The U.S. Commodity Futures Trading Commission (CFTC) is taking steps to assert its authority over prediction markets by proposing a formal regulation that redefines certain contracts traded on platforms like Kalshi as swaps, which fall under its jurisdiction.
This regulatory push is part of Chairman Mike Selig's strategy to ensure that transactions involving event contracts are exclusively overseen by the CFTC, distancing them from state gambling regulations. The proposed rules aim to clarify that while some forms of sports betting do not qualify as swaps, event contracts do and thus remain within the agency's purview.
The CFTC's recent rule, designated as "interim final," allows for immediate enforcement while still inviting public feedback during its implementation phase. The accompanying proposal seeks to explicitly categorize "event contracts, including those related to sports, politics, culture, and weather" as swaps regulated by the CFTC, although this proposal is still open for public comment for 30 days.
Numerous states and former federal officials have contested the CFTC’s interpretation, arguing that it undermines state authority over sports betting. These objections have led to legal submissions to the U.S. Supreme Court, which may ultimately have to settle the dispute.
Should the case reach the Supreme Court, the CFTC will be equipped to demonstrate its proactive regulatory stance regarding prediction markets. Several states are currently involved in litigation against the commission, asserting that they have jurisdiction over the betting activities on these platforms, with accusations of illegal gambling operations surfacing. Recent court rulings have yielded mixed outcomes, with some favoring the states and others siding with the CFTC.
Jaret Seiberg, a policy analyst at TD Cowen, noted that the interim final rule is likely intended to strengthen the CFTC's position in court, particularly as states argue that the agency’s definition of a swap could classify any wager at state or tribal casinos as federally illegal. However, he acknowledged that the effectiveness of this strategy remains uncertain.
The CFTC's rapid progression in this area follows a White House review of the proposed regulations just weeks prior, indicating a concerted effort to address legal challenges surrounding its claim to regulate prediction markets while delineating its role from casino-style gambling.
Companies like Kalshi have aligned with the CFTC in seeking to establish it as their sole regulatory authority. Currently, Chairman Selig is operating as the only commissioner, as President Donald Trump has not appointed additional members to the five-person commission, which also reflects a similar situation at the Securities and Exchange Commission.