Much of the outcry against event contracts on sports has come from the gambling industry, but they aren’t the only ones critical of certain contracts. Ilya Beylin, Associate Professor of Law at Seton Law School, has built a case against game-like event contracts based on CFTC history and financial law.
His research examines financial law and CFTC policy to suggest how financial regulations can protect traders of all skill levels.
“If a financial product is out there for entertainment, that doesn’t sound like a financial product,” Beylin said. “That’s a distinction I’m trying to draw.”
Beylin’s concerns stem from the two main functions derivatives have played in financial markets. The first is hedging, in which traders use event contracts as a form of insurance. Prediction market platforms have prided themselves on offering hedges on increasingly niche events, so even a handful of hedgers can justify a contract. But that’s an assumption that Beylin questions. He believes a hedging use below a de minimis threshold should be ignored.
The second is cash market pricing, which was once a fundamental use of derivatives contracts. Beylin argues that a strand of derivatives that include event contracts abandoned this use decades ago. Which brings us to Beylin’s core argument:
Transactions that provide neither appreciable hedging utility nor cash market pricing should not be regulated as derivatives under the Commodity Exchange Act, says Beylin.
Derivatives’ drift from cash market pricing
The crux of Beylin’s objection to event contracts, among other exotic derivatives, is the detachment of these contracts from cash market pricing.
Traditional agricultural derivatives were used as a baseline to establish prices in different parts of the agricultural supply chain. Farmers and grain elevators wouldn’t pluck their prices from thin air. Instead, they could reference futures contract prices to establish fair prices for their goods.
“If I was a farmer in Iowa contracting with a grain elevator in Iowa, I wouldn’t haggle over price myself,” Beylin said. “I would say ‘Well, my grain is sort of like the grain sold on the CBOT [Chicago Board of Trade], but it’s a little bit better. So let’s just use the price that the CBOT sets for hard winter wheat but add a couple of pennies to that price.”
When Congress passed the Commodity Exchange Act (CEA), it included a section establishing what the products under its jurisdiction should be used for. The most recent version was amended in 2000 and reads:
“The transactions subject to this Act are entered into regularly in interstate and international commerce and are affected with a national public interest by providing a means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities.”
Nowhere are entertainment or forecasting listed as uses of derivatives. However, Congress isn’t the only authority deciding which products to list and which to prohibit. The CFTC Chairman has broad authority over which products–and which rules–can be made available to traders by regulated exchanges.
Under this reading of the CEA, event contracts, and even some older derivatives, could be prohibited by being beyond the scope of the CEA. However, the CFTC retains the discretion to allow or prohibit increasingly exotic derivatives, including event contracts on sports.
Why the CFTC doesn’t limit event contracts
The CFTC doesn’t limit event contracts because it is structured to allow markets to lead the way in introducing new products. Its sister agency, the Securities Exchange Commission (SEC), regulates securities, which are ownership stakes in companies or organizations. The SEC requires many disclosures up front to protect investors from lies or omissions that could change the way they calculate their expected return on investments. Those disclosures can be forms that take thousands of hours, millions of dollars, and many lawyers to successfully complete.
In contrast, the CFTC allows products to come to market first, then issues fines or conducts investigations after it uncovers evidence of fraud or misconduct. Since the CFTC defers to the industries it regulates on the specifics of how they’ll protect investors and offer hedging opportunities, the agency’s regulatory processes allow exchanges to take the lead in launching new products.
“…the CFTC is stuck in a legislative scheme, something that Congress designed, something that the CFTC can’t override, and that scheme limits their discretion when reviewing contracts,” Beylin said. “And then the CFTC hasn’t had any appetite to creatively approach the problem and see if there is room for disqualifying some contracts, like the gaming contracts that exchanges currently host on NFL games.”
His proposed solution is to review products that are used more often for entertainment than for hedging and those that lack a relationship to cash markets.
However, he also acknowledges that such a drastic reversal is unlikely in practice. No one set of CFTC commissioners is likely to unilaterally reverse decades of agency precedent. Judicial or congressional intervention would likely be practically necessary to draw the line, in Beylin’s estimation.
In the meantime, ordinary people are gaining access to more financial products they may not know how to responsibly or safely use.
Cost of broad access to speculative finance
Companies like Robinhood and industries like crypto celebrate increasingly easy access to finance. Eliminating gatekeepers and circumventing regulations is viewed as a good in itself, so that more people can invest with greater privacy.
But there’s a cost that Beylin worries about:
“There is a celebration of democratizing finance, but I don’t think the people who now have access to financial products really have a sense of whether these products do them any good or not, and the people who benefit are the exchanges and other intermediaries that offer these products.”
Trading event contracts in mention markets may be enjoyable, but the hedging utility of those contracts is low. However, increasingly niche hedges are seen as a positive mission for many in the prediction market industry. Concerns about the use of prediction markets for gambling are outweighed by the mission of catering to niche needs or forecasts.
“There’s a lot of exploitation of people that don’t have the intellectual capacity to fend for themselves, protect themselves, and it’s unfortunate,” Beylin said. “That said, gambling is fun, and the great majority of people that gamble do it responsibly and do it only a few times a year…So maybe I shouldn’t be so critical of these practices, because most people that use finance to gamble seem to do quite fine.”
Even if the courts don’t prohibit event contracts on sports, many people will use other event contracts for gambling. Those same customers will also gamble in other financial markets where securities or contracts can be flipped at a profit.
What should financial products be used for?
The CEA outlines some functions that derivatives are intended to serve, and Beylin believes that the most exotic event contracts have lost sight of what finance should be used for:
“One important use of finance is that we capitalize companies that need capital, and in exchange, savers get access to bonds, stocks, and other financial products that help them save and accumulate income. Another use of finance is hedging.”
The value that traders get in return for risking their money in traditional securities and derivatives markets is foundational to what Beylin views as legitimate uses of finance. Traders who accept suboptimal prices still receive benefits like market-based returns or risk mitigation. Even traders who make unprofitable trades get cash flows or assets that may accumulate in value over time.
“In the case of just a prediction, all that’s happening is two transfers,” Beylin said. “One, there’s a transfer from the uninformed traders to the informed traders. And two, there’s a transfer from the traders to the exchange that launched the product and through the systematic predation on the uninformed traders.”
Many in the prediction market industry may argue that the forecast is valuable in and of itself or that a niche hedge is still a hedge. However, while forecasts help third parties, prediction market participants are often taking losses to produce that benefit for third parties. While platforms pay interest on qualifying positions and cash balances, they don’t offer the benefits that securities and traditional derivatives offer in terms of market-based returns or risk mitigation.
The question of whether all event contracts are legitimate financial instruments or some constitute gambling products that should be disallowed is playing out in court battles between prediction market platforms and state gambling regulators. States have sent cease-and-desist letters to prediction market exchanges (mostly Kalshi) and their brokers over sports contracts. Those lawsuits have reached two appellate courts and could reach the Supreme Court sometime between 2026 and 2028, law experts believe.
One of these views may become enshrined in legal precedent that clarifies how much a future set of CFTC commissioners can or must delist event contracts. All the while, state-regulated gambling products could have new, long-lasting, and federally regulated competitors.
