US Courts to Determine Fate of Online Sports Prediction Markets

Sports gambling is lawful in more than half the states, subject to state regulation and licensing requirements. But online prediction markets—such as Kalshi and Crypto.com—are offering “event contracts” that make sports wagers available nationwide, even where it’s illegal.

The platforms are in litigation with regulators that will decide whether to limit sports betting to state-regulated sportsbooks or make it nationally available and immune from state regulation. Recent judicial decisions have split, and it seems only a matter of time before these questions reach the Supreme Court.

The parties’ arguments raise serious questions about the jurisdiction of the Commodity Futures Trading Commission, federal preemption, and the regulatory landscape around sports betting. If the prediction markets succeed, it will disrupt the current sports betting industry and likely result in further governmental or self-regulatory efforts to address inherent sports betting risks.

Questions of Authority

The US Supreme Court’s 2018 ruling in Murphy v. NCAA invalidated the federal law banning sports gambling in most states and ushered in a vast increase in sports gambling. 39 states, Washington, DC, and Puerto Rico now allow it, and the industry is rapidly evolving with existing casino brands and newer online sports gambling entrants.

Online prediction markets seek to further disrupt the industry by offering sports wagers nationwide, without state-by-state regulation. The CFTC—the federal regulator tasked with supervising the derivatives markets—has exclusive jurisdiction over agreements that depend on the occurrence or non-occurrence of a “financial, commercial, or economic consequence.”

The CFTC permits designated contract markets to list event contracts after they self-certify that they comply with applicable laws. A special rule in the Commodity Exchange Act prohibits contracts that the CFTC determines are contrary to the public interest, while another rule prohibits event contracts involving “terrorism, assassination, war, [or] gaming.”

Kalshi—a designated contract market—self-certified event contracts in January that were tied to the outcome of sporting events. The CFTC took no public action, and Kalshi has made sports contracts available to the public, effectively allowing sports gambling nationwide.

Multiple state regulators then issued cease-and-desists, prompting Kalshi to preemptively sue in federal court in Nevada, New Jersey, and Maryland, arguing that regulators intruded on the CFTC’s exclusive authority over futures derivatives trading.

Other parties have brought similar cases supporting sporting event contracts, while regulators, industry associations, and others have joined in opposition.

Proponents argue that, so long as the CFTC doesn’t prevent a designated contract market from offering contracts, those contracts are legal and not subject to state regulation. Opponents contend that sports gambling is beyond the CFTC’s jurisdiction, and that Congress didn’t intend to preempt state authority.

Much of the debate focuses on whether such contracts involve a “financial, commercial, or economic consequence,” which underlies the CFTC’s jurisdiction. The designated contract markets contend that sporting events are big business and that the outcome of the Super Bowl, for example, has huge financial implications.

By contrast, opponents argue that whether one team outscores another isn’t a matter of “financial, commercial, or economic consequence.” How much the New York Knicks spend in free agency may be an event of “financial, commercial, or economic consequence.” But whether the Knicks score more points than the Boston Celtics may not be.

Opponents also point to a slippery slope. Just as the CFTC lacks tools to regulate sports betting, it lacks any mechanism for regulating assassination or terrorism. But the upshot of this position is that a futures contract on those topics—such as whether a political figure will be murdered—would be subject to exclusive CFTC jurisdiction.

If a designated contract market self-certified such a contract, and the CFTC failed to act, the contract would be deemed lawful, states would theoretically have no ability to intervene or prosecute, and the CFTC itself can’t enforce the federal criminal laws, opponents argue.

This regulatory scheme has a twist that has received less attention. Ordinarily, preemption occurs when Congress enacts a federal law that supersedes state law. Here, preemption would arise when a private party (the designated contract market) self-certifies compliance and a federal regulator (the CFTC) fails to act. It remains an open question whether such regulatory inaction can preempt state law.

Supreme Court Bound?

Kalshi has had some early success in litigation. In Nevada, the court granted Kalshi a preliminary injunction, finding Kalshi was likely subject to exclusive CFTC jurisdiction and Nevada agencies couldn’t regulate conduct legal under federal law. In New Jersey, the court found Kalshi was likely to prove its contracts fell under the CFTC’s exclusive jurisdiction, and that the CFTC’s “implicit decision to permit them” preempted state law.

The Maryland federal court, however, denied Kalshi a preliminary injunction, finding it “highly unlikely” that Congress intended to supplant state gambling laws when dictating CFTC jurisdiction. The issue could easily make it to the Supreme Court.

An outcome favoring state regulators would restore the status quo ante and have obvious ramifications for prediction markets—they would lose the ability to offer event contracts nationwide but could seek to continue offering such contracts under licenses in states that permit sports gambling.

An outcome in the prediction markets’ favor would shift how existing market participants approach sports gambling. Regulated participants could enter the event contract space and take advantage of the nationwide market.

Leagues and sportsbooks have historically collaborated to ensure the fairness of the gambling market and underlying competitions, a partnership that has factored into high-profile gambling-related investigations by Major League Baseball and the NBA.

If the designated contract markets succeed, they, the CFTC, and sports leagues will need strategies to detect and prohibit suspicious behavior; event contracts may create risks that aren’t present in traditional sports gambling.

While the current CFTC hasn’t acted on Kalshi’s event contracts, there is no guarantee that a future CFTC will continue to abstain. If a future commission shifts position and starts to block such event contracts, they could immediately lose their immunity.

Market participants must consider these and other risks as the results of the conflict between designated contract markets and regulators take shape.

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

Andrew Dean is a partner in Weil’s securities litigation and white collar defense, regulatory, and investigations practices.

Zack Tripp is co-head of Weil’s appeals and strategic counseling practice.

Greg Burton is an associate in Weil’s white collar defense, regulatory, and investigations practices.

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