Invest4 publishers3 min readPublished
CFTC tries to settle its prediction-market fight with the states by redefining swaps
CFTC sent the White House two rules on Sept. 28 that would define event contracts as swaps and carve out casino-style gambling products. The agency is trying to settle by rule a state-federal fight that has split appeals courts and now sits before the Supreme Court.
The Investor · Invest desk
What happened
- A federal court last week found Kalshi's sports-tied contracts are not swaps and are subject to state gambling laws, siding with Ohio and Tennessee.
- New York sued Polymarket last week to ban it within the state, following an earlier state action against Kalshi.
- A CFTC advisory this week said contracts settling on whether a named person says certain words should be presumed readily susceptible to manipulation.
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Why it matters
- constraint Even a final swap rule would leave standing the holding that the Commodity Exchange Act does not preempt Ohio and Tennessee gambling law, so state suits need not end on the definition.
- exposure Whatever the text calls casino-style falls outside the swap definition, and into state regulators' reach, once the interim rule is approved, and operators cannot yet tell which contracts that covers.
- precedent A second CFTC rulemaking at the White House puts crypto and event-contract policy on the agency's timetable, and operators and states will be answering rule text the regulator drafted.
The carve-out can take effect before the claim does [2]. The exclusion for "casino-style gambling products" is an interim final rule, RIN 3038-AF81, and could take effect on approval [3]. The inclusion of event contracts, RIN 3038-AF82, is a proposed rule that goes to public comment first [2]. White House budget-office review is typically the last step before a rule goes out for comment, according to CoinDesk's reporting as cited by PYMNTS [12]. So the part of the package that concedes jurisdiction to the states can be in force while the part that asserts it is still open for comment [2].
I think the order is aimed at judges. Chairman Michael Selig has argued that CFTC authority over swaps is exclusive. If it is, state gambling regulators cannot reach the platforms [7]. The agency has countersued states that sued operators for illegal gambling [8]. Handing casino-style products to the states first shrinks the federal claim before a court has to weigh it. The counter-reading is that the carve-out is housekeeping, a boundary drawn so the inclusion rule does not sweep in products the CFTC never meant to supervise. The CFTC has not made the text of either rule public [17].
The harder limit is in the Ohio and Tennessee ruling. After finding that Kalshi's sports contracts were not swaps, the court went a step further [9]. "It also held that, even if the contracts qualified as swaps, the CEA does not expressly or implicitly preempt Ohio and Tennessee gambling laws," PYMNTS wrote [10]. A rule that redraws the swap definition goes at the first holding. The second holding assumes the contracts are swaps and leaves state law standing anyway [1].
If the text keeps sports contracts inside the swap definition, the CFTC is contradicting that court head-on while conflicting appeals-court rulings sit before the Supreme Court [6]. Should "casino-style" turn out to cover sports contracts, the agency will have conceded the category the Ohio and Tennessee case was about [9]. A Supreme Court decision on preemption grounds would make the definition matter less for suits like New York's against Polymarket [11]. I'd expect the first outcome, given Selig's exclusivity argument [7]. A published RIN 3038-AF81 that lists sports contracts as casino-style would prove that wrong [3].
The only size estimate in the record is the CFTC's own label. It classified both rules as not economically significant [5], though they decide who supervises event contracts traded on Kalshi, Polymarket, Crypto.com and Robinhood [4][7]. The agency has also stopped waiting for Congress. It recently sent a separate crypto-markets rulemaking to the White House, part of a post-Clarity Act pattern of writing its own rules [15].
The agency is asking for exclusive authority while it investigates former Rep. Adam Kinzinger over Kalshi bets tied to his own pardon [14]. Bloomberg reported that bank regulators and federal lawmakers are worried about Polymarket contracts on the likelihood of bank failures [16].
What to watch
- Publication of RIN 3038-AF81 and whether its definition of casino-style gambling products reaches sports contracts.
- Whether the White House clears the interim final rule before the Supreme Court acts on the appeals-court split.
- Whether either rule addresses preemption of state gambling law, the second ground of the Ohio and Tennessee ruling.