In Kalshi’s court battle against Ohio, 39 states plus the District of Columbia have filed an amicus brief in support of the state. Despite the widespread opposition, the Commodity Futures Trading Commission (CFTC) has moved to formally approve sports prediction markets in its new rules.
In addition to the states, a host of tribes, the American Gaming Association (AGA), and Better Markets, a nonprofit that focuses on financial regulation, all filed briefs in support of Ohio. The CFTC, meanwhile, filed a brief in support of Kalshi. All filings can be viewed here.
The CFTC claims exclusive regulatory authority over prediction markets and this week moved to formally recognize sports contracts as legal and valid, releasing its proposal for new rules for the industry.
CFTC Aims to Clarify Gaming Definition
Currently, the Commodity Exchange Act (CEA), which governs prediction market operators such as Kalshi, does not explicitly prohibit sports markets. It says that markets related to gaming can be restricted if deemed contrary to the public interest.
Kalshi argues that its sports markets are fair and legal because they are valid financial contracts with real-world economic consequences. The states, tribes, and others argue that this constitutes sports betting rather than financial contracts.
In its new rule proposal, the CFTC clarifies the definition of gaming, stating, “Gaming means any activity that: (i) one or more participants typically engage in for purposes of recreation or to entertain others, (ii) is governed by rules; and (iii) includes measurable occurrences or outcomes that depend on the participants’ luck, skill, or athletic ability during the activity.”
“The Commission also notes that if an activity is not gaming as defined above, the mere fact that gambling occurs in relation to that activity does not make it gaming,” it adds.
Former CFTC Chairman Opposes New Direction
Under new chairman Michael Selig, the CFTC has moved to aggressively defend Kalshi and other licensed operators. In addition to the briefs it has filed in support of legal battles, it has filed lawsuits in several states.
“The CFTC will protect the integrity of our regulated markets without standing in the way of responsible innovation,” said Selig when announcing the new rules proposal. “This proposal gives the Commission a durable, transparent framework to identify the contracts Congress directed us to scrutinize while letting legitimate markets move forward.”
Former CFTC Chairman Gary Gensler also filed a brief in support of Ohio and against Kalshi. In the brief, Gensler clearly states that he believes “sports bets are not swaps.”
He also says that at no point did anyone consider approving sports contracts when writing the Dodd-Frank Act in 2010, which amended the CEA.
In fact, those working on the Dodd-Frank Act explicitly said it was not intended to allow sports markets. Sen. Blanche Lincoln played a significant role in writing the act. At the time, she stated, “It would be quite easy to construct an ‘event contract’ around sporting events such as the Super Bowl, the Kentucky Derby, and Masters Golf Tournament. These types of contracts would not serve any real commercial purpose. Rather, they would be used solely for gambling.”
She has since registered as a Kalshi lobbyist and supported the company’s right to offer sports contracts on events such as the Super Bowl and the Masters.
Which Way Will Sixth Circuit Vote?
Kalshi won a landmark ruling in the Third Circuit in April in its battle against New Jersey. New Jersey has since said it intends to take the case to the Supreme Court.
The Third Circuit Court of Appeals ruled 2-1 that Kalshi was likely to succeed in the case, arguing that federal laws preempt state gambling regulations and make its sports markets fair and legal. The dissenting judge concluded that “[b]ecause Kalshi is facilitating gambling, it can be subjected to state regulation.”
The three judges were all appointed by Republican Presidents, with the one dissenter who sided with New Jersey a Reagan appointment. The others were Trump and George W. Bush appointments. In the Sixth Circuit, seven of the 16 judges have been appointed by Trump and three by Bush.
With Trump strongly voicing his support for prediction markets and the CFTC recently, it may be reasonable to expect those judges to side with Kalshi. The four judges appointed by Joe Biden and two by Bill Clinton may be less inclined to do so.
It could therefore come down to the lottery of which judges get assigned to the case. The odds are in Kalshi’s favor, but like its sports markets, it is not easy to predict.
