A federal judge in Tennessee has granted Kalshi a preliminary injunction blocking state enforcement against the prediction market platform, ruling that sports event contracts qualify as swaps under the Commodity Exchange Act and that the CFTC holds exclusive jurisdiction over them. The ruling by Judge Aleta Trauger of the U.S. District Court for the Middle District of Tennessee, reported by The Block on February 20, marks the strongest federal court victory yet for Kalshi in its battle against state regulators, and it directly contradicts rulings in Massachusetts and Nevada that went the other way.
The decision upgrades the temporary restraining order Trauger issued on January 13 into a full preliminary injunction, as of February 20, 2026. Where the TRO merely paused enforcement while the court considered arguments, the preliminary injunction signals that Trauger believes Kalshi is likely to win on the merits. The implications extend far beyond Tennessee: with courts now split on whether prediction markets are federally regulated financial instruments or state-regulated gambling, the legal battlefield is heading toward an eventual appellate showdown.
Judge Trauger Draws the Line Between Exchanges and Sportsbooks
The heart of Trauger's reasoning rests on a structural distinction that prediction market operators have been making for years but that few courts have accepted this cleanly. "Unlike traditional sportsbooks, Kalshi operates an exchange on which gamblers bet against each other, rather than the house," Trauger wrote. "Kalshi does not set the odds (they are determined by the market), is not a party to the bets (the two people on either end of the bet are), and has no interest in who wins (Kalshi makes money by charging fees for each trade)."
That distinction matters because the Commodity Exchange Act grants the CFTC exclusive jurisdiction over swaps traded on designated contract markets. If sports event contracts are swaps, then state gambling commissions have no authority to regulate them, full stop. The legal doctrine is called federal preemption, and Trauger found that both "field preemption" (the CEA occupies the entire regulatory field for derivatives on designated exchanges) and "conflict preemption" (state enforcement would directly contradict federal law allowing these contracts) apply.
Trauger also addressed the definitional question that has tripped up other courts. The CEA defines a swap broadly, requiring only that the instrument potentially have economic impact. Trauger concluded that sports event contracts meet this threshold: they do not need a "definite economic consequence" beyond the contract itself. The price discovery mechanism, the exchange structure, and the fee-based revenue model all point to a financial instrument, not a wager.
The Escalation From TRO to Preliminary Injunction
The timeline in Tennessee has moved fast. On January 9, the Tennessee Sports Wagering Council sent cease-and-desist letters to Kalshi, Polymarket, and Crypto.com, ordering all three platforms to stop offering sports-related event contracts to Tennessee residents, void all pending contracts, and refund customer deposits by January 31. Kalshi responded by filing a federal lawsuit arguing that the state was intruding on the CFTC's exclusive jurisdiction.
Four days later, on January 13, Trauger granted the temporary restraining order, blocking Tennessee from enforcing the cease-and-desist while the court weighed the preemption arguments. A preliminary injunction hearing was set for January 26.
On February 11, Trauger appeared to push back during oral arguments, questioning whether sports prediction contracts truly qualify as financial swaps under the CEA. "What troubles me is that under Loper Bright, the agency does not just get to decide what a swap is," she said, referencing the Supreme Court's 2024 decision that stripped federal agencies of Chevron deference. That skepticism made the February 19-20 preliminary injunction ruling all the more significant: despite her own reservations, Trauger concluded that the statutory text and exchange structure support Kalshi's classification argument.
A Deepening Circuit Split Across State Lines
Tennessee is now the clearest federal win for Kalshi, but it is far from the only courtroom where this fight is playing out. The landscape across other states paints a more complicated picture.
In Massachusetts, Suffolk County Superior Court Judge Christopher Barry-Smith granted a preliminary injunction on January 20 barring Kalshi from offering sports event contracts to state residents. That ruling reached the opposite conclusion from Trauger's: Barry-Smith treated sports contracts as gambling products subject to state regulation. Polymarket subsequently sued Massachusetts in a separate case challenging the same enforcement framework.
In Nevada, the Gaming Control Board sued both Kalshi and Polymarket for operating unlicensed sports betting platforms. A federal judge issued a temporary restraining order against Kalshi there, and Kalshi has appealed to the U.S. Court of Appeals for the Ninth Circuit, where the case could set binding precedent for Western states.
Multiple other states, including New Jersey, Ohio, Connecticut, and New York, have initiated enforcement actions or lawsuits. Kalshi itself has gone on offense, filing suits against regulators in New York, Michigan, and Illinois. The total count now sits at roughly 19 to 20 federal lawsuits spanning both sides of the argument.
