Kalshi may have the support of key regulators, but the prediction market platform’s sports contracts must overcome about 60 years of congressional hostility to remain legal.
Over half a dozen states have sent Kalshi and other prediction markets cease and desist letters over event contracts on sports. Kalshi has sued three of those states, arguing that the only regulator it needs to mind is the CFTC, not state gambling regulators.
Sports betting attorney Daniel Wallach views the conflict between Kalshi and state regulators through the lens of federal gaming law and does not believe that Kalshi’s invocations of congressional intent will hold up. Kalshi has argued that Congress intended the CFTC to be the sole regulator of event contracts, preventing the states from prohibiting sports contracts.
Examining Congress’ federal gambling policy tells a more complete story.
Congressional disapproval goes back decades
States may be embracing sports betting, but Congress has been hostile to it since at least the Wire Act. Passed in 1961, the Wire Act prohibited wire communications from sending betting information across state lines. It was intended to target illegal gambling operations that organized crime syndicates used to generate revenue. Today, that law has made betting exchanges difficult to launch in the United States.
At a glance, the fact that Kalshi is a federally-regulated derivatives market gets it around the Wire Act. Futures contracts are regulated under financial law instead of gambling law. However, the last time the federal government addressed event contracts and sports betting was in 2010 when it passed the Dodd-Frank Act.
The Dodd-Frank Act added guardrails to the finance industry that the Commodity Futures Modernization Act (CFMA) had removed 20 years earlier. Dodd-Frank returned the CFTC’s ability to prohibit event contracts through public interest reviews. It listed six categories that the CFTC could review to find contracts that could be contrary to the public interest.
The incoming CFTC chairman, Brian Quintenz, has previously interpreted the CFTC’s latitude as a way to allow sports contracts, though he has also acknowledged the CFTC’s own regulation prohibiting contracts involving “gaming.” Wallach views the special rule, the section of the Commodity Exchange Act listing event contract topics that could violate the public interest, differently:
“Through the special rule, Congress left it up to the CFTC to determine whether an event contract ‘involves’ any of the six enumerated categories and is therefore ‘contrary to the public interest.’ Far from constituting an ‘authorization’ to allow them, it evinces congressional intent that these kinds of contracts should be prohibited.”
Key senators stated their intent for the Dodd-Frank amendments
In a 2010 Senate colloquy, two senators crucial to financial reform following the Great Recession, Sen. Diane Feinstein and Sen. Blanche Lincoln, explicitly laid out the rationale for giving the CFTC latitude through public interest review. When Feinstein asked whether the CFTC would get the power to decide a contract was “a gaming contract” if it was primarily used for speculation instead of hedging, Lincoln replied:
“That is our intent. The Commission needs the power to, and should, prevent derivatives contracts that are contrary to the public interest because they exist predominantly to enable gambling through supposed ‘’event contracts.’’ It would be quite easy to construct an ‘’event contract’’ around sporting events such as the Super Bowl, the Kentucky Derby, and Masters Golf Tournament. These types of contracts would not serve any real commercial purpose. Rather, they would be used solely for gambling.”
Feinstein’s and Lincoln’s concerns about event contracts have come true. Kalshi has already offered contracts on two of those three events and has expanded into NBA and MLB games. Wallach notes that aside from congressional intent:
“When Congress passed the Dodd-Frank Act in 2010, it did so with full knowledge that there was already a federal ban in place prohibiting state-authorized sports wagering. The Wire Act was also in effect at that time. Those two federal statutes reflected a longstanding congressional policy disfavoring sports gambling, which severely undercuts Kalshi’s federal preemption argument.”
The CFTC may support Kalshi’s sports contracts, and the courts may even side with Kalshi and the CFTC. But the argument that Congress intended for the CFTC to allow sports contracts to circumvent state sports betting law doesn’t hold up. The Supreme Court may have changed state sports betting regulations, but Congress hasn’t shifted its sports betting policy since 2010.
Canceled prediction market roundtable in context
Given the legal turmoil surrounding Kalshi’s sports contracts, it’s less surprising that the CFTC canceled its highly anticipated roundtable for the end of April. It was tentatively set for April 30 based on remarks the acting CFTC chair gave at the International Futures Industry Conference. However, there are compelling reasons to put the roundtable on hold.
“You not only have three lawsuits that Kalshi has brought, but there’s also the impending federal appeals court ruling in Kalshi v. CFTC, which involves political event contracts and where the topic of gaming within the special rule is front and center,” Wallach said. “I think it makes sense to take a brief pause for those two reasons to see how some of these judicial rulings play out.”
There’s one more missing piece to the prediction market roundtable and the ongoing regulatory conflicts: how the incoming CFTC chair will address them.
Brian Quintenz is one of the last missing pieces
Quintenz was a CFTC commissioner from 2017 to 2021. During that time, he defended another prediction market platform’s right to offer sports contracts, but admitted in a speech two months later that CFTC regulations prevented contracts involving gaming.
“Quintenz has been the lead voice in support of sports-based event contracts,” Wallach said. “It would seem strange for such a high-profile roundtable devoted to the very topic that he has personally championed to proceed in his absence, especially in view of the fact that he is the incoming CFTC Chairman – assuming that he is confirmed.”
After his term as a commissioner, Quintenz joined Kalshi’s board. As of April 28, Quintenz’s nomination hearing has not been scheduled. One of the most important questions will be whether he is divested from one of the most prominent companies he will oversee as CFTC chairman.
Even with proper divestments, Quintenz will likely be a powerful ally for Kalshi. His previous support for sports contracts and Kalshi itself suggest a lenient regulator for the foreseeable future. Should Kalshi’s preemption arguments prevail in court, Quintenz could become the new focal point for state challenges to the CFTC for refraining from conducting public interest reviews.
