instruments at issue, she wrote, “are likely swaps as defined by the Commodity Exchange Act—they just happen to be swaps that people find entertaining and fun.” That line will not settle the circuit split. It does capture, in a single sentence, the disagreement the Supreme Court is now being asked to resolve.
De Silva Law Offices, LLC follows the prediction market space closely and writes about it regularly. The firm represents exchanges, intermediaries, market participants and new entrants in the prediction market and event contract space, on matters including CFTC and NFA registration, compliance and enforcement defense. Our prediction markets and event contracts practice advises exchanges, intermediaries, and market participants on CFTC registration, compliance, enforcement defense, and the intersection of federal derivatives regulation and state gaming laws. Questions about this article may be directed to info@desilvalawoffices.com or 312-500-8424.
NB: This article is commentary on a matter of public record and is not legal advice. Reading it does not create an attorney-client relationship. R Tamara de Silva is the Managing Partner of De Silva Law Offices, LLC, Chicago, and writes on financial regulation, derivatives and prediction markets.