As prediction markets rapidly expand, especially sports event contracts, one of the most important questions that needs to be answered is who should regulate them – the Commodity Futures Trading Commission (CFTC) or state gaming regulators.
“So, states versus the CFTC, I have been calling this a legislative mess on our hands,” said Rob Schwartz, partner in the futures and derivatives practice at Morgan, Lewis & Bockius.
“It’s a mess deciding one way or another … the question of what is state-regulated gambling, and what is federally regulated derivatives trading,” Schwartz said Tuesday during a discussion on the regulation of prediction markets at Predict 2026 in New York.
CDC Gaming photo
Schwartz said this is, in one sense, a new issue, as sports-related contracts just launched in March of last year. This argument over futures trading, however, isn’t new, with Joseph Penso de la Vega, a prominent merchant in a book describing the Amsterdam Beurs (Stock Exchange) in 1688 as “a gambling hell.”
“He described trading as a game … the traders he called skillful gamblers who put up wheels of fortune,” Schwartz said. “De la Vega was also a trader on the exchange and in the same pages where he wrote those things, he explained how derivatives hedge market risk.”
Schwartz added that it was much of the same thing that we are looking at today, include are these contracts useful economic activity.
Schwartz, a former general counsel with the CFTC who moderated the discussion, asked CFTC General Counsel Tyler Badgley to explain what’s going on in terms of the legal battles between the agency, prediction market companies and state gaming regulators.
“The litigation is voluminous and fast moving,” said Badgley, who explained there are four buckets that the agency has seen, beginning with Designated Contract Markets (DCMs) in court against the states.
“There are … companies going into federal court and trying to prevent states from using gambling laws against those companies,” Badgley said.
Another bucket is states bringing enforcement actions, or other actions, including criminal indictments against CFTC-regulated entities. The Arizona attorney general filed a 20-count indictment against Kalshi in March for unlicensed gambling and illegal election wagering.
In April, a federal judge issued a temporary restraining order blocking Arizona from continuing their criminal case, which remains on hold until the legality of sports event and other contracts is settled by the courts or Congress.
Badgley said the third bucket was the CFTC going to court to ask for preliminary injunctions preventing states to enforce their gambling laws, while the fourth bucket is “everything else,” from class-action lawsuits to tribes suing for violations of the Indian Gaming Regulatory Act (IGRA) of 1988.
“But across all this litigation, there’s really only two questions,” Badgley said. “The first is what is the scope of the CEA (Commodity Exchange Act) and the definition of a swap. And the second is the scope of the CEA’s preemptive effect, to the extent there is any.”
Schwartz and Badgley were joined on the panel by Alper Ozgit, co-founder and CEO of Lexicon Labs, and Elliott Stein, senior litigation analyst with Bloomberg Intelligence.
Ozgit said the U.S. Supreme Court should weigh in on the issue, finally providing clarity on the regulatory structure of prediction markets, especially sports-event contracts.
“The Supreme Court should take it this term,” said Stein, adding there are “three circuit court splits going every which way, and not agreeing completely with each other at all.”
Stein expected the Supreme Court to accept the case by the end of the year, with briefings submitted in the first quarter, arguments in April, which is the last month for arguments before the justices, and then have a decision by July.
One of the arguments against the Supreme Court taking any of the cases is that most of the rulings are preliminary injunctions and the high court prefers to wait for a final decision before granting a writ of certiorari.
Stein said there are additional rulings pending from the Massachusetts Supreme Court and the U.S. Court of Appeals for the Fourth Circuit. He added that he wasn’t sure what those cases would add to the ones that we have.
The Fourth Circuit is weighing a legal challenge involving Kalshi and Maryland lottery and gaming regulators over whether prediction markets are subject to state gaming regulations. The Massachusetts Supreme Court was expected to rule that the state retains its ability to regulate sports event contracts offered by prediction market operators.
