It’s increasingly likely a prediction market case makes it to the Supreme Court, and here’s what the highest court in the land will have to wrestle with.
The Bulletin Board
THE LEDE: What will SCOTUS consider if it hears a prediction market case?
ROUNDUP: A look at the stories you may have missed.
NEWS: Canada makes it clear where it stands on prediction markets.
AROUND the WATERCOOLER: Gambling ads need to go.
STRAY THOUGHTS: Another reason to become a paid subscriber.
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The Lede: The Legal Questions SCOTUS Will Consider
If the Supreme Court takes a prediction markets case (which is exceedingly likely at this point), it will likely decide the case on two overarching questions, which are the meat of this entry.
The Third Circuit and the Ninth Circuit are split on Question #1: Are sports contracts swaps? Question #2, does the Commodity Exchange Act (CEA) preempt state gaming laws, only comes into play if the contracts are deemed to be swaps.
However, there is a third “sleeper” SCOTUS can consider, which I’ll outline in a moment.
Question #1: Are sports contracts “swaps”?
The crux of the case is this: Prediction markets and the Commodity Futures Trading Commission (CFTC) claim the CFTC has exclusive jurisdiction over swaps on a designated contract market (DCM).
If sports contracts are deemed swaps, states are likely on the outside looking in. If they are not swaps, state-level gaming laws apply.
Kalshi and the current CFTC read the definition of swap and the CFTC rules governing them broadly, which makes almost anything a swap, so long as it is offered on a licensed DCM.
Earlier this year, the Third Circuit agreed with that assessment, finding in KalshiEX LLC v. Flaherty that sports event contracts on CFTC-licensed exchanges are swaps, and the CFTC has exclusive jurisdiction.
Last week, the Ninth Circuit disagreed, and ruled in KalshiEX LLC v. Assad that they are obviously sports bets, and that calling them event contracts does not change what they are.
That circuit split all but ensures a date at SCOTUS, and brings us to the overarching question that no one really knows the answer to: Will SCOTUS read the definition broadly or will it choose a contextual reading that keeps sports betting (and other forms of gambling) firmly under the control of state laws?
And that brings us to Question #2.
Question #2: If they are swaps, does the CEA preempt state gaming laws?
Winning the “what is a swap” debate is one of the bars Kalshi must clear. Both circuits largely agreed that if it is a swap on a DCM, exclusive jurisdiction applies. They disagreed on whether sports contracts meet that threshold (Question #1). Of note, these were preliminary-injunction rulings, not merits rulings.
But Kalshi also needs to establish preemption to declare a total victory.
Federal preemption can happen in three ways:
Express preemption is when Congress plainly says federal law supersedes state law. Kalshi says the CEA’s exclusive-jurisdiction clause is exactly that.
Field preemption is when Congress writes a law that doesn’t expressly say states can’t pass their own laws, but the federal scheme is so pervasive that it leaves no room for states — which is what the Third Circuit said, once a product falls into the realm of a swap on a DCM, states are cut out.
Conflict preemption is when you cannot obey federal and state laws at the same time, or when the state rule blocks what Congress was trying to do.
Kalshi argues “exclusive” means exclusive, while states have pointed to savings clauses in the CEA as evidence that Congress left room for complementary state law. And then there is the Special Rule itself, which lists activity ‘unlawful under any Federal or State law’ as a category the CFTC may deem contrary to the public interest.
The Ninth Circuit, as well as courts in Maryland, Utah, and New York, agree with the states, that there isn’t conflict preemption, that Kalshi can comply with state and federal law.
Another hurdle that I’ll address later this week is the major-questions doctrine. As attorney Daniel Wallach noted, Congress regulated sports betting by name in the Wire Act and PASPA. If Congress wanted the CFTC to run national sports betting, it would say so. It did not do that in Dodd-Frank.
Question #3: What do the Special Rule and Regulation 40.11 do?
In my opinion, Rule 40.11 is how SCOTUS might ultimately decide the case, as it doesn’t slam the door in either direction.
Recall that in PASPA, SCOTUS left the door open for Congress to regulate sports betting. Justice Samuel Alito’s majority opinion in Murphy v. NCAA reads in part:
“The legalization of sports gambling requires an important policy choice, but the choice is not ours to make. Congress can regulate sports gambling directly, but if it elects not to do so, each State is free to act on its own. Our job is to interpret the law Congress has enacted and decide whether it is consistent with the Constitution. PASPA is not.”
