The Commodity Futures Trading Commission (CFTC) published an Interim Final Rule that differentiated gambling products from swaps offered by prediction markets.
A Friday announcement confirmed that swaps, which fall under CFTC regulation under the Commodity Exchange Act, do not include casino games and sportsbook betting odds. Both rulings include a 30-day comment period following publication in the federal registry.
CFTC says swaps not gambling
Event contracts have come under fire across the country. Recently, 39 state attorneys general signed an amicus brief supporting New Jersey’s request for a U.S. Supreme Court review of a case between state gaming officials and Kalshi, the country’s leading operator of prediction markets.
The CFTC’s new announcement defines “casino-style gambling products” while also explaining why sports event contracts — prediction markets tied to sports outcomes — do not meet that description.
“Casino-style gambling products are not derivatives,” said CFTC Chairman Michael S. Selig. “Just as the CFTC has done with respect to other products historically regulated by the states, the Commission today provides clarity regarding the limits of its regulatory remit by codifying the exclusion of casino-style gambling products from the ‘swap’ definition.”
A 41-page copy of the new rule acknowledges that swaps were intentionally broadly defined by Congress so that they may take on a variety of forms. However, Selig noted that the CFTC does not possess limitless power.
An expanded description of illegal casino-style gambling products characterizes offers that CFTC-licensed platforms are not authorized to offer to consumers.
“[A swap does not include anything that] is offered or entered into by a person that is licensed or otherwise authorized to offer gambling or gaming products, or accept wagers, under the law of a State or the law of a federally recognized Indian tribe pursuant to the Indian Gaming Regulatory Act...and is not traded on a board of trade, an organized exchange, a swap execution facility, or any other market in which trades are executed multilaterally or subject to individual negotiation.”
The document individually names “Sports Wagers,” “Casino Games” and “Other Licensed Games of Chance” as products that fit its definition of unapproved casino-style gambling products.
Prediction markets still facing pushback
The CFTC’s new rule noted the perceived lack of distinction between sports event contracts and sports betting odds, which has been the basis of most of the pushback that prediction markets have faced.
“The Sixth Circuit viewed sports event contracts as legally indistinguishable from casino-style sports wagers, and thus, it expressed concern that, if sports event contracts are swaps, any sports wager—including “every sports wager placed in a casino, on an online sports book, or between two friends at a bar”—would need to “take place on federal markets,” the document read.
“The Ninth Circuit similarly reasoned that sports event contracts and casino-style sports wagering are indistinguishable, finding that the “substance” of the sports event contracts at issue was “sports gambling, regardless of whether [the DCM] calls them swaps” (and, by inference, regardless of whether the CFTC regulates them as swaps).”
Those verdicts set up Selig’s ruling and reiteration that sports event contracts are legal according to federal law and do not represent sports betting products. His argument primarily settled on sportsbooks using a system of house-made odds, while prediction markets utilize national exchanges at market-set prices.
Debates over prediction markets are still far from over. The national pushback on their products is hitting all-time highs, with conflicting judicial rulings, national support for a Supreme Court hearing, and constant resetting of trading records amid an active period headlined by the NFL season.
The Trade Handle Prediction Markets Take
The CFTC’s new rule effectively codifies a position it has long maintained, which is that sports betting odds and casino-style products are illegal, but that sports event contracts do not fit either of those definitions. Every development related to the regulatory structure of prediction markets appears to draw the industry closer to the Supreme Court — however, a recently released three-case docket omitted prediction markets from cases the court plans to review at the beginning of next year.