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

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."

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, which sent the matter back to a federal judge in California who decided that prediction market access should be blocked in certain tribal jurisdictions.

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."

Even so, the CFTC approved the new interpretation and issued it late Thursday, saying, "The commission expects DCMs to evaluate their access criteria, exchange rules, and intermediary access arrangements to ensure compliance."

A spokesperson for Kalshi didn't respond to a request for comment on its plans for compliance by press time.

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. He's also embarked on an array of legal fights with the states that have claimed prediction market firms are offering unregulated gambling that belongs under their own, local gaming laws — some of which, like Utah, ban gambling entirely.

In July, Selig's CFTC had sought to demand Kalshi defy a Michigan intervention that ordered trades be reversed there, with the CFTC using much the same argument embedded in this week's fuller interpretation.

“Derivatives markets must operate on a uniform basis at a national scale in order to achieve the purposes set out in the Commodity Exchange Act,” Selig said in a statement alongside the latest guidance. “Geographic access restrictions are inconsistent with those purposes and the act’s impartial access requirements.”

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."

"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, which also flagged election betting as being especially localized.

"Election markets may be particularly sensitive to harms stemming from geographic access restrictions," it said. "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."