Regulator drops appeal in prediction market case 451811

13 May 2025

By I. Nelson Rose

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I must start by saying I like prediction markets. Allowing people to trade event contracts, that is, make bets on future real-world events, has led to extraordinarily accurate forecasts. Of course, it invites insider trading. But that is not always bad.

In 2003 the Pentagon’s Defense Advanced Research Projects Agency, developer of the Internet, planned to set up an experimental Policy Analysis Market to predict terrorism and other future events in the Middle East. An opponent, Senator Ron Wyden (D.-Or.), put it this way:

You may think early on that Prime Minister X is going to be assassinated. So you buy the futures contracts for 5 cents each. As more people begin to think the person’s going to be assassinated, the cost of the contract could go up, to 50 cents.

The payoff if he’s assassinated is $1 per future. So if it comes to , and those who bought at 5 cents make 95 cents. Those who bought at 50 cents make 50 cents.

Opponents were able to kill the plan, and get extensive media exposure, by calling the plan “gambling.” “Spending taxpayer dollars to create terrorism betting parlors is as wasteful as it is repugnant.” By the next day, the plan was dead.

It might be in bad taste, but if there had been a market in a Palestinian attack on Israel before October 7th you know some greedy leaders of Hamas would use their insider knowledge to buy the contracts, running up the price and tipping off Israel to take steps to prevent the invasion. Who better than the Palestinian terrorists themselves to tell us what they are planning to do?

Nevada used to allow its sports books to take bets on just about anything, like which movie would win the Oscar for Best Picture. Then regulators figured out that someone puts the card in the envelope, long before the Academy Awards show is broadcast.

The latest twist is futures markets on real-world sports events. Companies like Kalshi are offering markets on events such as the Pro Men’s Basketball Champion – currently about 45 cents to win $1.00 on Oklahoma City – and who will be the next Pope. Kalshi does try to prevent insiders rigging the system, by prohibiting players, coaches, etc., from trading. It’s unclear how a futures market open to the general public would enforce that prohibition. And Kalshi did make a market on which film would win the Academy Award.

Futures markets require that for every person who predicts that an event will take place, there must be another person who predicts that it will not. Prediction market makers make their profits by charging a small fee for each transaction, while most traditional sports books accept bets directly but pay off at less than full odds, e.g. bet $11 to win $10.

The reason we haven’t seen futures market in the U.S., is they have been illegal for centuries. In 2011 I wrote an article for Gaming Law Review and Economics “Gambling and the Law®: How Securities Trading Became Legally Not Gambling.” You can find it on my website: https://www.gamblingandthelaw.com/how-securities-trading-became-legally-not-gambling/ Trading in commodities, that is, betting on the future price of produce like wheat and corn, were illegal gambling under the laws of almost every state. States even tried to, and often succeeded, in outlawing stock markets. Because commodities’ futures serve a valuable role in the U.S. economy, the U.S. Supreme Court created legal fictions for more than half a century to keep these markets open. Finally, Congress stepped in during the Great Depression to enact the 1933 and 1934 Acts, to expressly overrule state anti-gambling laws.

Federal statutes later expanded the ability to trade contracts on future prices to include fictional baskets of stocks. But not everything is legal. Usually, the trade must be listed on a regulated exchange.

Futures markets are not legal because they are games of skill. They are legal because Congress has declared them to be legal, if certain criteria are met. Internet gambling giant Flutter just announced it is considering getting into the U,S, prediction market, using its British-based BetFair Exchange, which allows exactly the same thing outside the U.S.

Kalshi and other market makers for event contracts are attempting to squeeze an entire industry, sports betting, through a tiny loophole. Prior to Kalshi, the only legal markets for future events were the University of Iowa’s Electronic Market and PredictIt operated by the Victoria University of Wellington. These had low dollar limits and were designed as educational and research projects. The federal Commodity Futures Trading Commission issued “no-action” letters to the IEM and PredictIt, stating that as long they conform to certain guidelines, the CFTC will take no action against them. Anyone else who tried to set up a futures market was closed down and forced to pay large fines.

But Kalshi decided to ask the CFTC for permission to open a for-profit market in event contracts to the world.

The first case involved the 2024 elections for the U.S. Congress. The CFTC prohibited Kalshi from listing its “Congressional Control Contracts” on its regulated exchange on the ground that they amount to gaming or election gambling,

Surprisingly, District Judge Jia Cobb not only said it was a close case, but she ruled against the regulators.

It is not a close case. There are at least half a dozen reasons for bets on elections and sports events as futures contracts to be kept illegal, starting with the Commodities Exchange Act, which declares that the CFTC may determine that contracts “are contrary to the public interest” if they “involve activity that is unlawful under any Federal or State law . . or gaming.”

It is the states, not the federal government, that decides what forms of gambling are legal within their borders. Utah should not be forced to accept sports betting. Even Nevada has filed suit, because there is no experienced federal regulator overseeing this new form of gaming and nothing like the background checks and safeguards Nevada imposes on its licensed sports books. And, of course, an unlicensed operator accepting bets across state lines on elections and sports events is unlawful under federal laws and the laws of every state.

There also has to be a legitimate public purpose for the future event contract; commodity futures are supposed to be used for hedging, for example, like NABISCO protecting itself against an unexpected rise in the price of future deliveries of sugar. What hedging can there be for which team will win the game tomorrow night?

And it is hard to imagine anything more like gaming than an event contract that is decided by which team wins.

But in a 5 May filing in the U.S. Court of Appeals for the District of Columbia Circuit, the CFTC announced that it is dropping its appeal of “Congressional Control Contracts” elections. If betting on candidates is now legal, then the door has been opened for future events contracts on sports, the Academy Awards and everything else.

How could this happen? Some clues:

On 11 January 2025, after his father was elected president, Donald J. Trump, Jr., announced that he has become a paid strategic adviser to Kalshi. I could not find out how much he is being paid.

Trump then appointed a new head of the CFTC, Brian Quintenz, who was a member of the Board of Kalshi.

And Eliezer Mishory, Kalshi’s top lawyer, quit the company to lead the Department of Government Efficiency, the infamous DOGE, at the U.S. Securities and Exchange Commission.

Although the rule of law in the United States was severely crippled when Chief Justice John Roberts (my former Harvard Law School classmate) and his conservative Republican colleagues on the Supreme Court declared that the President has the immunity of a king, there are still some courts that are at least slowing down some of the worst authoritarian actions and open corruption. States, including Nevada, Illinois and Michigan, and their gaming regulators, are filing actions against Kalshi.

So far, Kalshi, and Donald Trump, Jr., are winning. And everyone is being polite, waiting to see how the federal cases play out.

But it is possible that creating a market for future events on NFL games may be going too far for some anti-gambling, states’ rights Attorney General or District Attorney. Illegal gambling triggers all of the organized crime statutes on the state as well as federal level.

More likely, one of the federal cases will end up in the U.S. Supreme Court. Many of the conservative justices believe strongly in states’ rights and would not like the idea that a federal regulator could overrule state restrictions and prohibitions on sports betting. Liberal justices will worry that allowing futures contracts on sports will greatly increase legal gambling and hurt the poor, while futures contracts on elections will further undercut belief that voting is not rigged.

A little-known fact about John Roberts: while still in private practice, he was the lawyer for the American Gaming Association, the casino trade group, successfully convincing the Supreme Court to allow legal gambling to over radio and television. He understands gaming and is not likely to look kindly on allowing barely regulated sports betting to come in through a loophole, no matter who is president or whose son is the strategic adviser.

Regulator drops appeal in prediction market case is republished from casinocitytimes.casinowinning.net.