Murphy left the policy choice to Congress, which hasn’t acted. Kalshi’s play is that Dodd-Frank already made the choice, or that rewritten Rule 40.11 will. Of interest, that would mean no one involved in the PASPA case (not the high-powered legal teams or the justices) pointed out that maybe Congress already had authorized sports betting in Dodd-Frank.
Dodd-Frank says the CFTC may determine that certain event contracts are contrary to the public interest if they involve gaming, war, terrorism, assassination, or activity that is unlawful under federal or state law.
Exact phrasing here:
“In connection with the listing of agreements, contracts, transactions, or swaps in excluded commodities that are based upon the occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or levels of a commodity described in section 1a(2)(i) of this title), by a designated contract market or swap execution facility, the Commission may determine that such agreements, contracts, or transactions are contrary to the public interest if the agreements, contracts, or transactions involve—(I) activity that is unlawful under any Federal or State law;(II) terrorism;(III) assassination;(IV) war;(V) gaming; or(VI) other similar activity determined by the Commission, by rule or regulation, to be contrary to the public interest.”
The implementing rule, 40.11, goes further, saying a registered entity “shall not list” contracts that involve, relate to, or reference gaming.
The two sides have diametrically opposed opinions on how all of that should be read.
The states argue Congress put “gaming” (along with war, terrorism, and assassination) inside an overarching framework of should-be-prohibited contracts, and the CFTC’s own rules expressly prohibit these contracts, with the against-the-public-interest rule reserved for fringe cases that may abut these categories.
On the other side of the coin, Kalshi and the CFTC argue that all contracts on the prohibited list are to be treated individually, and the CFTC can decide if they are allowed or not, given the “may” in Dodd-Frank.
Judge Lee’s concurrence in the Ninth Circuit hits on this very point, as he noted, the statute says the Commission “may determine” a gaming contract is contrary to the public interest, implying there is discretion to allow some gaming contracts — but Judge Lee said the Court need not resolve that, because the existing regulation bars them now. So unlike in Murphy v. NCAA, in this case Congress or amended CFTC rules could tip the scales in Kalshi’s favor.
And that isn’t a hypothetical. The CFTC is working on amending its rules in a way that sports would count as “gaming,” but game-outcome and many prop-type contracts would survive a public-interest review.
That makes the CFTC’s pending amendments quite important, as states and tribes are likely to attack the amended rules, opening yet another legal front.
SCOTUS could narrowly decide the case solely on 40.11, leaving the “what is a swap” question for another day. It’s the Alito argument from PASPA: Congress can do it directly, but until it does, the states are free to act on their own.
Upshot
Kalshi has to win on both Question #1 and #2, unless the Court takes the 40.11 off-ramp.
And one other consideration: A Kalshi win against states would not reach into tribal cases. Tribal cases under IGRA would still be open — more on that later this week.
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Roundup: So Much News; So Little Newsletter Space
Bet365’s online casino goes live in West Virginia [Press Release]: Bet365’s sportsbook and online casino went live in West Virginia last week. The bet365 sportsbook is now live in 18 states, and West Virginia is the fourth state it has launched its online casino product in. In the press release, bet365 pointed to the launch as “continuing on a path of strategic growth across the country, entering mature markets with high-quality features for bettors.” Bet365’s US strategy is something STTP has touched on in the past, here and here.
Atlantic City could lose up to 35% of its casino jobs by 2035 [Press of Atlantic City]: “The Atlantic County Economic Alliance, a nonprofit economic development corporation established in 2017 for business attraction, retention and marketing efforts in the county, released a report Tuesday outlining the potential damage from casino expansion, and other factors including the continued growth of internet gambling and stubborn inflation. The group…said a ‘baseline scenario’ of New York casino expansion and other factors could cost Atlantic City 5,100 casino jobs and nearly $815 million in lost revenue by 2035.”
18-21 year-olds have wagered close to $4B on Kalshi [CNN]: “Young adults between 18 and 21, who are legally barred from most gambling in the US, have traded an estimated $5.4 billion so far this year on the Kalshi prediction market, according to a new CNN analysis… The CNN analysis found that Kalshi users between 18 and 21 have traded an estimated $3.9 billion in those categories [sports] this year – and that’s expected to rise.” Kalshi declined to comment or provide data on its 18-21 year-old users.
