The Heat Is On, Kalshi Edition
After receiving cease-and-desist letters following its entry into sports markets, Kalshi has filed suit against Nevada and New Jersey in defense of its 'truth machines.'
The Bulletin Board
THE LEDE: Kalshi fires back; files lawsuits against Nevada and New Jersey.
BEYOND the HEADLINE: The legal fight: Multiple laws will come into play.
WAY BEYOND the HEADLINE: Will prior statements undermine Kalshi’s case?
ROUNDUP: Illinois, Florida, and Mississippi sweepstakes bills.
VIEWS: CBS Sunday Morning hammers sports betting.
AROUND the WATERCOOLER: The easy case for legal online casinos.
STRAY THOUGHTS: Winning doesn’t make you invincible.
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The Lede: Kalshi Files Suit Against Nevada and New Jersey
The Commodity Futures Trading Commission (CFTC) roundtable on prediction markets is looming. At least two states are tired of waiting and have decided to take matters into their own hands after Kalshi launched sports prediction markets.
Nevada sent Kalshi a cease-and-desist letter: Nevada kicked off the actions against prediction markets earlier this month, issuing a cease-and-desist letter to Kalshi calling its sports and election markets "unlawful in Nevada, unless and until approved as licensed gaming by the Nevada Gaming Commission.”
New Jersey has sent Kalshi and Robinhood a cease-and-desist letter: “The New Jersey Department of Gaming Enforcement has issued cease-and-desist letters to both the prediction markets platform Kalshi and financial platform Robinhood,” per Dustin Gouker’s The Closing Line Substack. Gouker later reported that Robinhood (but not Kalshi) has restricted New Jersey from its March Madness betting options.
Massachusetts Secretary of State Bill Galvin is investigating Robinhood: Massachusetts Secretary of State Bill Galvin has opened an investigation into Robinhood’s sports contracts and issued a subpoena to the firm, Per Reuters. Galvin called the sports markets a “gimmick from a company that’s very good at gimmicks.”
And we now know how Kalshi will respond, with righteous indignation.
Kalshi has filed lawsuits against Nevada and New Jersey, and CEO Tarek Mansour wrote in a statement, “We have been targeted before, we have fought before, and we have won before. This time will be no different.”
As Dustin Gouker reports, one of the lawyers Kalshi has retained is former New Jersey Attorney General Gurbir Grewal, who previously argued against federal intrusion into New Jersey’s online gambling industry.
In its lawsuit, Kalshi argues, “There are crucial differences between Kalshi’s exchange and a sportsbook that justify the very different regulatory models under which they function. A financial exchange is an investment marketplace where traders enter into contracts with other traders—not with a casino or ‘house.’”
It would appear that Kalshi is trying to redefine sports betting, not as a wager on a sports event, but as a wager on a sports event between a customer and the house. Under Kalshi’s peer-to-peer model, the sportsbook becomes an investment marketplace, wagers become contracts, and bettors become traders.
STTP Thought: Congratulations, you’ve just invented peer-to-peer betting exchanges (which I thought Betfair did about 25 years ago), which, last I checked, need to be licensed and regulated as sportsbooks. Just ask existing exchanges and online poker sites.
In a LinkedIn post, Mansour took the us-against-the-world rhetoric even further, writing:
“Over the last decade, the concept of objective truth has been dangerously eroded by aggressive politicization, rampant misinformation, and biased journalism. Without the ability to agree on some of the basis and without truth… we are blind… a society evolving without direction, endlessly debating itself into oblivion.
“Prediction markets have proven themselves to be the antidote. They mobilize the most elegant and effective properties of free financial markets towards the pursuit of unbiased truth. They are the quintessential truth machines. With trust in traditional institutions at an all-time low, people are turning to prediction markets at an astronomical pace. The growth of the ecosystem in the last year is a testament to how important they have become to the American people.
”We need prediction markets… now, more than ever.”
Mansour went on to say that the cease-and-desist letters sent by Nevada and New Jersey “undermine the foundation of U.S. financial markets,” and that Kalshi has tried to “educate” these regulators on “how critical they [prediction markets] are… but our words fell on deaf ears.”
STTP Thought: Hubris level unlocked. I get this is a fight, but speaking so patronizingly to significant regulatory bodies doesn’t seem like the wisest choice unless you think you are a lock to win and are willing to go scorched earth.
Furthermore, as Earnings+More pointed out today, prediction markets, at least when it comes to sports, aren’t the “quintessential truth machines” Mansour claims. In fact, they look a lot like traditional gambling.
“New analysis from a data scientist shows that sports prediction markets available on the offshore Polymarket unsurprisingly are less accurate than non-sports based markets in being predictors of the actual outcome of an actual event.
“The analysis available on Dune from Alex McCullough, a New York-based onchain analyst, pointed out Polymarket “predominantly” features simply yes/no markets, “many of which are extremely long odds” and which inflate the platform’s overall accuracy.”