The result is exactly the kind of regulatory patchwork that CFTC Chairman Michael Selig warned about. In a February 17 Wall Street Journal opinion piece, Selig wrote that "the CFTC will no longer sit idly by while overzealous state governments undermine the agency's exclusive jurisdiction over these markets." The agency has filed amicus briefs in multiple cases and created a 35-member Innovation Advisory Committee that includes CEOs from Polymarket, Kalshi, Coinbase, Robinhood, FanDuel, and DraftKings.
Utah Governor Spencer Cox publicly criticized Selig's position, calling prediction markets "gambling, pure and simple." That tension between federal financial regulators and state gaming authorities shows no sign of resolving short of appellate or Supreme Court intervention.
What This Means for Prediction Market Users and Crypto Platforms
For Kalshi users in Tennessee, the immediate impact is continuity: sports event contracts remain available while the case proceeds. But the broader significance lies in the legal precedent. A preliminary injunction requires the court to find that the plaintiff is likely to succeed on the merits. Trauger's ruling is the first federal court decision to fully embrace the argument that sports event contracts are swaps and that the CEA preempts state gambling law.
That precedent could influence pending cases in other jurisdictions, particularly where courts have not yet reached the merits. It also strengthens Kalshi's hand in settlement negotiations with states that may prefer to avoid a binding appellate ruling.
For crypto-native platforms, the case has direct relevance. Coinbase received the same cease-and-desist from Tennessee that Kalshi and Polymarket did. Coinbase launched its own prediction market product and has faced separate enforcement action from Nevada. The question of whether event contracts are financial instruments or gambling products affects any platform, whether centralized or decentralized, that wants to offer them.
The case also intersects with the broader CFTC regulatory framework that governs crypto derivatives. The same Commodity Exchange Act that Kalshi is invoking to shield its prediction markets from state gambling laws is the statute that gives the CFTC authority over Bitcoin and Ethereum futures, perpetual swaps on platforms like dYdX, and the growing universe of tokenized event contracts on decentralized protocols.
The Road to an Appellate Showdown
With Tennessee and Massachusetts reaching opposite conclusions on the same legal question, and Nevada's case heading to the Ninth Circuit, the conditions for appellate review are ripe. Federal courts disagree on whether sports event contracts are swaps, whether the CEA preempts state gambling law, and whether the Loper Bright decision changes the calculus by stripping the CFTC of Chevron deference on definitional questions.
The Trump administration has signaled clear support for prediction markets through Selig's CFTC, but administrative backing does not resolve judicial disagreements. An eventual circuit split, where different federal appeals courts reach different conclusions, would create the strongest possible grounds for Supreme Court review.
For now, Kalshi can operate in Tennessee. But the company still faces active enforcement in Nevada, Massachusetts, and multiple other states. Each court ruling reshapes the landscape, and the Tennessee preliminary injunction has just made Kalshi's argument significantly harder for other courts to dismiss.
FAQ
What did the Tennessee judge actually rule? Judge Aleta Trauger granted Kalshi a preliminary injunction blocking the Tennessee Sports Wagering Council from enforcing its cease-and-desist order. She ruled that sports event contracts are swaps under the Commodity Exchange Act and that federal law preempts state gambling regulation of CFTC-regulated platforms.
How is this different from the earlier temporary restraining order? The TRO, issued January 13, was a temporary pause on enforcement while the court considered arguments. The preliminary injunction signals that the court believes Kalshi is likely to succeed on the merits, making it a much stronger legal victory.
Does this ruling apply in other states? No. Federal district court rulings apply only to the jurisdiction where they are issued. However, the legal reasoning can be cited by Kalshi in other cases and may influence judges in states that have not yet ruled.
What happens next in the Tennessee case? The case will proceed to trial or summary judgment on the merits. Meanwhile, Kalshi can continue operating in Tennessee under the protection of the preliminary injunction.
How many states are fighting prediction markets? At least a dozen states have initiated enforcement actions or lawsuits, with roughly 19 to 20 federal cases pending across the country.
Overview
Judge Aleta Trauger's preliminary injunction in Tennessee represents the strongest federal court endorsement yet of the argument that prediction market sports contracts are financial instruments, not gambling products. The ruling directly contradicts decisions in Massachusetts and Nevada, setting up the deepest circuit split in the prediction market regulatory war. With the Trump administration's CFTC actively backing platforms like Kalshi and Polymarket, and state regulators pushing back with their own enforcement actions, the prediction market industry is heading toward an appellate reckoning that will define whether event contracts live under federal financial law or state gambling codes for the foreseeable future.
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