The recent flurry of Commodity Futures Trading Commission (CFTC) missives around sports prediction markets “is a feeble attempt to shore up an area that they are sorely losing in court,” Better Markets COO and Policy Director Amanda Fischer said Wednesday.
A day after key prediction market representatives were “disinvited” to a White House innovation summit, Fischer joined Indian Gaming Association Chair David Bean and New Normal webinar host and IGA Conference Chair Victor Rocha to discuss the federal agency’s most recent moves.
Rocha said he believes prediction markets were cut out because “it’s becoming too big of a distraction, and that kind of brazen power grab is just starting to play badly on the hill.” Fischer called it “insulting and humiliating” that Better Markets was not invited.
How the legality of prediction markets offering sports event contracts eventually plays out will be a decision for the courts, not the CFTC suddenly putting forth myriad documents. Kalshi and the CFTC are in court with more than 20 state and tribal groups, and lately, the legal pendulum has swung more often in favor of states and tribes. At issue is whether or not state gaming laws and the federal Indian Gaming Regulatory Act apply to prediction markets.
Worst case, it was a good run
No matter the result, Fischer said, the prediction markets have exploited a moment in time that is allowing them to make hundreds of millions, if not billions of dollars.
“Listen, I think the play for the prediction markets, it’s not stupid,” Fischer said. “Even if the Supreme Court ultimately sides against [them, they] would have had a good run: ‘We did unregulated sports betting for a couple of years and we made a bunch of money on it and we paid out our early investors, and nice to know you.’ Because without sports, what are prediction markets, really? They’re niche, they’re not that interesting.
“But where the value proposition changes is if there are disgorgements and penalties for the conduct that occurred during this period. And we’ve seen states be very aggressive in trying to assert that authority, and all of a sudden, it just changes the value proposition if you have to pay that. … To me, it’s appropriate to pay it. I don’t think you should be ‘no harm, no foul’ after a few years of the impermissible sports betting that they are offering on these platforms. States are right to be concerned — that’s a lot of tax revenue that they are potentially losing for a couple years that could fund service provisions for their constituents.”
Fischer said the specter of fines and penalties from states “turns the temperature way up on the litigation.” The most clear instance of a state trying to penalize Kalshi is Nevada, which is currently calling for a $120,000-per-day fine for what it says is the company’s failure to properly geofence the state out of its offerings. But other states have included requests for daily or per-transaction fines in their court briefs, as well.
Congress having second thoughts?
Not surprisingly, Bean agrees with Fischer, but he also said he believes that congressional members are “complicit” and should be held accountable. Over the last year, Congress has been struggling with where or if prediction markets on gambling or sports — and some other subjects that are explicitly restricted in the Commodity Exchange Act (CEA) — should be allowed. Since Trump appointee Michael Selig was approved as CFTC chair in December, he has been the agency’s only commissioner and has been a champion for such markets.
But now, Fischer said, Congress is beginning to question whether Selig is the right man for the job. Gambling stakeholders have, for months, been pushing for the CFTC to be filled out. The agency is mandated to have five commissioners, but it has been operating with far fewer for more than a year.
After saying during his confirmation hearings that the courts should decide the fate of sports event contracts, Selig almost immediately did an about-face, announcing that his agency would craft new rules around event contracts and also play an active role in the lawsuits rather than spectating. The proposed rules were posted and garnered 1,500 comments that the agency is now sorting through. A draft of the permanent rules has not been published.
The House Committee on Agriculture has, since February, been grilling Selig about event contracts. In April, Democratic Rep. Jim McGovern told Selig that he’s “worried” because the CFTC’s actions “smell like corruption,” and at a Senate Indian Affairs Roundtable last month, committee Democratic Vice Chair Brian Schatz said he believes that prediction markets are decimating budgets in Indian Country that rely on gambling revenue.
Fischer said the comments indicate that Congress may be rethinking how qualified Selig is to handle other matters that fall under CFTC jurisdiction. Or, at the least, not allow him to be the only arbiter.
“I think that there is a growing understanding that if we are reopening the Commodities Exchange Act [via the Clarity Act], if we are handing all of this power to Mike Selig, what do his actions on prediction markets suggest about the judgment, the trustworthiness of this person leading this agency as a single director in a five-person agency given just how much he has overstepped tribal and state authority?” Fischer said. “I think a lot of lawmakers are questioning if they want to hand him more power.”
New York, New York
Questions about Selig’s and the CFTC’s motives have also surfaced in New York, Fischer said. The state and Kalshi are in a legal dispute, in which a federal court in July ruled that the state could ban Kalshi contracts. It also opened the opportunity for the state to sue Kalshi in state court, which it did on July 31. The New York attorney general sued for $36 billion in damages.
Less than two weeks later, the CFTC issued a memorandum saying that if New York issues a ban on Kalshi event contracts, it would invoke emergency powers and allow the company to continue to offer the products in violation of the court order. Kalshi, Fischer said, went to the Second Circuit the following day and filed a brief along the lines of, “Oh, you see this emergency order, we’re just in this terrible predicament between the court and the CFTC.” The company went on to ask the court to stop the state from enforcing its gambling laws.
Those moves, Fischer said, point to the CFTC and Kalshi working together in an unusual way.
“It is obvious that the CFTC and the prediction markets have their lawyers working in concert,” she said. “They are coordinating. It is the government moving in lockstep with a regulated entity to advance a legal strategy. … To me, I cannot think of an example in my career of a federal agency moving so lockstep with firms that are the subject of litigation.
“If I were Congress, I would definitely try to get my hands on those communications to see the level of integration between the government’s legal strategy and the prediction markets’ legal strategy.”
