The Commodity Futures Trading Commission (CFTC) has released two proposals designed to delineate its regulatory authority over prediction markets versus traditional gambling. The first proposal defines event contracts tied to sports, politics, cultural events, and weather as “swaps” under federal law, asserting they are commodity derivatives within the agency’s exclusive jurisdiction. Chairman Michael Selig stated that these products are financial instruments commonly known as swaps, seeking to resolve existing ambiguities. The second proposal explicitly excludes casino-style gambling products, including wagers on sportsbooks and casino games, from the definition of a swap, reinforcing the view that such activities are not derivatives.
These measures arrive amidst ongoing legal conflicts between the CFTC and several states that have sued operators like Kalshi and Polymarket for alleged illegal gambling. The CFTC has countersued to defend its federal jurisdiction. Recent judicial rulings have complicated this landscape; in late September, the 6th US Circuit Court of Appeals ruled against Kalshi, allowing Ohio and Tennessee to regulate sports-event contracts under state laws. Conversely, an April decision by the 3rd Circuit Court of Appeals permitted Kalshi to operate in New Jersey during its appeal process. Both new CFTC proposals carry 30-day comment windows and set the stage for potential Supreme Court review regarding federal versus state regulatory power.
The CFTC’s dual proposals represent a strategic effort to codify the boundary between regulated financial derivatives and prohibited gambling, directly addressing the legal uncertainty surrounding prediction market operators. By defining event contracts as swaps, the agency asserts exclusive federal jurisdiction, challenging state authorities who claim these products fall under local gaming regulations. This move is significant because it attempts to preemptively resolve definitional disputes that have led to conflicting appellate court rulings, such as the 6th Circuit’s decision against Kalshi and the 3rd Circuit’s allowance of operations in New Jersey. The exclusion of casino-style gambling clarifies that the CFTC does not seek to regulate traditional wagering, thereby narrowing the scope of its intervention to specific derivative structures.
However, the effectiveness of these administrative definitions remains contingent on judicial interpretation, particularly given the pending amicus briefs urging Supreme Court involvement. The divergence between federal assertions of jurisdiction and state enforcement actions creates a complex compliance environment for operators like Kalshi and Polymarket. While the CFTC aims to provide clarity through rulemaking, the underlying constitutional question of federal preemption over state police powers regarding gambling has not been definitively settled. Market participants must monitor whether courts accept the CFTC’s characterization of event contracts as swaps or continue to defer to state regulatory frameworks, which could determine the viability of nationwide prediction market operations.
