CFTC Pursues Definitions for Event Contracts Amid State Gambling Disputes

The Commodity Futures Trading Commission (CFTC) is seeking to redefine event contracts as swaps, amid ongoing legal disputes with state regulators.

The CFTC has submitted two proposed rules to the White House’s Office of Management and Budget (OMB) that aim to classify event contracts, often used in prediction markets, as swaps rather than gambling products. This move could significantly alter the regulatory landscape for platforms like Kalshi, which have been embroiled in legal battles with state authorities over their operations.

Currently, the CFTC asserts its role as the primary federal regulator for prediction markets, which allow users to place binary bets on events such as sports outcomes and elections. The agency's new rules are designed to clarify that these contracts are not related to gambling, which has been a point of contention with state-level regulators who argue they fall under gambling laws.

A recent ruling by the U.S. Sixth Circuit Court of Appeals stated that sports bets on Kalshi do not qualify as swaps and are therefore subject to state gambling regulations. This decision, supported by the Eighth Circuit, contrasts with the Third Circuit’s ruling that upheld CFTC jurisdiction over prediction markets, creating a fragmented legal framework.

By classifying event contracts as swaps, the CFTC aims to weaken the legal basis for states that claim the authority to regulate these markets as gambling. The agency’s proposed rules are currently under OMB review, which is a standard procedure before they can be made available for public comment. An interim rule could take effect immediately, allowing for public feedback and potential revisions.

The CFTC has been proactive in defending its jurisdiction, frequently engaging in legal action against states asserting their regulatory power. This ongoing tug-of-war has resulted in conflicting decisions from federal appellate courts, raising the possibility of a Supreme Court review in the future.

Moreover, the CFTC's recent proposals do not appear to be classified as economically significant, and the agency continues to operate with a reduced commission, lacking the full complement of five members since President Trump has not nominated additional commissioners.