The dismissal of the Commodity Futures Trading Commission’s (CFTC) case against Kalshi has ushered in an uncertain future for the US gaming industry.
Prediction markets were at the forefront of the minds of attendees at SBC Summit Americas, in a panel moderated by Christopher Gerlacher of PredictionNews, stakeholders at the summit agreed that the CFTC is now a ‘captured’ organisation, given the composition of the body’s administration, and the nomination for Chair of Brian Quintenz, a board member of Kalshi.
In addition, there is also the presence of Donald Trump Jr. as a strategic advisor for Kalshi.
As a result of this, revealed Melissa Blau, CEO of iGaming Capital, the industry is becoming increasingly concerned about the new verticals.
“As my clients watch this, they can’t do anything, and it’s frustrating,” she said. “The reaction has been different for different tribes, for different clients, depending on how knowledgeable they are. Most are not knowledgeable. They don’t know this headwind that is about to be taken away from them. But the problem is, the ones that do know can’t do anything about it.”
At the heart of the conflict is whether the CFTC has exclusive jurisdiction to regulate Kalshi’s sports events contracts, therefore effectively making some forms of sports betting a federally regulated issue, rather than one legislated for on a state-by-state basis.
However, Attorney Daniel Wallach argued that, despite the potential position of the CFTC on the issue, a special rule enacted by the CFTC in 2011 expressly prohibits gaming-related contracts, among other things.
David Aron, counsel at Jones Day, also cited the rule as well as a 2021 case where a company, ErisX, was preparing to self-certify event contracts but withdrew them once it learned the CFTC was planning to reject them.
However, opinions were split on the wording that surrounds this rule. The sentence following the CFTC’s statement on prohibiting gaming-related contracts also prohibits event contracts that are not in the public interest.
Wallach argued that the rule reads that such contracts mentioned in the first sentence of the rule preclude them together, however, Alex Kane, CEO of Sporttrade, disagreed.
Instead, he claimed that the rules form a two-part test as to whether a contract is permissible. As a result, a contract related to gaming and not in the public interest would be prohibited, but a gaming-related contract deemed to be in the public interest would not.
Kane suggested that the public interest defence could be used for numerous reasons, such as where a monopoly on gaming occurs. For example, in the Summit’s host state of Florida, Hard Rock Bet and the Seminole Tribe have a monopoly on sports betting.
He argued: “The company that is operating here as a monopoly doesn’t share tax revenue, does not pay tax revenue, right? Those millions of people that are subjected to worse odds or worse experiences, no competition, are they part of the public? Is it in their public interest that they have one option?”
Wallach countered that both Acting Chair Caroline Pham and Quintenz have stated publicly that the special rule prohibits these categories even if deemed to be in the public interest.
For now, the gaming industry must wait for the rulings in a number of lawsuits brought by Kalshi against states that have issued cease and desist orders against the company, claiming that its market of event contracts tied to sports outcomes violates state gaming laws.
