The Commodity Futures Trading Commission’s (CFTC) decision to say sports event contracts involve gaming may be a shrewd move that helps the agency argue that it is actually regulating the products, as part of its attempt to box out states and tribes, legal experts say.
The gaming classification came as part of the CFTC’s notice of proposed rulemaking published on June 10.
The rulemaking included a number of clarifications around the CFTC’s Rule 40.11. The pre-rulemaking version of 40.11 refers to a “prohibition” on event contracts on war, terrorism, assassination, and gaming.
After clarifying that its definition of “involves” refers to the event being bet on, not the act of trading the event contracts themselves, the CFTC published its proposed definition of gaming. Gaming, it says, is “any activity that: (i) one or more participants typically engage in for purposes of recreation or to entertain others; (ii) is governed by rules; and (iii) includes measurable occurrences or outcomes that depend on the participants’ luck, skill, or athletic ability during the activity.”
NPRM_PredictionMarkets060926The document later acknowledges that this definition clearly includes sports.
The CFTC offered an alternative definition, a tricky-to-parse concept about activities created by their rules and “purposes that are defined by and internal to the activity itself.” It’s not the clearest, but the commission clarifies that this too would include sports.
In other words, sports event contracts involve gaming.
That might sound like a win for states, tribes, or anyone else who opposes the rise of the new products. But those groups mostly understood that the rulemaking was entrenching sports event contracts, not limiting them.
The classification of sports contracts as gaming may paradoxically be part of that. By clarifying that it has the power to ban sports contracts, the CFTC may be attempting to prove that it’s an actual regulator of the products, legal experts say.
Not automatically banned
The CFTC argues that sports event contracts are gaming, but that contracts on gaming are not automatically banned.
As part of the rulemaking, it is changing the wording of its Rule 40.11 to make it read less like an outright ban.
The CFTC argues that the prohibition would go beyond the instruction given to it by Congress in the Commodity Exchange Act’s “special rule,” which says the CFTC “may” ban contracts that it determines to be against the public interest, rather than calling for an outright ban. In practice, the CFTC had always enforced rule 40.11 as more of a public interest test than an outright ban, even under previous administrations.
The new version of the rule published in the Federal Register sounds more like a public interest test.
“The Commission may determine, in accordance with the procedures set forth in this section, that agreements, contracts, transactions, or swaps described in paragraph (a)(2) of this section are contrary to the public interest,” it reads. “Agreements, contracts, transactions, or swaps subject to such a determination shall not be listed for trading or accepted for clearing on or through a registered entity.”
Change in position
So does making sports contracts gaming have direct and immediate consequences? Only a little.
If sports contracts were not gaming, the CFTC would have little authority to ban them even if they were against the public interest. But the examples of contracts the CFTC listed as being most likely against the public interest are only a small sliver of possible contracts, generally on topics like injuries or penalties that CFTC-regulated prediction markets have shied away from listing even before the rulemaking.
Yet, symbolically at least, it feels like a bigger shift.
For one thing, it’s a reversal from mid-April, when the Ninth Circuit heard oral arguments – including from the CFTC – in Kalshi’s, Robinhood’s, and Crypto.com’s cases against the state of Nevada.
At that time, CFTC lawyer Jordan Minot said that the CFTC’s interpretation of involving gaming was one in which the underlying event that is being bet on is a game of chance, and so a contract on a sporting event does not count. CFTC Chair Michael Selig had previously worked on a letter arguing that sports event contracts were not gaming.
Now the CFTC appears to be abandoning that position.
‘They’re not stupid’
Often, the discussion of sports event contracts is presented as a dichotomy between being a legitimate financial product, and being gaming.
But the concession on gaming might actually help the CFTC argue that sports event contracts should be legal.
“I think the drafters — and I assume more than one person wrote those 267 pages — they’re not stupid,” Melinda Roth, a professor at Washington and Lee University’s School of Law who studies the prediction market industry, told InGame.
“They’re thinking about the litigation strategy because classifying sports event contracts as gaming allows them to stop having this question of gaming asked. And instead the question becomes, ‘Who gets to regulate it?’ And I think that plays into their hands.”
Already, there are signs that prediction platforms think the change could have an effect.
Last week, Kalshi submitted a response brief in its Sixth Circuit lawsuit against Tennessee, arguing the rulemaking “confirms that the CEA ‘expressly preempts state laws’ with respect to event contracts on DCMs.”
On Wednesday, Kalshi sued Illinois over the state’s attempt to tax and regulate prediction markets. In its complaint, Kalshi said “the CFTC recently promulgated a Notice of Proposed Rulemaking that sets out a detailed federal framework regulating the trading of sports events contracts on DCMs.”
A Kalshi spokesperson did not respond to InGame‘s question about whether it believes sports event contracts are gaming. The company’s lawyers argued that they were in its 2024 lawsuit over election contracts, then walked back those comments during the litigation over sports contracts, though the classification has never been a central part of its legal arguments.
CFTC loses a prong of its argument?
On the other hand, the CFTC loses a prong of its argument, and the arguments of the prediction markets it regulates – that sports event contracts don’t involve gaming and so cannot be banned under the CFTC’s own rules.
One reason is that the argument that sports event contracts don’t involve gaming didn’t seem to be the most convincing.
“I don’t think the argument they presented was the strongest,” an expert in CFTC regulation told InGame.
Roth agrees.
“I think this classification potentially does have some consequences,” she said. “I think one is that [the] CFTC might look less stupid.”
In the Ninth Circuit, judge Ryan D. Nelson struggled to see why there would be a distinction between sports contracts and contracts on casino games when both are traditional forms of gambling.
And regardless of whether Congress intended to ban sports event contracts or to leave it up to the CFTC, it seems clear that the intention behind the inclusion of the word “gaming” was to include sports contracts.
“The one sliver of legislative history on it mentions the Kentucky Derby, the Super Bowl and the Masters,” the expert in CFTC regulation said, referencing a 2010 colloquy between Senator (turned Kalshi lobbyist) Blanche Lincoln and Senator Diane Feinstein on the “special rule,” during debate in relation to the Dodd-Frank Act. States argue the colloquy shows sports contracts were always meant to be banned, while prediction markets argue that it shows the CFTC has jurisdiction over them.
Power to ban more contracts?
The other consequence of sports event contracts being classed as gaming is that it could potentially give the CFTC power to ban more contracts in the future if it determines that they are against the public interest.
The self-certification system allows for exchanges to list a large number of contracts without explicit CFTC approval of each one beforehand. Allowing the option to ban certain sports contracts, even if rarely used, could help the CFTC prevent the entire event contract system from spiraling out of the agency’s control.
“I think they feel bound by the current statutory structure, which allows exchanges to self-certify,” David Aron, special counsel at Lowenstein Sandler, told InGame.
“If it’s not in the enumerated categories they can’t even review it. They support these contracts in general, but if they find some big problem they can still shut it down. They might think that in general they’re not against the public interest, but a group of them could be.”
Roth adds another potential reason to classify sports contracts as gaming — an attempt to create a system that might last beyond the current White House administration.
“This is my own opinion, and I’m reading into it a little, but one of the things the one commissioner has said is, ‘We want this to be future proof no matter the administration,’” she says. “And by giving the CFTC discretion, you may get more buy-in from maybe not political sides, but more people. It hands the CFTC something that is not a categorical ban, but a path to a ban if they wanted to go beyond the specified examples.”
