Former SEC Chair Gary Gensler helped write the Dodd-Frank definition of a ‘swap.’

Now, Kalshi is using his words to argue its sports event contracts are federally regulated derivatives, not gambling. Gensler says they’ve got it all wrong.

That’s a problem for Kalshi, which has built its entire legal strategy around the argument that sports event contracts are swaps.

The Third Circuit agreed last week, ruling 2-1 that federal law preempts state gambling regulation.

But the Ninth Circuit hears consolidated oral arguments today in the Nevada cases involving Kalshi, Robinhood Markets (NASDAQ:HOOD) and Crypto.com.

If the panel reaches a different conclusion, this likely ends up at the Supreme Court.

What Gensler Undercuts

Kalshi’s legal defense rests on the plain text of the statute. Courts have agreed so far, but Gensler says the legislative intent tells a different story.

He revealed that then-Senate Majority Leader Harry Reid specifically pushed to insert the word “gaming” into the Commodity Exchange Act so the CFTC could block gambling-like contracts.

“Nobody was intending to pre-empt the New Jersey state gaming commission,” Gensler said.

That lines up awkwardly with Kalshi’s own filings. The company asked the U.S. Patent and Trademark Office in November to classify its product under “bookmaking services” and “sports betting and gambling tournaments.”

Kalshi called the trademark strategy “intentionally broad,” but a Dodd-Frank author calling sports contracts gaming and Kalshi’s own trademark filing calling them bookmaking may be difficult to explain away in front of the Supreme Court.

Who Gets Hurt If Gensler Is Right

Kalshi raised $1 billion at a $22 billion valuation last month, more than Flutter Entertainment (NYSE:FLUT) and DraftKings (NASDAQ:DKNG).

That number assumes a single federal charter. If courts decide prediction markets need state gambling licenses, Kalshi’s cost structure changes and the incumbents stand to benefit.

DKNG is down roughly 37% year-to-date as prediction markets have eaten into sports betting market share. A ruling that forces Kalshi into 50-state licensing could reverse that pressure.

Current CFTC Chair Mike Selig declined to say whether sports contracts count as gaming at his confirmation hearing. Gensler was less careful. “Betting on sports is gaming,” he said.

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