Mansour finishes with:
“I can’t speak to why they are taking this action, but prediction markets have proven their use, so it is a shame that these authorities are still trying to censor them.
”We are left with no choice: sue.”
Really? You don’t know why states are taking these actions after you started offering sports markets?
STTP Thought: I can’t believe this needs to be said: We are talking about self-certified prediction markets on sports events (will Houston beat Tennessee in the Elite Eight type stuff), not Ukraine-Russia discourse or nuclear disarmament talks between superpowers.
Beyond the Headline: The Legal Arguments For and Against Prediction Markets
I do not know how this will play out. As I’ve said before, I’m all for new products, so long as they are tightly regulated — maybe this is an opportunity for a second licensing level?
Here’s what I do know: I’ve seen this movie before: The Tale of the Disruptor.
The tale begins by arguing over when everything was perfect, which is some arbitrary moment in time each side chooses — the DOJ’s Wire Act opinions of 2002, 2011, and 2018 are prime examples of this, with Sheldon Adelson backing the RAWA (the Restoration of America’s Wire Act bill) post-2011, which simply restored it to his ideal 2002 opinion. When the 2018 opinion was handed down, the industry chose 2011 as its ideal moment in time.
Kalshi has been around for a hot minute (founded in 2018). The ruling (that is still under appeal) allowing Kalshi to offer election markets (not sports markets) happened roughly six months ago. It launched self-certified sports markets in January, less than three months ago.
STTP Stray Thought: This is the same company that briefly offered Luigi Mangione markets, and said after launching self-certified sports contracts, “We are just getting started.” That makes me wonder where Kalshi believes the line should be drawn, or if there is any line at all.
Still, its statements are written in absolutes, as if everything is settled.
CFTC rules are constantly changing. The Commodity Futures Modernization Act passed in 2000, and after the passage of Dodd-Frank in 2010, are two recent examples.
And just like choosing a moment in time, Kalshi’s arguments also focus on a single federal law that works in its favor, when the reality is that there is a tapestry of interwoven laws to consider.
Kalshi’s lawsuit claims that “The Board’s [Nevada] attempt to regulate trading on a federally regulated exchange is preempted by federal law… This action challenges the state of Nevada’s intrusion into the federal government’s “exclusive” authority to regulate futures derivatives trading on exchanges overseen by the Commodity Futures Trading Commission (“CFTC”).
As attorney Daniel Wallach notes, the 1978 Interstate Horse Racing Act reads, “the States should have the primary responsibility for determining what forms of gambling may legally take place within their borders.”
In a client alert, the law firm Brownstein, Hyatt, Farber, Schrek wrote that “even a favorable ruling from the court will not necessarily clear the way for Kalshi or similar companies to offer sports-based event contracts,” as the Wire Act and the Illegal Gaming Business Act could come into play:
“Simply put, even if the Wire Act does not cover sports gambling via online event contracts trading platforms, IGBA might,” the Brownstein alert states. “If online prediction markets’ sports offerings violate the laws of any state—especially states with expansive gambling regulatory regimes—those state violations may also be a violation of federal law under IGBA.”
There are also the tribal complications that are likely to arise:
“Allowing sports contracts to be listed and traded will interfere with the sovereign right of tribes and states to exercise their police power to regulate gaming within their respective territories—a right long recognized by courts throughout the United States,” wrote Indian Gaming Association Chairman Ernie Stevens Jr. in a letter to the CFTC.
Ryan Rodenberg, a Florida State University Law Professor, noted that CFTC rules enacted after Dodd-Frank included trading prohibitions on: “Terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law.” The CFTC also included a catch-all ban for any similar activity “contrary to the public interest.”
And that’s where things get extremely interesting.
Speaking to Straight to the Point, Rodenberg said:
“The word 'gaming' was left undefined when it was added over a decade ago, and the CFTC recently offered a proposed definition. The ambiguity has been an issue in the ongoing litigation, and the district court judge weighed in late last year when ruling in Kalshi's favor."
And then there is the equally important “activity that is unlawful under any State or Federal law” bit, which Rodenberg explained to STTP:
"As evidenced by Nevada's recent cease-and-desist order issued to Kalshi, there is considerable friction between state and federal regulation in the sports event contract space. MLB and other sports leagues will likely seize upon such friction and use it as a lever to get involved directly as a way to control revenue streams moving forward."
Way Beyond the Headline: Kalshi’s Incongruent Arguments
Daniel Wallach has been taking Kalshi to task, pointing out some potentially problematic contradictions in Kalshi’s arguments.
“Kalshi has changed its story in the Nevada and New Jersey lawsuits. It has done what you should never do when appearing before multiple federal courts — advance diametrically opposite positions before two different tribunals (on an important point). While now claiming that ‘sports-outcome contracts’ are lawful under federal law, it told the D.C. Circuit in November that “Congress did not want sports betting to be conducted on derivatives markets.” A complete 180.”
