U.S. prediction markets regulator issues demand that clashes directly with courts

The U.S. Commodity Futures Trading Commission is setting up another legal showdown over prediction markets companies who have been ordered by courts to stop doing business in certain states, with the federal regulator saying it's against the rules for exchanges to cut off customers based on geography.

As the agency and industry have lost several court disputes about whether the business violates local gambling laws — including some rulings in recent days — the regulator is making a broad claim that the platforms will be violating federal law if they close their doors in certain jurisdictions, though that's what they've been ordered to do by a number of courts.

Federal Mandate vs. Court Orders

The agency said firms like Kalshi have 30 days to return to a nationwide service or to explain why they can't. Kalshi and other prediction markets platforms that offer event contracts in such arenas as sporting events, weather and politics are registered with the agency as "designated contract markets" (DCMs), and they operate under federal laws that govern the derivatives sector.

The CFTC is now saying that such DCMs aren't allowed to go dark in specific states and must operate nationwide, despite court rulings that demand otherwise. Companies are given 30 days to reopen their doors to closed-off regions, or they have to submit an explanation to the agency for why that "is not feasible."

State-by-State Legal Battles

Kalshi customers in states including Nevada, Washington and Michigan had been geofenced from trading with the company as it's been working out its legal disputes with those and other jurisdictions. Other states, such as Utah (where gambling is entirely outlawed under its constitution) have been vigorously trying to halt Kalshi's operations, with Utah battling the betting through a civil case and in recent criminal charges.

A rash of court actions and decisions have been going against the prediction markets firms (and the CFTC's position) in recent days, including: A U.S. Court of Appeals for the Second Circuit decision against Kalshi and Coinbase that may allow the pursuit of enforcement actions in Connecticut and New York; and the U.S. Court of Appeals for the Ninth Circuit found that Kalshi was likely to lose claims that its contracts don't violate tribal gambling laws.

Consumer advocates Better Markets called the federal court rulings the "latest in a long line of clear and strong decisions stating the obvious: The law is clear; the CFTC's position promoting unrestrained prediction markets is baseless, and it's time for this illegal gambling to be stopped and the grifters and lawbreakers prosecuted."

Market Access Concerns

In the new legal interpretation, the CFTC argued that the platforms cutting away whole states "could increase dependence on a more limited group of market participants, particularly when the excluded jurisdiction accounts for meaningful activity." The guidance flagged sports-related contracts and election betting as being especially localized.

"Sports-related contracts illustrate the point. Insomuch as particular contracts attract disproportionately regional interest (e.g., whether a home team advances to its playoffs), excluding such regions could decrease the contracts' overall liquidity," according to the guidance. "Election markets may be particularly sensitive to harms stemming from geographic access restrictions." Some statewide and more localized election markets may generate the most volume and/or knowledge from residents of the state or locality where the election takes place.

The CFTC is meant under the law to be led by a bipartisan group of five commissioners but is currently occupied by one Republican — Chairman Mike Selig — so commission actions are issued unilaterally. Selig has made prediction markets one of his leading causes and has been trying to foster friendly federal oversight.