Sportradar and Polymarket expand strategic relationship [Press Release]: “Sportradar and Polymarket announced a significant expansion of their strategic relationship extending Sportradar’s premium sports data, streaming and integrity services to Polymarket across more than 20 sports leagues and competitions representing approximately 300,000 matches annually. Under the U.S. agreement, the expansion adds premier global leagues including the Bundesliga, Euroleague Basketball, the Chinese Basketball Association (CBA), the National Basketball League (NBL), Tennis Grand Slams, and UTR Pro events, among others, deepening Polymarket’s coverage across soccer, basketball, and tennis, backed by the deepest and broadest sports data and content portfolio in the industry.”
NFL renews deals with FanDuel and DraftKings, adds Fanatics [Press Release]: “The National Football League today announced it has reached commercial agreements with three leading sports betting operators ahead of the 2026 season. DraftKings and FanDuel, partners in the category since 2021, each signed a multi-year deal. Fanatics Betting and Gaming also signed a multi-year agreement, expanding a relationship with the NFL that includes collectibles and official league merchandise. As part of these multi-year deals, all three partners will have the ability to leverage NFL marks within the sports betting category and promote online and retail sports betting. They will also have presence at NFL tentpole events such as the Super Bowl and NFL Draft, unique hospitality and VIP experiences and integrations across NFL-owned digital media properties. Finally, they will have access to real-time, official play-by-play statistics, proprietary Next Gen Stats and BetVision through Genius Sports, the league’s exclusive data distribution partner.”
News: Canada Says No to Prediction Markets… For Now.
Prediction markets have landed in Canada (Kalshi’s partnership with Toronto-based Wealthsimple), but don’t expect sports contracts anytime soon, as financial regulators have issued an advisory that sports and entertainment contracts do not meet the standards of securities or derivatives.
As reported by Tom Nightingale for Canadian Gaming Business, “The Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) said they posted the public notice to explicitly state their views on sports event contracts ‘in light of growing interest in prediction markets in Canada.’”
The notice to staff reads in part (bold mine):
“In light of growing interest in prediction markets in Canada, this Notice focuses on Event Contracts based on sports or entertainment events or outcomes and sets out CSA and CIRO staff’s views on the applicable regulatory framework for those products. Further guidance on Event Contracts based on other types of events will follow.
“CSA staff recognize that Event Contracts may fall within the broad definitions of securities or derivatives under securities and derivatives legislation. However, securities and derivatives legislation, related rules, and guidance, contemplate that certain instruments are outside the scope of that framework, or are otherwise excluded, depending on the facts and circumstances. CSA staff’s view is that Event Contracts based on sports and entertainment events or outcomes should not be regulated within securities and derivatives legislation.”
The Canadian Gaming Association applauded the notice, saying in part:
“The Canadian Gaming Association welcomes today’s guidance from CSA and CIRO staff,” CGA CEO Paul Burns said in a statement. “It brings clarity to a question that matters a great deal to Canadian consumers, provincial governments, and the licensed gaming industry: sports wagering is sports betting, whatever the platform, and it belongs within the framework that provinces have built specifically to regulate it.”
At the provincial level, Loto-Québec issued its own press release on prediction markets:
“Following the publication of the most recent notice from the Canadian Securities Administrators (CSA), Loto-Québec would like to reiterate that, in Québec, there is no ambiguity: the only 100% legal casino and sports betting website is lotoquebec.com. Regardless of the platform — whether it’s a gaming website or a prediction market website offering event contracts related to sports and entertainment--if it’s not Loto-Québec, it’s not legal.”
The guidance is clear, but I would caution that the “broad definitions” admission could lead to future problems, as a shift in regulatory view or leadership change could reopen the issue.
Around the Watercooler
Social media conversations, rumors, and gossip.
Here’s why I’m full on board with a blanket advertising ban (from David Purdum’s excellent article on a pseudonymous gambler named Amit):
“But Amit had one request: no betting ads in a story about him. Some recovering gambling addicts say they’re hesitant to watch sports anymore, worried that a sportsbook ad or a reference to betting odds will trigger a relapse. Last season, NFL games on national TV averaged two betting-related commercials, though some primetime games had up to five, according to iSpot.TV, a company that measures TV and video ads.”
The ability to wager on sports isn’t new, it was happening before PASPA was repealed in 2018. What is new is the way it has permeated every aspect of our lives.
The non-stop barrage of gambling ads when people aren’t even thinking about gambling (like when they’re watching a game) is certainly one example of this, an example we could quickly get rid of.
Basically, we need to stop pretending that 24/7 in-your-face betting on everything is some anti-black market measure. If people want to bet, so be it. We don’t need to beat them over the head with it all day long.
Stray Thoughts
Consider upgrading to paid. Not only will you unlock a large amount of paywalled content, but I spent the last two days moving kids into college, and every little bit helps!