PREDICTION MARKETS
The language of Section 5c(c)(5)(C) of the CEA says that the CFTC can then prohibit a contract from trading if it determines that the contract is “contrary to the public interest” because it involves: i. activity that is unlawful under any Federal or State law; ii. terrorism; iii. assassination; iv. war; v. gaming; or vi. other similar activity determined by the Commission, by rule or regulation, to be contrary to the public interest. For a long time, the CFTC interpreted this definition in a way that gave it plenary authority to ban more or less any market that it wanted. In general, this meant that it refused to permit markets relating to elections, sports, and award shows - so, the juicy stuff – from trading. That’s not what the law says though, and after the Chevron doctrine was overturned in Loper Bright Enterprises v. Raimondo , 603 U.S. 369 (2024), federal agencies have generally been required to follow the law. So when, in late 2023, the CFTC moved to prevent Kalshi from listing contracts related to elections, Kalshi sued. And in August 2024, in KalshiEX LLC v. Commodity Futures Trading Commission , No. 1:23-cv-03257 (JMC), 2024 WL 4164694 (D.D.C. Sept. 12, 2024), Kalshi won. The proximate effect of this ruling was ostensibly narrow. Kalshi, and other DCMs, were allowed to offer election contracts in the lead up to the 2024 election. This lucrative market promoted their growth, but they were dwarfed in scale by their off-shore competitor Polymarket, who ultimately gained the greatest attention share that season. After Donald Trump was elected, as the implications of the Kalshi ruling began to sink in, practitioners began to think
about the margins of the new regime. Crypto.com was the first mover, self-certifying contracts based on the outcomes of sporting events in December 2024, and Kalshi soon followed. 3 While the lame-duck Biden CFTC did move to review the Crypto.com contracts in January, they did not issue a final determination prohibiting the contracts prior to Mr. Trump’s inauguration, and the incoming CFTC has appeared more receptive to the segment. Indeed, in May the CFTC dropped its appeal of the Kalshi case, in effect accepting the limits to its authority to prohibit election contracts. 4 This came amidst speculation that incoming Commission Chair Brian Quintenz will view DCM prediction markets favorably, given arguments he made as far back as 2021 in favor of sports-based prediction markets. 5 Things are looking good for prediction markets on the regulatory front. As sports markets have grown in popularity, states have taken note. Post-PAPSA state-licensed sports betting regimes are major money-makers for states that permit them, and federally licensed DCMs sit outside of this framework. Naturally, traditional sports-betting friendly states like Nevada and New Jersey see this development as a threat to their fiefdoms. In the Spring of 2025, this dynamic led to a flurry of state cease-and- desist letters targeting the new markets. 6 At the time of writing, this litigation is ongoing. However, Kalshi has made significant strides and won preliminary injunctions against Nevada and New Jersey. See e.g. KalshiEX LLC v. Flaherty , No. 1:25-cv-02152, slip op. at 16 (D.N.J. Apr. 28, 2025). Section 2(a)(1)(A) of the CEA provides that “[t]he Commission shall have exclusive jurisdiction [over covered derivatives]” and that is about the strongest preemption case you are likely to see litigated in your career. There are caveats and counterarguments, but brass tacks, if you were betting on the outcome, you would put your money on Kalshi and Crypto. com winning these cases.
3 See Crypto.com, Crypto.com Launches Sports Event Trading (Dec. 23, 2024), https://crypto.com/en/product-news/sports; Alexander Osipov- ich, Prediction Market Kalshi Launches Sports Betting , Wall St. J. (Live Coverage Jan. 23, 2025), https://www.wsj.com/livecoverage/stock-mar- ket-today-dow-sp500-nasdaq-live-01-23-2025/card/prediction-market-kalshi-launches-sports-betting-EMq0xRAi1BL20HWrFKIm. 4 See Turner Wright, US Regulator Moves to Drop Appeal Against Kalshi, Cointelegraph (May 6, 2025), https://cointelegraph.com/news/cftc-dis- miss-appeal-kalshi. 5 Statement of Commissioner Brian D. Quintenz on ErisX RSBIX NFL Contracts and Certain Event Contracts: “Any Given Sunday in the Futures Market,” CFTC (Mar. 25, 2021), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement032521. 6 See e.g. Nev. Gaming Control Bd., Cease and Desist Order to KalshiEX LLC, d/b/a Kalshi (Mar. 4, 2025), https://gaming.nv.gov/uploadedFiles/ gamingnvgov/content/about/press-release/NGCB%20-%20News%20Release%20-%20KalshiEX%20Cease%20and%20Desist%20Order%20 %283-4-2025%29.pdf; N.J. Div. of Gaming Enforcement, Cease and Desist Letter to Kalshi Inc. d/b/a Kalshi (Mar. 27, 2025), https://www.nj.gov/ oag/ge/docs/EmergencyOrders/Kalshi2025.pdf; Md. Lottery & Gaming Control Comm’n, Cease and Desist Letter to Kalshi (Apr. 7, 2025), https:// www.mdgaming.com/wp-content/uploads/2025/04/Kalshi-4-7-25.pdf.
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IMGL MAGAZINE | JUNE 2025
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