At a Congressional hearing on Tuesday, two former Commodity Futures Trading Commission (CFTC) counsels agreed that the commission took an “extraordinary” and unprecedented step by directly ordering Kalshi to defy a court ruling in Michigan.
During a two-hour meeting of the House Committee on Agriculture’s Subcommittee on Commodity Markets, Digital Assets, and Rural Development in Washington, D.C., on prediction markets and sports event contracts, Rep. Kristen McDonald Rivet (D-Mich.) asked witnesses about the CFTC’s directive to its registrant last week.
The federal agency, the current commission of which consists solely of Chairman Michael Selig, told Kalshi to fulfill its existing sports event contract trades in Michigan despite a state court judge banning them, and subsequently ordering the operator to void and refund pre-existing and unsettled sports trades made by Michigan customers.
McDonald Rivet argued that the CFTC’s action contradicts the idea that the commission is well-equipped to oversee prediction markets activity at a federal level, “particularly when we have a singular federal official [able] to just order registrants to ignore court orders he disagrees with.” She added that such an approach “stretches credulity” about the CFTC’s suitability as a regulator of such products.
CFTC flexing at states, suggest attorneys
Former CFTC General Counsel Rob Schwartz and ex-CFTC Special Counsel Carl Kennedy stopped short of passing judgment on whether the agency was right or wrong to do so, but both acknowledged that it was a radical measure.
“I think certainly it was an extraordinary action,” Schwartz told representatives. “I think more than anything else, it speaks to the need for clarity in this space. Because you’re right: an exchange like Kalshi that is caught in the middle of its federal regulator and a court order, I don’t know what the best advice would be.
“I think in this situation, Kalshi actually had followed the court order by the time the commission issued its order telling it not to, so it was too late. But it certainly was a flex.”
How Kalshi confusion in Michigan happened
As alluded to by Schwartz, who is now a partner at Morgan Lewis, Kalshi filed a proposed emergency rule with the CFTC on July 12 to notify the federal agency that it would “force-liquidate” open sports trades made by certain Michigan users in compliance with the court order. The CFTC announced two days later that it would exercise its emergency authority to order Kalshi to complete those open trades.
“It had been 46 years since the commission had issued any order under its emergency authority,” said former CFTC Special Counsel Carl Kennedy, now co-chair of Katten Muchin Rosenman LLP’s Financial Markets and Regulation Practice. “We are in an extraordinary situation, and I think everybody would like to see better cooperation.”
Speaking from the American Gaming Association’s staunchly anti-sports event contracts position, Senior Vice President of Government Relations Chris Cylke implied that the CFTC’s order to Kalshi takes a drastic change in its stance one step farther. Selig told the Senate last fall that he would ensure the CFTC would defer to the courts on the matter of sports event contracts; since then, he has led the commission not only to support prediction market platforms in existing court battles but also to sue several states in fresh lawsuits.
“Certainly, as others have pointed out, I think it’s an extraordinary flex, if you will, that the CFTC has gone from not being involved in this space and allowing the courts to decide to now telling one of their registrants to intentionally ignore a ruling of a court,” said Cylke.
Familiar prediction markets debate resurfaces
The assessment of the CFTC’s action in Michigan was one portion of a hearing entitled ‘Examining Customer Protections and Market Integrity in Sports Event Prediction Markets‘, which focused largely on familiar issues in the prediction markets debate, including:
- The high-level question of whether the CFTC’s federal authority should supersede state gaming rights when it comes to sports contracts
- Whether enough is being done to safeguard market integrity
- Whether the CFTC has the capacity, let alone the authority, to regulate prediction markets on the whole
“[Prediction markets] have grown to a size and a scope that few of us could have imagined even just two years ago,” said subcommittee chair Rep. Dusty Johnson (R-SC). “As with many emerging technologies, our laws are being asked to answer questions that we had never really contemplated when we wrote the laws years ago.”
Schwartz and Kennedy argued at various points that the CFTC has both the jurisdiction and the capacity to regulate swaps and event contracts. Cylke and Indian Gaming Association Chair David Bean reiterated arguments that sports contracts are just sports betting wearing a different outfit and that Congress gave the power to regulate sports betting to states and tribes.
“The AGA supports responsible financial innovation, but what prediction markets are doing with sports gambling is not innovative,” Cylke said. “Litigation has reached nine federal appeals courts, and lawmakers across the country are responding for one simple reason: these platforms are running backdoor sportsbooks.”
The representative of the AGA and the IGA also combined to paint a picture of prediction markets as being little more than underhand copycats when it comes to sports betting.
“They claim that they are innovators, yet they have invented nothing,” added Bean.
Is the CFTC just one man?
Bean also stressed that while the CFTC is supposed to be made up of five commissioners, its top-level leadership right now comprises only Trump appointee Selig as chair.
“No one voted for this,” he added. “Congress has not passed any new laws on this matter. This is happening because one person has declared that online sports gambling is legal in every state and on every reservation. One man has taken the CFTC from crops to props.”
That was also referenced by Rep. Angie Craig (D-Minn), who stressed that she has “serious doubts” about whether the CFTC is fit for purpose as the regulator of these products. She argued that while the CFTC put forth its proposed rules for prediction markets, with Selig as the only commissioner in place, that equates to “his personal vision.”
“If someone tries to tell me that in the seven months that Mr. Selig has been chairman of the agency, they have acquired all the expertise necessary to understand and surveil these different events traded on prediction markets, including sports, frankly, I wouldn’t believe them,” she added.
Congress could still act on prediction markets
Johnson and full Agriculture Committee Chair G.T. Thompson (R-Penn) both said that this would not be the last hearing on prediction markets.
After Bean urged committee members to advance federal legislation to ban sports and casino contracts, Johnson and Thompson also acknowledged that Congress might still have a role to play, even while litigation in numerous states advances through the courts.
“Where the commission’s authority is found to be insufficient to meet its mandate to support responsible innovation and protect market participants, we will consider legislation as may be appropriate,” said Thompson.
Johnson added that Congress has “an obligation” to further explore the issue and try to find the right path forward.
“It may be that the courts and the commission alone can provide that needed clarity,” he said. “And yet if we don’t ask whether or not there’s an important role for Congress, we are not doing our job.”
