Sports event contracts involve gaming, but they’re legal, according to a proposed set of rules the Commodity Futures Trading Commission (CFTC) released Wednesday.
The position, a change from how the CFTC’s lawyers presented the topic before an appellate court in March, allows the CFTC to potentially ban a subset of sports event contracts, while allowing others.
The subset it appears set to ban, though, mostly deal with topics such as bets on injuries or next-pitch bets, which prediction markets have generally not listed so far, rather than a wide swath of sports contracts that are currently on offer. In general, state gambling regulators already ban such markets.
CFTC had few definitions
Contracts involving gaming — as well as terrorism, war, assassination, and other illegal activities – are a key part of two related rules: the Commodity Exchange Act’s “special rule” and the CFTC’s Rule 40.11.
The special rule appears to refer to a two-part test, where if the CFTC determines that a contract involves one of these categories, it may then determine whether it is against the public interest before banning it. The meaning of 40.11 appears to be more ambiguous — it refers to a “prohibition” and says exchanges “shall not list” these contracts, but also refers to a review process.
Despite the importance of the term “contracts involving gaming” in its rules and the CEA, the CFTC does not currently include definitions of “involve” or “gaming.”
In the proposed rules, the CFTC offers a definition of “involve” in this context to refer to the underlying event that is being bet on, not the act of trading itself. With this definition, it says, the inclusion of gaming next to items like terrorism or war would make more sense.
It noted that trading on a contract about an assassination would not itself be an assassination, and so if “involving gaming” was meant to mean that trading on a contract equates to gaming, then contracts about assassination, war, and terrorism would all be allowed.
This would also prevent any contract from being defined as a contract involving gaming, it said, as trading all contracts involves staking money based on a contingent outcome and so could meet some definitions of gambling.
“A definition that characterizes ‘gaming’ as a property of the event contract itself (for example, ‘the act of risking something of value, especially money, for a chance to win a prize’) cannot coherently be applied because it has no limiting principle,” the CFTC says. “Under such a definition, every event contract would involve ‘gaming’ by definition, because every event contract stakes value on a contingent outcome.”
Gaming includes sports
Regarding the word “gaming” itself, the CFTC proposed what it sees as a straightforward definition.
“The coherent reading is the one the ordinary meaning of the word naturally supplies: gaming is the game itself,” it said.
The new definition reads: “Gaming means 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.”
It went on to say that this would include sports games, the status of which with regards to gaming had previously been ambiguous.
“The Commission preliminarily believes that the meaning of ‘game’ relevant to the Special Rule encompasses the activities that are games in common parlance — sports games, athletic competitions and recreational games including games of chance,” the CFTC said.
The regulator also proposed an alternative definition, which relies less on plain language, but also encompasses sporting events. This alternative definition is “an activity created by its rules, in which all participants whose conduct determines the outcome operate within the activity itself, and those participants, in their capacity as participants, have purposes that are defined by and internal to the activity itself.”
It goes on to explain that this definition refers to events which exist only because of their rules, rather than being existing activities around which rules have been written, in which players’ actions are due to their participation in the game, and where the potential winner is a participant in the process that defines the winner. Sporting events would meet all of these criteria, while awards, for example, would not.
Change of position for CFTC?
The proposed rule looks to be something of a change of position on semantics at least for Selig’s CFTC, even if in practice it leads to allowing virtually all of the same contracts. Before the U.S. Court of Appeals for the Ninth Circuit, CFTC lawyer Jordan Minot said the agency did not see sports event contracts as contracts involving gaming, citing a narrower definition where gaming would refer to casino-type games.
That definition was similar to one expressed in a letter that Michael Selig had worked on in 2024, sent by Kalshi investor Paradigm Operations, which argued that counting sports event contracts as gaming would be “arbitrary and capricious.”
Now, the CFTC is arguing that they are included.
The new position allows the CFTC to identify certain sports bets as against the public interest, while allowing others to stand.
Five kinds of contracts against public interest
Counting contracts as gaming — in the CFTC’s opinion, at least — does not mean they would automatically be banned. The CFTC appears set to continue to allow virtually all types of sports event contracts that have already been put up for trading, while banning a smaller segment of contracts that appear to raise more obvious integrity questions.
The CFTC says that contracts on game winners, final scores, point differentials, or individual statistics are “unlikely to raise the particular manipulation, settlement ambiguity and information leakage issues that could raise public interest concerns” and may have real economic utility.
In this case, the CFTC identified five types of sports contracts that it said would likely be against the public interest. These are “Player injury contracts,” “officiating outcome contracts,” “Discrete-action contracts involving specific participants,” “Physical altercation contracts,” and contracts on “pre-collegiate sports events.”
