On the Thursday before Christmas, when finance regulators were on holiday, Crypto.com broke the fuzzy line between finance and gambling. The crypto exchange self-certified event contracts on the Super Bowl and followed up with markets on NFL conference championships and college bowl games in early January. On Jan. 23, Kalshi followed suit, launching sports markets of its own.
These contracts not only pushed the boundaries of event contracts but also put regulated exchanges in direct competition with sportsbooks like DraftKings and FanDuel. Crypto.com offers a moneyline wager on some of the most popular sports events with better pricing for customers and fewer regulatory costs than sportsbooks incur.
Unlike federally regulated exchanges, sportsbooks must navigate a patchwork of state regulations, paying hundreds of thousands of dollars for licenses to operate in individual states, each with its own tax laws and hold requirements.
Since Crypto.com and Kalshi are regulated by the Commodity Futures Trading Commission (CFTC), their event contracts fall under federal finance law instead of state gambling law. They have access to all 50 states with one set of regulations.
However, Sporttrade was the first to offer regulated prediction markets for sports betting. In 2022, it launched in New Jersey under state sports betting regulation rather than attempting to become a federally regulated exchange. The only difference between Sporttrade’s wagers and Crypto.com’s event contracts is a legal designation. They’re identical products under different regulatory frameworks.
Federal market access is a competitive advantage that sportsbooks hoped federal regulation would grant — not take from them.
Despite opposing federal regulation mandating certain operational requirements for sportsbooks, the American Gaming Association (AGA) sees value in legislation that encourages bettors to move from illegal offshore sportsbooks to regulated alternatives in the United States. Shrinking the illegal gambling market is one of the AGA’s most common talking points when lobbying for states to legalize sports betting.
In May 2024, the AGA posted that the illegal sports betting market had shrunk to almost a third of its size. It did not identify the time it took for that reduction to occur or how it arrived at those figures:
Since the legalization of sports betting in the U.S., the illegal market has shrunk dramatically from $150B to $64B.
— American Gaming Association (@AmericanGaming) May 21, 2024
AGA CEO @BillMillerAGA shares insights with @washingtonpost into the U.S. gaming industry: https://t.co/nE1cEtJW37 pic.twitter.com/nQQixY1tSC
Some of the lawmakers who fought for regulated sports betting are also watching how sports event contracts play out. By offering a product that has belonged to state regulators since 2018, Crypto.com and Kalshi have potentially started a conflict with state legislatures.
State sports betting laws and federal event contract regulations have transformed dramatically since 2018. Parallel regulations have created new questions that have only been answered in part. Crypto.com’s sports markets have created a new demand to answer those questions comprehensively.
How event contracts expanded to elections and, for now, sports
Event contracts have a long history in the United States. In 2004, the CFTC designated HedgeStreet as an exchange that could offer event contracts. HedgeStreet focused on home prices and macroeconomic indicators. It shut down in 2007 and was acquired in 2009.
The next generation of derivatives exchanges would popularize event contracts and prediction markets.
In 2018, a startup called Kalshi stretched the logic of event contracts beyond commodities. If event contracts could help traders hedge economic risk from the price of oil, then why couldn’t individual traders hedge against events that traditional commodities didn’t offer hedges against?
For example, Kalshi’s first markets included state rainfall levels. Rainfall levels seem like nothing more than a fun market at a glance. But if a North Carolina trader places a “Yes” bet on high rainfall as a hurricane approaches the state, the payouts from those contracts could function the same way that insurance payouts do. That’s how derivatives can be used to hedge against risk.
To avoid incentivizing criminal activity, the Commodity Exchange Act (CEA) prohibits certain event contracts, including those based on assassination, terrorism, and gaming. Additionally, to prevent conflicts between state law and federal regulation, event contracts cannot be based on other activities prohibited by state or federal law.
Kalshi didn’t just make event contracts more accessible to individual traders. It also expanded the types of contracts the CFTC would allow to be traded.
In its lawsuit against the CFTC, Kalshi argued that election contracts could not be considered “gaming” under the CEA. Kalshi argued elections are not illegal activities and do not violate state or federal laws against election betting. Kalshi won the right to offer bets on the U.S. presidential election in October 2024.
Despite pushing the limits of the CEA, Kalshi complied with federal regulations throughout its existence. Kalshi did not list markets on the election until the courts allowed their listing. Additionally, Kalshi didn’t list markets on sports outcomes until after Crypto.com certified its sports markets.
Crypto.com’s argument is new. While Kalshi distanced itself from gaming, Crypto.com has claimed a right to transactions that state gambling regulators have overseen since 2018, when the Supreme Court allowed states to regulate sports betting.
Interest from an influential state lawmaker
On one level, the conflict between state and federal laws is simple. Federal regulation pre-empts state law, so Crypto.com can offer its sports contracts as long as it has the support of its federal regulator.
However, one of the reasons many state lawmakers chose to legalize sports betting was its revenue potential. New York, the largest sports betting market in the United States, generated $862 million in 2024 sports betting tax revenue. New York sportsbooks pay a 51% tax rate, and the state senator who pushed sports betting through the New York legislature is paying attention to Crypto.com.
“Most governments, federal, state, would love to regulate [Crypto.com’s event contracts], because by regulating it, not only do you make it safe or possibly for your residents, but there’s revenue involved,” New York State Senator Joseph Addabbo said. “I’m trying to get igaming regulated in New York and one of the reasons is because there’s an illegal market that’s doing very well with igaming…and obviously there’s a lot of money there.”
