The CFTC’s notice of proposed rulemaking that closed in July received more than 1,000 comments about the details of prediction market regulation.
Among them was one from former Sen. Chris Dodd, whose name is on the Dodd-Frank Act, the Wall Street reform bill that, among other things, granted “exclusive jurisdiction” over swaps to the Commodity Futures Trading Commission (CFTC).
In the view of prediction markets, Dodd-Frank made sports event contracts legal and immune to state gambling laws. Dodd disagrees.
According to the letter, Dodd’s disagreement with the CFTC is about its definition of gaming, which the CFTC defines in a way that would cover the playing of games, whether gambling or sporting contests.
“The proposed definition of ‘gaming’ is at odds with the way Congress has used that term,” Dodd wrote. “My colleagues’ colloquy during a discussion of the Dodd-Frank legislation expressly links the terms ‘gaming’ and ‘gambling.’”
But taken literally, Dodd’s letter would actually make it harder, not easier, to ban sports event contracts. If he wanted to argue that sports contracts should not have been permitted, his disagreement is about another word — one that has arguably been overlooked, but the interpretation of which could become very important. And the CFTC’s rulemaking includes an interpretation of that word that appears to be much more clearly in conflict with Dodd’s aims.
The word in question isn’t “gaming,” or “may,” but “involve.”
Word could become more important
The word “involve” plays an important part in both the Commodity Exchange Act’s (CEA) special rule — which gives the CFTC power to ban contracts that “involve” terrorism, war, assassination, gaming, or illegal activities — and the CFTC’s rule 40.11, which refers to a “prohibition” on contracts that “involve” those categories.
It has not been central to sports event contract litigation so far. As long as the CFTC supports sports event contracts, whether they involve gaming or not usually becomes secondary to questions about preemption and the meaning of a swap.
But it could potentially become more relevant through the CFTC’s rulemaking.
The Ninth Circuit’s Aug. 28 opinion, siding with Nevada over Kalshi, made extensive use of CFTC rules, particularly rule 40.11. But that rule is set to become obsolete with the CFTC’s new rulemaking. Judge Kenneth K. Lee, in a concurring opinion, noted that if the CFTC rules were different, the case may get more complicated, but added that he couldn’t rule on regulations that don’t exist yet.
When the Supreme Court ultimately takes up a prediction market case, whether that is soon or in the more distant future, it may have to deal with an updated version of the CFTC’s rules.
One part of the CFTC’s new rule is a less strict wording that replaces a “prohibition” with a public interest test. But alongside that, it defines “involve” within the rule for the first time and opts for a definition different to how the court viewed it.
Back to 2024
To the Ninth Circuit, a contract involving gaming is a contract that is itself gaming. The court determined that because the CFTC had a prohibition on contracts involving gaming, they should not be considered swaps and therefore cannot be immune from state law.
But back in 2024, another court defined the word differently. And that definition is the one the CFTC wants to add into its rules.
When the United States District Court for the District of Columbia first allowed Kalshi’s election contracts, the meaning of “involve” was much more important. At the time, the CFTC was arguing that it had the power to ban election contracts, because they “involved” gaming. Kalshi disagreed, and the court ruled Kalshi’s way.
“I’m not sure that it should have been decided the way it was,” David Aron, special counsel at Lowenstein Sandler, told InGame.
‘Involve’ doesn’t mean ‘is,’ CFTC says
Kalshi’s definition of “involves gaming” — which became the D.C. District Court’s definition, and now the CFTC’s proposed definition — was that the underlying event that is the subject of a trade must be gaming. In other words, it doesn’t matter if buying or selling the contract itself could be considered an act of gaming, only whether the event that determines the payout is gaming. Whether or not bets on elections are gaming, an election itself is clearly not, so as long as Kalshi could establish its preferred definition, it would win the case.
There is a kind of grammatical consistency with this approach. The CEA gives the CFTC power to ban contracts involving “terrorism, assassination, war, gaming, or unlawful activity.” For some of those items, it seems clear that Congress was referring to the topic being traded on, not the literal contract itself.
“No contract itself can be terrorism, assassination, or war unless you print out the contract and murder someone by paper cut,” Aron said.
As the CFTC noted in its proposed rulemaking, a contract about a public figure being assassinated is not itself assassination. So if “involve gaming” was meant to include contracts that amount to gaming, the word would need multiple definitions in a single use.
