Prediction markets are at the center of a growing jurisdictional battle between the CFTC and U.S. states.
A regulatory battle is unfolding over who should control prediction markets, and CFTC Chair Michal Selig has drawn a clear line in the sand: the CFTC, not the states.
What are Prediction Markets?
Prediction markets (also known in the U.S. as event contract markets) are peer-to-peer platforms where bettors, punters or investors speculate on the outcomes of events, including sporting contests, elections, economic indicators and even potential geopolitical developments.
In February, the CFTC filed an amicus brief in a case before a federal appeals court, arguing that because “these products are commodity derivatives,” the Commodity Exchange Act (CEA) gives the CFTC “sole regulatory jurisdiction over prediction markets.”
The agency further argued that these markets fall “squarely within the CFTC’s regulatory authority,” even classifying them as Designated Contract Markets (DCMs), the same classification given to long-established and liquid markets such as the CME Group exchanges. The case involves the Nevada Gaming Control Board, which is seeking to protect the gaming industry in that state.
Chair Selig then made public statements reasserting the CFTC’s “exclusive jurisdiction” over prediction markets. He argued that the CFTC has regulated such markets for more than two decades and views them as legitimate financial markets, warning anyone challenging the agency’s authority that the CFTC “will see you in court.”
A Growing Jurisdictional Battle
Operators of prediction markets want the CFTC to have jurisdiction because the agency has generally appeared more amenable to these markets operating. Federal oversight would also allow platforms to operate nationally.
From a marketing perspective, CFTC regulation could allow operators to frame participation as “investing” or “trading” rather than “betting” or “gambling,” presenting these platforms as federally regulated financial markets.
Meanwhile, many states want to retain the ability to restrict or ban certain markets, particularly those that closely resemble sports betting. Traditionally, sports betting has fallen under the jurisdiction of state gaming control authorities. In some states the aim is to prohibit it entirely as a means of protecting citizens; in others, the objective is to tax and regulate the activity.
The disagreement is no longer theoretical. It is already being tested in courts across the United States.
Currently, there are at least 50 cases making their way through courts in various states. The operator of one major prediction market is already involved in litigation against at least eleven states, so the CFTC is unlikely to lack opportunities to test its arguments.
In one recent ruling, the state concerned concluded that providing access to sports event-contract markets to consumers within that state violated state law. The market operator then sought an injunction in federal district court to prevent state authorities from regulating its activities. However, once again the court at first instance sided with the state and declined to grant the requested injunction.
Appeals have already begun in several of these cases, making it increasingly likely that the issue will eventually reach the Supreme Court.
What’s at Stake
The outcome of these cases could have significant ramifications either way.
If the CFTC prevails, prediction markets could become firmly established as federally regulated financial markets. In the extreme, activity resembling sports betting could potentially fall within CFTC jurisdiction, possibly leading to such markets operating only on CFTC-regulated Designated Contract Markets. This could significantly affect gaming currently conducted through state-regulated facilities or on Tribal lands.
If the states prevail, prediction market platforms could face a patchwork of bans and taxes imposed at the state level. At the same time, the definitions within the Commodity Exchange Act, described by Chair Selig as “extraordinarily broad,” would have clearer boundaries placed around them.
Entrenching its position that it holds exclusive jurisdiction, the CFTC is now seeking public comment on proposed rules relating to prediction markets. Several of the questions focus specifically on “gaming” and “contests,” including sporting competitions.
For now, however, the regulatory contest over prediction markets is far from settled. If Chair Selig is correct, the courts — not the states — will ultimately decide who governs them.
Sources
CFTC Amicus Brief press release
Selig’s Wall Street Journal op-ed