NY State Actions Show Prediction Markets Are Having a Moment

Prediction markets are raising ongoing questions about who regulates this emerging marketplace, the legality of event contracts, and insider trading in these markets.

The markets have expanded, and so have the number of financial platforms providing these contracts. This has ignited a multitude of ongoing legal battles, mostly focused on whether sports event contracts are nothing more than sports betting, and therefore should be regulated by the states.

The Commodity Futures Trading Commission has recently suggested they have exclusive jurisdiction over event contracts and the platforms offering these products are exchanges regulated by them. Because prediction markets focus on the collective “wisdom of crowds,” there is also significant attention lately being paid to insider trading issues.

Last week, Gov. Kathy Hochul (D) signed an executive order preventing state employees from utilizing nonpublic information they have from their jobs to trade on prediction markets. This ban mirrors action taken in other states such as Illinois and California. Because both existing state and federal laws already cover such insider trading, these executive orders might be considered superfluous.

But these actions may nevertheless look good for the Democratic governors because it helps them show they are trying to combat corruption and fight the Trump administration, which has favored prediction markets. Even if these bans may be more for show than actual need, however, having clarity that state employees can’t use information obtained through their jobs may also be beneficial because prediction markets are so nascent.

Next, the day after Hochul’s executive order, New York Attorney General Letitia James filed lawsuits in state court accusing two crypto exchanges of conducting illegal gambling for offering prediction markets platforms in the state. But this isn’t unique to New York.

There are now similar lawsuits in at least 11 other states. The question being litigated is whether the federal law (namely the Commodity Exchange Act) preempts state legislation on sports betting.

States believe sports event contracts are not financial derivative products regulated by the CFTC, but simply gambling products, and that the states are the ones who regulate sports betting. The states also have a vested interest in pushing this line of thinking, as those that have legalized sports betting are making significant revenue for their state budgets.

For example, New York state, which taxes its legalized sports books at a 51% rate, received over $1.3 billion from sports betting last year. This is why the states (and some federally recognized native American tribes) are going after prediction markets.

The CFTC last week also sued New York in federal court, after recently having filed similar lawsuits in Arizona, Connecticut, and Illinois, and this week, Wisconsin. This is a bold move because the CFTC doesn’t typically sue states. It transforms a fragmented litigation landscape into a direct clash between the federal government and the states over who governs prediction markets.

Congress is also now paying attention. There are numerous draft bills in Congress to ban federal government employees from insider trading or even ban prediction markets altogether. Several trades in the prediction markets garnered national attention with accusations of insider trading, pushing Congress to try to address the insider trading angle. Much of this speculation was focused on the “Maduro” trades, where someone seemingly in the know made $400,000 betting on US actions regarding Venezuela’s then-president, Nicolás Maduro.

In a parallel criminal and civil enforcement action, the CFTC filed a civil complaint, and the Department of Justice unsealed a criminal indictment against Gannon Ken Van Dyke. He is a member of the US Special Forces who had been part of the planning of the US capture of Maduro and who had used this information to profit personally. This serves as an example that the CFTC has sufficient power to enforce insider trading in the prediction marketplace and the systems in place were able to detect and trace the insider trading.

Legal and regulatory clarity are needed as the prediction markets continue to grow. The increasing number of lawsuits involving the states and the prediction markets platforms, and now the federal government in the form of the CFTC, indicate a likely circuit split, which is often a fast track to US Supreme Court review. Whether and when that might happen is unclear.

Meanwhile, the CFTC isn’t sitting around and waiting but has started the process of rulemaking for the prediction markets. The barrage of news on the prediction markets is unlikely to slow any time soon.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Melinda Roth is a visiting associate professor at Washington and Lee University School of Law.

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