In July 2024, Crypto.com overtook Coinbase as the United States’ largest crypto exchange. Trading volume on Crypto.com reached $134 billion in October compared to Coinbase’s $46 billion. By comparison, New York bettors wagered $19 billion at online sportsbooks in all of 2024.
The large amount of money traded on Crypto.com is an attractive target for lawmakers seeking taxable revenue. Addabbo believes that federal and state law can come together to find a compromise between state interests and federal authority.
“There should be a coexistence [between state and federal regulation] if the focus remains the safety of the resident and making sure that they’re protected, both as a consumer but also as a possible problem gaming issue,” Addabbo said. “Of course, there’s the issue of the revenue, but if we keep the focus of what’s best for a New Yorker, I think things can be worked out, both on the federal and state level.”
Who is in charge of resolving what event contracts should be listed?
The first section of the CEA names event contracts that derivatives exchanges cannot list. The next section sets conditions for the CFTC to ban an event contract:
An agreement, contract, transaction, or swap based upon an excluded commodity…which involves, relates to, or references an activity that is similar to an activity enumerated in § 40.11(a)(1) of this part, and that the Commission determines…to be contrary to the public interest.
The CFTC commissioners and chair must determine that an event contract violates the public interest before banning an event contract.
Kalshi’s election contract lawsuit arose out of the CFTC’s public interest review which determined Kalshi’s election contracts violated the public interest. First, Kalshi self-certified its election contracts. Then the CFTC conducted a public interest review. After the CFTC decided Kalshi’s election contracts were contrary to the public interest, Kalshi sued the CFTC to challenge the regulator’s public interest finding.
Since the CFTC commissions play a vital role in determining which event contracts can’t be listed, Congress wouldn’t have to amend the CEA to allow Crypto.com’s sports contracts. While one party may push for a legislative change, the power to resolve questions about legal event contracts can be resolved by the CFTC chair and commissioners.
Legal scenarios: State AG challenges or coexistence
State gambling regulators have also been paying attention. “In an email to Prediction News, a spokesperson for the Massachusetts Gaming Commission, one of the most proactive state gaming regulators, said: “The Commission is aware of and currently monitoring this new offering from Crypto.com. We’re also aware of CFTC’s actions and litigation related to things like election markets.“
Any violation of state law would have to be addressed by the Attorney General, who could bring a suit against Crypto.com if its sports contracts were found to violate state law. State gambling laws against gambling include carveouts for business transactions like derivatives trading. If an Attorney General thought Crypto.com’s sports contracts failed to count as a business transaction, that could result in a lawsuit against the federal government.
I could see a big state like California bringing a suit to Crypto.com and saying, ‘We have carveouts. You don’t count as one of those carveouts because we don’t recognize what you’re doing…as one of these carved out things.
A challenge from a state AG could settle whether state or federal governments have authority over bets on game outcomes. However, a stranger outcome is on the table too. The same product could be offered under two separate regulatory regimes: one under state gambling and another under federal finance.
Sports wagers at the state and federal levels
The finance industry has a quirk that would be odd in other industries. It can offer the same product under different regulatory rules.
For example, the CFTC oversees the trade of physical gold. However, gold EFTs, which is identical to trading physical gold, are overseen by the SEC. An identical transaction is allowed under two different but related regulatory structures.
A similar accident could allow state and federal versions of sports wagers. The CFTC could regulate sports event contracts on derivatives exchanges and leave other sports wagers to state gambling authorities.
However, parallel regulatory frameworks could only occur if legal challenges to Crypto.com’s sports contracts either don’t occur or fail in court. A large gambling state could sue to help their sportsbooks or tribal casinos maintain local monopolies on sports wagers. Anti-gambling states who’ve repeatedly rejected sports betting bills, like Texas, could also sue the federal government for allowing Crypto.com’s workaround.
While sports event contracts’ futures are uncertain, there are a few predictable consequences for customers and the gambling industry.
What uncertainty means for customers and the gambling industry
Compared to traditional sportsbooks, the prediction market model offers customers important benefits, most importantly improved pricing. Because there’s no house to bet against, traders set the prices based on what they think the contract is worth. Traders can also sell their contracts after placing their wagers to mitigate losses or guarantee winnings.
“This is unique for a bettor to place a wager but then be able to pull it back once they see the odds shift and they want to limit their losses,” State Sen. Addabbo said. “It’s different and people like different sometimes.”
Traditional sportsbooks factor in a “hold” that allows them to keep more revenue from their customers’ wagers. Prediction market models take small percentages of winnings and allow customers to set their own prices or accept exchange prices that are often better than traditional sportsbooks.
Trading sports at 1/3 the cost. (Or less)@sporttrade_app vs everyone else pic.twitter.com/ckNhMR8U91
— Alex Kane (@a_kane47) January 11, 2025
If sports event contracts were allowed on CFTC-regulated exchanges, then “it would be so incredibly disruptive,” Kane said. “The vast majority of vendors in the [sports betting] market now would go extinct because they rely on this state-by-state siloed regime that is extremely costly to operators and provides no benefit to the customer.”
Since 2018, discussions about federal regulation in the sports betting industry focused on issues like removing the federal excise tax and modernizing the Wire Act. Today, federal regulation could undermine the monopoly sportsbooks have had on certain sports wagers.
Sports contracts may only be the beginning of finance’s disruption of the traditional sports betting industry. Kalshi offers markets on sports futures and parlays on Grammy winners. If Kalshi could do the same with sports, then sportsbooks would lose the monopoly on their most profitable products, too.
How the new CFTC regulates sports event contracts will determine whether the lines between finance and gambling will break or remain permeable.