It also fits with the world of commodity futures, where contracts are almost always derivatives based on something else — like a contract that pays out based on the price of corn. The “underlying” is a more natural concept in this world than it would be in most other contexts.
Novig Chief Legal Officer Elie Mishory — who was Kalshi’s general counsel during the D.C. case — backs the “underlying event” interpretation. In a recent LinkedIn post, he criticized the interpretation of “involve” to mean “amounts to,” as it means decisions would have to be made based on how a contract is used.
“Under this view, the underlying event can be an election, which is not itself one of the activities Congress listed, and the Special Rule can still apply — because of what the traders, rather than the candidates, are doing,” he wrote. “Notice what that means. Whether the Special Rule reaches a contract no longer depends only on what the contract is about.”
More flexible definitions
But could the word have multiple meanings?
Aron says the strangeness of a contract being war or terrorism could actually be an argument for a more flexible definition of “involve.”
“Obviously a contract itself can’t be war,” he said. “It’s just a piece of paper — maybe if there was a declaration of war attached. But it can be gaming. So just based on that I don’t think you have to apply the word the same way to all six enumerated categories.”
Another analyst of CFTC regulation argues that rather than being a changing definition, it’s one definition that simply encompasses multiple kinds of relationships to the underlying event.
“It’s not inconsistent,” he said. “’Involve’ includes a broad range of relationships. It may be that gaming contracts have more relationships, but it’s the same meaning of ‘involve’ even if the number of relationships is fewer.”
Congressional intent seems like it would support a wider meaning of gaming.
“The court is allowed to look at the real world in determining what words in a statute mean,” the commodity regulation analyst said. “And Congress easily could have said, ‘based upon the occurrence that involves gaming,’ but instead it says it’s based on ‘agreements, contracts, or transactions’ that involve gaming.”
And a ban on contracts where the underlying event is gaming seems oddly specific.
“If we take gaming to mean gambling, then that would be an event contract where the underlying is slots or something like that,” Aron said. “What would that even be?”
Where do sports fit?
Part of the reason why the debates over the word “involve” have not been a big part of the courtroom battles so far is that even with the CFTC’s definition, it’s not totally clear how sports would be treated. Sports are games — are they gaming?
In fact, both Kalshi and the CFTC have flip-flopped on this.
In the D.C. case, Kalshi’s lawyers used sports as an example of a contract that would involve gaming. But in her response to the CFTC’s proposed rulemaking, Kalshi co-founder Luana Lopes Lara argued that sports contracts don’t involve gaming.
In oral arguments before the Ninth Circuit, the CFTC’s lawyers argued that involving gaming would refer only to contracts where the underlying event was a casino-style game of chance, but the regulator’s proposed rules said that a sports game is an example of gaming.
Complicating things further is that under the CFTC’s new rules, involving gaming would only give the CFTC the power to ban a contract, rather than banning them by rule.
But granting the narrower definition of “involve” and then still including sports may be a tough balancing act.
It’s convenient for the CFTC, allowing it to still block sports contracts it deems inappropriate, but it relies on a definition of gaming that does not mean gambling. The CFTC’s attempt to define gaming to make the balancing act work includes a complicated passage about events defined by their own rules.
“The Kentucky Derby is not ‘gaming’ — it’s a game,” the commodity regulation analyst said. “So their interpretation requires the same meaning of the statute that they rejected. An election is not gaming, but neither is the Super Bowl.”
How do judges see it?
If it becomes part of a lawsuit, will judges care about what makes the most sense linguistically or what seemed to be within the spirit of what Congress meant?
It probably depends on what overall result would make sense, rather than solely on which legal principles win out.
“I’m not saying they’re looking for things to justify their view, but there are so many canons of interpretation that cut against each other,” Aron said.
The commodities law analyst sees things similarly.
“The major questions doctrine can be a get-out-of-jail-free card,” he said. “A lot of these judges lean on the plain meaning of the text, unless what results from the plain meaning would be too consequential.”
That dynamic — where judges can find a convincing doctrine to back up either side of the argument — is true for many of the ambiguous words and phrases in the CEA.
“If Congress really wanted to be clear in prohibiting something or permitting something, they could be clear,” Aron said. “Instead, they did a terrible job.”
