Gary Gensler Argues Prediction Markets Should Abide by State Regulations

Gary Gensler, the former Chair of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), has filed an amicus brief to the Sixth Circuit Court of Appeals. In this filing, he argues that sports-related prediction markets, operated by companies like KalshiEx, do not fall under federal oversight and violate state regulations.

Gensler's brief adds to a growing legal debate that questions whether these markets should be classified as federally regulated derivatives. Along with Gensler, several other organizations, including the American Gaming Association, tribal nations, and the Indian Gaming Association, have also filed briefs emphasizing that prediction markets infringe upon state and tribal gambling laws.

The foundation of Gensler's argument rests on the definition set forth in the Dodd-Frank Act, which regulated specific derivatives but did not include sports betting contracts as a category eligible for CFTC oversight. In his brief, he specifies, "Congress did not include sports betting contracts within the statutory Dodd-Frank definition of swap. Such contracts do not fit the CEA’s purpose or the statutory language defining swap, which focuses on hedging economic risk. Sports bets are very rarely, if ever, about hedging." This assertion highlights the distinction between traditional financial instruments and prediction markets that center around gambling.

The ongoing litigation arises from a preemptive lawsuit filed by Kalshi against the state of Ohio, which is trying to assert its regulatory authority over the prediction market. A federal judge previously ruled in favor of Ohio, setting the stage for Gensler's and the other organizations' appeal.

Each side in this dispute is staked on the possible implications of the courts' decisions. If the CFTC successfully demonstrates that it has jurisdiction, states could potentially lose substantial tax revenues. Conversely, if state regulations prevail, prediction market platforms like Kalshi would be compelled to adhere to local laws across the numerous jurisdictions they operate in. Notably, states such as Arizona and Minnesota impose criminal penalties for unregistered gaming platforms.

Gensler's brief further narrates how influential figures in politics, such as Nevada's then-Senate Majority Leader Harry Reid, would likely not have tolerated a regulatory framework that permits sports betting only under the CFTC’s authority. The legal landscape is still developing, with courts divided on the issue. Some courts, like the Third Circuit Court of Appeals, have ruled in favor of the prediction market providers, while others, such as a panel of the Ninth Circuit Court of Appeals, seem to favor state regulations.

Looking ahead, the Supreme Court might ultimately be asked to resolve these conflicting interpretations. The congressional interest in the matter indicates that broader legislative changes may occur as this dialogue continues to evolve across states and federal agencies.