Federal regulators during the Trump administration may submit a “friend of the court” brief in favor of Kalshi as it appeals to the US Court of Appeals for the 9th Circuit, bolstering the argument that event-based contracts are under the jurisdiction of the Commodity Futures Trading Commission (CFTC).
This submission will involve the CFTC in the ongoing case, according to a report from the Associated Press, where Kalshi contests a temporary restraining order imposed in Nevada.
The Nevada Gaming Control Board has sued Kalshi and Polymarket, asserting that they have been operating unauthorized sports betting platforms in the state. Consequently, a federal judge has issued a restraining order preventing Kalshi from functioning in Nevada.
Federal Oversight vs. State Gambling Legislation
The CFTC governs prediction markets as per federal commodities legislation. This legal framework enables operators like Kalshi to provide contracts on a nationwide basis, even in states where conventional gambling is prohibited.
Multiple states have contested this framework, claiming that the companies’ contracts should be classified as sports betting subject to state gambling laws. State regulators assert that, while prediction markets enable trading on a variety of future events, the majority of the transactions are associated with sporting events.
They also point out that several platforms allow participation from individuals aged 18 and over, while state-regulated gambling often restricts access to those aged 21 and up.
CFTC Chairman Michael Selig has contended that states cannot override federal authority in this sector.
“To anyone trying to challenge our jurisdiction in this area, let me be clear: We will confront you in court,” Selig stated.
In a commentary published in the Wall Street Journal, Selig expressed: “The CFTC will no longer remain passive while overzealous state governments infringe on the agency’s exclusive authority over these markets by striving to impose state-wide restrictions on these engaging products.”
Impact of Sports Contracts on Trading Volume
Prediction markets allow users to trade contracts based on the likelihood of various events, from weather forecasts to international affairs and sports championships. The value of these contracts typically ranges between $0.01 and $0.99, reflecting the estimated probability of an outcome.
Although these platforms feature an array of contracts, sports dominate the volume of transactions. Approximately 90% of Kalshi’s trading activity is linked to sports, while around 50% of the trades on Polymarket are related to sports events. Kalshi recorded over $1 billion in trading volume specifically for the Super Bowl.
States debating the legality of these platforms reference these statistics, arguing that the business resembles sports wagering more than traditional hedging instruments.
Selig has remarked that prediction markets operate like other futures contracts, enabling participants to mitigate risks related to adverse weather or fluctuating energy prices, distinguishing them from sportsbooks, where customers wager against the house.
The CFTC’s Role in Financial Markets
The CFTC supervises markets for commodities, futures, and derivatives, including oil, agricultural goods, and gold. The agency employs approximately 700 staff, compared to around 5,000 at the Securities and Exchange Commission.
Over recent years, the CFTC has assumed a more significant role in financial markets as cryptocurrency companies and prediction market operators have fallen within its jurisdiction.
Last week, Selig announced the formation of an “Innovation Advisory Committee” to aid the agency in developing regulations governing cryptocurrencies and prediction markets. The 35-member group includes CEOs from Polymarket, Kalshi, Coinbase, Robinhood, FanDuel, and DraftKings, incorporating some input from traditional finance while lacking representation from consumer advocates or public interest organizations.
During his Senate confirmation hearing, Selig informed senators that it would be fitting for the courts to resolve the primary legal issues facing Kalshi and Polymarket. The agency’s court filing now positions it squarely in the appeal process.
The administration’s stance holds political significance. Donald Trump Jr. has invested in Polymarket through his venture capital firm and holds a strategic advisory role with Kalshi.
Criticism of the case has also emerged from some Republican figures. Utah Governor Spencer Cox, whose state enforces strict gambling regulations, questioned the classification of sports-related contracts under commodities law.
“Mike, I appreciate your attempt to present this earnestly, but I don’t recall the CFTC having jurisdiction over the ‘derivative market’ of LeBron James’ rebounds,” Cox articulated on Twitter. “These prediction markets you are zealously defending amount to gambling — pure and simple.”