Wallach highlighted several statements from Kalshi from its arguments before the DC District Court last year, when Kalshi was fighting to offer election markets:
“An event contract involves gaming if it is contingent on a game or game-related event. The classic example is a contract on the outcome of a sporting event; as the legislative history directly confirms, Congress did not want sports betting to be conducted on derivatives markets.”
Wallach also noted that, “During the 5/30/24 hearing in the district court case, Kalshi conceded that ‘event contracts’ tied to sporting events such as football, horse racing, and golf have 'no inherent economic significance' and are done ‘purely to facilitate the betting itself… for its own sake.” Kalshi also said, football, horse racing and golf “are probably not the type of contracts that we want to be listed on an exchange, because they don’t have any real economic value to them.”
Effectively, Kalshi’s election betting argument was that elections aren’t “gaming,” like sports outcomes. Now?
These incongruities are reminiscent of the “we would never [insert claim]” arguments we’ve heard from other online gambling operators seeking to be legalized over the years, only to see them constantly move toward the behavior they denied.
Again, I really don’t know how this plays out, but get your popcorn ready.
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Roundup: Illinois, Florida, and Mississippi Sweepstakes Bills
Illinois sweeps bills introduced: A pair of bills in Illinois would prohibit online sweepstakes. Per Casino Reports, SB 1705, sponsored by Sen. Bill Cunningham, “would amend the state’s criminal code to address two key areas: making video sweepstakes machines that are routinely found in jurisdictions that opted out of offering VGT play illegal as well as banning online sweeps.” Rep. Bob Rita’s HB 2879 also targets illegal gaming. With the addition of Illinois, the number of states with sweepstakes prohibition bills now stands at eight: New Jersey, Mississippi, Maryland, Connecticut, New York, Nevada, and Florida are covered here, and Arkansas is covered here.
Florida sweepstakes bill passes first committee: SB 1404 passed the Senate Regulated Industries Committee in an 8-0 vote. The bill broadly defines internet gambling to cover sweepstakes gambling, as it has a carveout for gambling under an approved tribal compact. It also covers vendors and suppliers, payment processors, and media affiliates. The bill’s next stop is the Senate Appropriations Committee on Agriculture, Environment, and General Government.
Mississippi sweeps-mobile betting bill heads to conference committee: As STTP anticipated, a Mississippi bill, first passed by the Senate, that prohibits sweepstakes is headed to a conference committee, after the House added language that would legalize mobile sports betting to the bill. Mobile betting will not pass the Senate, so the bill will die, or the House will cave and pass a sweepstakes-only bill. The conference committee comprises Senators Joey Fillingane (who sponsored the sweepstakes bill), Mike Thompson, David Blount, and House members Casey Eure (who sponsored the failed House mobile sports betting bill), Jay McKnight, and Brent Anderson.
Views: Take a Guess How CBS Sunday Morning Covered Sports Betting
The title tells you exactly how this 11-minute segment went: The dangers of sports gambling addiction.
Around the Watercooler
Social media conversations, rumors, and gossip.
The case for legal, regulated online gambling (sports betting, casino games, and poker is an easy one to make. It’s not about revenue, it’s about consumer protections:
“Ricardo Rivera learned this lesson the hard way. After years of gaming online… he says he became a fraud victim on a crypto-gambling site called SpinMe.club.”
“I basically hit the biggest jackpot that they have, and it was $4 million," Rivera said.
“Rivera had already deposited hundreds of dollars in cash and bitcoin to open his account. But to claim the jackpot, there was a new catch: He was told to pay another thousand dollars to cover "taxes.””
“It was then that Rivera realized he was the victim of a scam… He says when he complained to customer service, the site blocked him and kept his money.
“CBS News repeatedly emailed SpinMe.club to ask about Rivera's case. All emails bounced back, and when reached via chat, the site blocked us.”
Toss in the numerous fake social media ads pretending to be online versions of land-based casinos, and you have a recipe for disaster.
The solution is simple: give bettors a legal alternative.
Online gambling laws expressly prohibit unlicensed operators. But without a clear law to point to, enforcement (asking a social media site to pull the fake ads) is challenging.
State gaming regulators list licensed and regulated sites. That list doesn’t exist if a state doesn’t allow legal online gambling.
Similarly, the fake websites would be drowned out by legitimate online gambling sites, but if online gambling isn’t legal in the state, they won’t advertise.
Stray Thoughts
What’s crazy about this sports prediction market mess is that Kalshi was roundly praised for breaking down the walls of election betting. But, like so many, that colossal win wasn’t enough. It wanted more (probably because investors and “experts” were whispering how sports betting is no different if you squint hard enough).
Now it looks like we might be headed for a Napoleon marching into Russia result — but perhaps not.