Those who came to the highly anticipated SBC Summit Americas panel on prediction markets seeking clarity came away only knowing the issue is still rife for debate, with no clear-cut conclusions.
However, the discussion did generate its fair share of drama as well as insight, particularly regarding the legal arguments that might stem from sports event contracts as well as potential options for actions for groups like tribes or state regulators.
Moderated by Christopher Gerlacher of PredictionNews, the panel represented opinions from attorneys, an exchange operator and a consultant with several tribal clients concerned about yet another new vertical honing in on the gaming industry.
Gaming industry increasingly concerned about new verticals
“As my clients watch this, they can’t do anything, and it’s frustrating,” noted iGaming Capital CEO Melissa Blau. “Today, it’s predictions. Yesterday was sweeps. They’re still processing sweepstakes, now they have to deal with this. The reaction has been different for different tribes, for different clients, depending on how knowledgeable they are. Most are not knowledgeable. They don’t know this headwind that is about to be taken away from them. But the problem is, the ones that do know can’t do anything about it.”
Blau argued the legal debate about whether or not sports-related event contracts are legitimate is largely academic. Also, given the composition of the administration and that the nominee for the chair of the Commodity Futures Trading Commission (CFTC), Brian Quintenz, is also a Kalshi board member, she believes the writing is already on the wall.
Moreover, while sports betting exchange Sporttrade CEO Alex Kane argued that exchanges generate one-hundredth of the hold that sports betting at traditional operators does, Blau suggested that contracts around the Oscars already indicated Kalshi’s ability and intent to create a parlay-like experience with better returns.
The actual economic impact of event contracts on the existing industry lacked consensus on the panel, as did the legality of these contracts in the first place.
CFTC special rule on gaming remains at heart of debate
Attorney Daniel Wallach argued the issue is moot, even with a potential new position on the phenomenon by the CFTC. He pointed to a special rule enacted by the CFTC in 2011 that expressly prohibited gaming-related contracts, amongst other things.
“It’s been on the books for the last 14 years,” he said. “That rule is a per se blanket prohibition against event contracts that involve, relate to or reference the following categories: terrorism, war, illegal behavior, illegal activity [and] gaming.”
David Aron, counsel at Jones Day, also cited the rule as well as a 2021 case where a company, ErisX, was preparing to self-certify event contracts.
“The CFTC reportedly viewed those contracts as gaming and was planning to reject them, so ErisX withdrew those contracts from consideration. So the CFTC never issued an order disapproving them,” Aron explained.
At the time, CFTC Commissioner Dan Berkowitz explained the rationale for why the contracts were deficient. In it, he agreed with several of the arguments surrounding their legitimacy, but suggested they lacked utility as a mechanism to hedge on an investment.
How many prongs are in the sports contract validity test?
Kane also referenced Berkowitz in what was arguably the most heated part of the debate.
Wallach and others interpret the special rule as prohibiting markets in the aforementioned categories. The sentence after those categories also prohibits event contracts that are not in the public interest. While Wallach argues the rule reads such that contracts mentioned in the first sentence of the rule preclude them altogether, Kane argued it is actually a two-pronged test.
“He’s got all these papers here, and he seems to know all the answers, but even Dan Wallach has failed to read the order from then-Commissioner Dan Berkowitz where he talks about it’s a two-part test as to whether a contract is permissible.”
In other words, a contract that is both gaming and not in the public interest would be prohibited, but a contract that is gaming-related and in the public interest would not.
Kane pointed to the Summit’s host state of Florida as an example where he sees sports contracts as being in the public interest. Hard Rock Bet and the Seminole Tribe have a monopoly on sports betting, which Kane called out in his argument.
“The company that is operating here as a monopoly doesn’t share tax revenue, does not pay tax revenue, right? Those millions of people that are subjected to worse odds or worse experiences, no competition, are they part of the public? Is it in their public interest that they have one option?”
Wallach countered that both Acting Chair Caroline Pham and Quintenz have stated publicly that the special rule prohibits these categories even if deemed to be in the public interest.
Semantic debate aside, as Blau noted, it appears the CFTC is not taking action. The presence of Donald Trump Jr. as a strategic advisor for Kalshi and Quintenz on Kalshi’s board suggested to the panel that the organization overseeing these contracts is “captured” and compromised in doing its governmental duties.
Panel agrees that CFTC is a ‘captured’ organization
Wallach noted that the courts are not captured and suggested that New Jersey’s appeal to the Third Circuit Court over Kalshi’s temporary injunction in the state is one to keep an eye on.
Aron also suggested there could be potential for a group like the National Indian Gaming Commission (NIGC) or a state regulator to take the CFTC to court and demand that the body enforce the regulations the group has on the books. Blau, however, noted that one of her clients went to the NIGC about the issue and the group said their hands were tied.
While the courts remain the most viable option to challenge the legality of event contracts tied to sports, Wallach questioned whether those who want to get into new states want it to be done this way.
“I know everybody in this room wants in on this new vertical. But doesn’t it bother us at a basic level that this is how it’s happening?” he asked. “Because the son of a president is a strategic advisor to a gaming company. I’ve been coming to SBC [Summits] for years. I’ve never once seen Donald Trump Jr. in this room or any room rendering strategic advice to any company.”