The CFTC clarifies that “discrete-action contracts involving specific participants” refer to specific outcomes that could be entirely under the control of one person, such as “the type or outcome of a specific pitch thrown by a specific pitcher, the outcome of a specific shot taken by a specific player,” so this does not appear to refer to all player props.
Generally, CFTC-regulated prediction markets have not offered contracts that unambiguously fall into those categories, though edge-cases could be debated around contracts on discrete actions or officiating outcomes.
The CFTC noted that these categories shouldn’t be taken as the only possible sporting contracts that are against the public interest, however. It said it still had the discretion to rule on a case-by-case basis.
“Nothing in the Proposal, including the Commission’s preliminary belief that such event contracts are unlikely to be contrary to the public interest, is intended to create a safe harbor that any particular contract satisfies the public interest standard, nor does it replace the multi-factor analysis required,” the CFTC said. “Rather, it reflects the Commission’s considered preliminary view of how the factor analysis generally resolves for such event contracts. Event contracts remain subject to factor-by-factor weighing.”
But what about gaming contract ban?
Perhaps creating a challenge for the CFTC is the fact that parts of rule 40.11 refer to a “prohibition” and say that exchanges “shall not list” these contracts for trading.
The CFTC did not propose a removal of that language. Instead, it argues that the language could never have referred to a ban in the first place, because it says Congress did not give it the authority to ban classes of contract outright.
“The Special Rule provides that the Commission ‘may determine’ that an event contract involving an Enumerated Activity is contrary to the public interest,” and the CFTC says “That language confers discretion to determine that a particular event contract is, or is not, contrary to the public interest.
“Interpreting that ‘may’ as a per se prohibition would conflict with the requirements of the statute.”
This could still lead to some challenges of how the CFTC is enforcing its rules. Ninth Circuit Judge Ryan D. Nelson was unconvinced when prediction markets argued that the rule as written was invalid, questioning why it was never formally challenged if it was illegal as written.
No casino games?
The CFTC also addressed contracts based on random chance, which could include event contracts on casino games. No prediction market has offered these contracts so far, but casino operators have noted that prediction markets’ interpretation of the law would appear to permit these contracts.
In the proposed rulemaking, the CFTC says that “event contracts involving games whose outcome depends on random chance — e.g., pure luck — are likely to be contrary to the public interest.” While no event contracts on casino games have been listed, Kalshi did offer contracts on the NBA Draft Lottery that were based entirely on chance. As an example, Kalshi self-certified a market that allowed traders to bet on the pre-draw odds that the winning team would have, which would be unaffected by sports results and solely determined by chance even if it was listed before the regular season ends.
The CFTC noted that this random chance provision may still allow contracts on poker to be permitted, as the game involves both luck and skill.
Terrorism, assassination and war
In addition, the proposed rules also address contracts involving terrorism, assassination, or war.
It refrained from defining these terms tightly. Instead, it would “consider the extent to which the event contracts involve violent or destructive activities occurring outside the United States with an element of coercion or intimidation and some relationship to political or social groups or ideologies, intentional killing of an individual outside the United States, or belligerent military activities and violent activities by organized groups, respectively.” As an example, it said military activity would likely fit into the “war” category even without a formal declaration of war.
The CFTC also says that contracts on whether a politician leaves office could even be counted as contracts involving assassination if they do not stipulate that assassination would not resolve the contract to “yes.”
The proposed rulemaking drew criticism from prediction market opponents.
Prediction market opponent criticizes proposal
Mick Mulvaney, executive director of anti-prediction market group Gambling is Not Investing, said the CFTC should not be putting itself in charge of sports betting, which has traditionally been regulated by states.
“The CFTC was created to oversee commodity markets, not to become the nation’s sports betting regulator,” he said. “Congress never intended for federal derivatives law to become a backdoor for unsafe sports gambling.
“This proposal deserves serious scrutiny from lawmakers, state officials, tribes, sports leagues, and anyone concerned about preserving the integrity of our gambling laws. A sports bet doesn’t stop being a sports bet just because you call it a contract. If it quacks like a duck, it’s sports gambling.”
90-day review
The proposals will be subject to a 90-day review process.
“The CFTC will protect the integrity of our regulated markets without standing in the way of responsible innovation,” said CFTC Chairman Michael S. Selig in a press release. “This proposal gives the Commission a durable, transparent framework to identify the contracts Congress directed us to scrutinize while letting legitimate markets move forward.”
In addition, the CFTC said that its March advanced notice of proposed rulemaking on event contracts could potentially lead to further proposed rules.
