After a dispute in Nevada, federal regulators from the Trump administration era could go a step further and support Kalshi by submitting a “friend of the court” brief at the US Court of Appeals for the 9th Circuit.
This step would be a clear signal that the Commodity Futures Trading Commission (CFTC) has the authority to regulate event-based contracts.
The brief would invite CFTC to take part in the case, Reuters quoted the Associated Press as saying. Kalshi is in court fighting a temporary restraining order (TRO) in Nevada.
The Nevada Gaming Control Board (NGCB) has brought a lawsuit against Kalshi and Polymarket for the operation of unlicensed sportsbooks within the state. Subsequently, a federal judge granted an injunction preventing Kalshi from conducting its business in Nevada.
CFTC oversees prediction markets as commodities under the federal law. It means the commission permits operators like Kalshi to market their contracts throughout the country, even in the states where conventional gambling is prohibited.
Some states have raised legal issues regarding the arrangement on the grounds that the company’s contracts are a form of sports betting under their respective local gambling laws. Regulators have responded that unlike sports betting which is very limited in scope, prediction markets allow trading on a number of different events, however, most of the trades are sports-related.
Also, these authors mention that some platforms set the minimum age for participation at 18 and above, whereas state-regulated gambling normally restricts age to 21 and above.
CFTC Chairman Michael Selig said:
To those who seek to challenge our authority in this space, let me be clear: We will see you in court. The CFTC will no longer sit idly by while overzealous state governments undermine the agency’s exclusive jurisdiction over these markets by seeking to establish statewide prohibitions on these exciting products.
Prediction markets are online venues where people buy and sell contracts that are based on how likely it is that certain events will happen. Those events can be anything from the weather, or global politics, to sports competitions.
The contracts usually cost somewhere between $0.01 and $0.99 depending on how likely an outcome is supposed to be.
While these platforms offer contracts in various fields, sports make up a very big chunk of the action. Around 90% of Kalshi’s trading volume is coming from sports, and only about half of Polymarket’s trades are sports events.
It is asserted that Kalshi has conducted Super Bowl trading for over $1 billion.
States that are challenging the platforms use those numbers to support their argument that the business is more like sports betting than just regular hedging products.
Selig explained that prediction markets have behaved in a very similar way to other futures contracts in that they provide traders with a way to hedge, for example, the risk of unseasonable weather or fluctuations in energy prices. And these markets are different from sportsbooks where the house is always the opposite side of the bet for the bettors.
How the CFTC Shapes Financial Markets
The CFTC is the main regulator of the commodities, futures, and derivatives markets, such as oil, agricultural products, and gold. The department, however, has only about 700 staff, whereas the Securities and Exchange Commission is staffed with approximately 5,000.
Over the last five years, the CFTC has extended its jurisdiction over financial markets with the inclusion of cryptocurrency firms and operators of prediction markets under its regulation.
Last week, Selig said that they will be establishing an Innovation Advisory Committee that will provide the Commission with advice on how to frame rules for cryptocurrency and prediction markets. The 35-member panel features the CEOs of Polymarket, Kalshi, Coinbase, Robinhood, FanDuel, and DraftKings. While this group does have a few representatives from the traditional finance sector, it lacks consumer advocates or public interest organizations.
In his Senate confirmation hearing, when confronted by questions on Kalshi and Polymarket, Selig indicated that only the courts would be able to decide the main legal issues therein. The agency by its court filing has entered the appellate process directly.
The current administration’s standpoint also is influenced by certain political issues. Donald Trump Jr., through his venture capital firm, is a Polymarket investor, and he also acts as a strategic advisor to Kalshi.
Some Republican leaders have also opposed the case. Governor Spencer Cox of Utah, a state that is known for its strict gambling laws, has expressed skepticism about whether sports-related contracts should necessarily be considered commodities and thus regulated as such.
In a statement on Twitter Cox said:
Mike, I appreciate you attempting this with a straight face, but I don’t remember the CFTC having authority over the ‘derivative market’ of LeBron James rebounds. These prediction markets you are breathlessly defending are gambling – pure and simple.
