A full week after the Fourth of July, panelists exchanged fireworks Thursday at a session in Louisville on prediction markets.
It is not often that two litigants appear on the same panel with divergent positions on a hot-button issue. But that’s what transpired at the National Council of Legislators From Gaming States Summer Meeting.
On one end of the dais sat Joshua Sterling, an attorney representing Kalshi and former director of the Market Participants Division at the U.S. Commodity Futures Trading Commission. On the other sat Michael Hoenig, an associate general counsel of gaming for Yuhaaviatam of San Manuel Nation, a California tribe. San Manuel is among the large coalition of tribes and tribal organisations that has filed amicus briefs in state suits against Kalshi.
NCLGS President Shawn Fluharty joked that organisers deliberately placed Hoenig on a separate table as far away as possible from Sterling. The panel took place at a time when the regulatory environment for prediction markets has reached a proverbial fork in the road.
Ongoing litigation in Maryland
The CFTC, the nation’s federal regulator of derivatives markets, is conducting a review on the treatment of sports event contracts on prediction markets. It comes as a plethora of states have issued cease-and-desist orders this year against Kalshi and Crypto.com for operating illegally in their jurisdictions.
After suing in Nevada and New Jersey, Kalshi was granted preliminary injunctions in both states. At present, there is also ongoing litigation in Maryland on the legality of sports event contracts in the Old Line State. Last month, a group of 27 federally recognized Native American tribes filed a motion for leave to file an amicus brief in Maryland federal court. Kalshi immediately took exception with the brief, describing it as “untimely and unhelpful”.
More broadly, regulation–or lack thereof– for sports event contracts on prediction markets has led to an intense debate on issues centering around federalism versus states’ rights in sports betting.
In April, MGM Resorts CEO Bill Hornbuckle told iGB that if the casino industry does not proceed properly in its fight against prediction markets, it could lead to federal oversight of the industry.
The debate on preemption
Earlier this year, another California tribe, the Santa Ynez Band of Chumash Indians, submitted a formal letter to the CFTC during a public comment period. In the letter, the tribe argued that permitting sports event contracts to be traded on a national exchange would “effectively preempt” a series of tribal laws. The statutes, they contend, have been established by sovereign governments to protect the welfare of their citizens.
The litigants have differing opinions on a CFTC regulation pertaining to event contracts that are deemed to be contrary to the public interest.
Regulations implemented in the wake of the 2010 Dodd Frank Act enable the CFTC to apply a public-interest test for event contracts. The rule, CFTC regulation 40.11, authorises the commission to ban contracts if they are contrary to the interest of the public. Enumerated examples of this in the regulation include:
- activity that is unlawful under any federal or state law;
- terrorism;
- assassination;
- war;
- gaming; or
- other similar activity determined by the commission, by rule or regulation, to be contrary to the public interest.
Examining the public interest test
Hoenig emphasised that his comments represented the views of the San Manuel Nation, not tribal gaming entities in totality. Nevertheless, he noted that the tribe does not believe that sports contracts are permissible because they violate the public interest.
Moreover, he indicated that the tribe rejects the premise that the CFTC has exclusive jurisdiction for regulating the contracts on tribal lands. To buttress his point, Hoenig argued that there is another federal law–the Indian Gaming Regulatory Act–that gives the National Indian Gaming Commission jurisdiction on gaming activity that takes places on those lands.
Sterling, a partner at Washington D.C. law firm Milbank LLP, represented Kalshi in a matter last fall before the U.S. Circuit Court of Appeals for the District of Columbia. There, he argued that Kalshi had the right to offer derivative contracts based on the outcome of the U.S. presidential election. After notching a win, Kalshi handled trading volume on the election in excess of $500 million. Sterling criticised Hoenig’s interpretation on the rule in a fiery rebuke.
While Sterling admitted the activities are enumerated in the Commodity Exchange Act, he argued that at no point is it explicitly stated that the activities are “illegal” in the statute. Rather, the attorney contended that the activities are subject to review on whether they are contrary to the public interest.
Trading on dangerous situations
On Friday, West Virginia Attorney General JB McCluskey weighed in on prediction markets during a keynote address. McCluskey noted that event contracts on morbid outcomes such as whether US President Donald Trump will be assassinated are “dangerous,” on its face. For clarity, in accordance with Rule 40.11, it does not appear that any US prediction market has offered contracts pertaining to assassination.
Following an assassination attempt on Trump last July, a trader told the Wall Street Journal that he bet on the Republican candidate to win the election based on the sympathy he would garner from the incident.
The individual made the trade on Polymarket, a crypto-based offshore exchange. The trade on whether Trump would win the election differs starkly from contracts on whether another assassination attempt would be made on his life.
McCluskey believes some middle ground can be attained in the dispute between prediction markets and tribal entities. One option is to create a carve-out that prohibits the trade of sports event contracts on tribal lands, but permits the activity elsewhere in a state.
Lack of state regulations on commodities
One area that the CFTC regulates is oil futures contracts, where the commission sets limits on the number of contracts a trader can hold. According to the mission of the agency, the regulations are aimed at preventing considerable speculation on the market.
Despite the regulations, Sterling noted that WTI crude futures sunk into negative territory at the height of the Covid-19 pandemic, falling below zero for the first time on record. The commission is also the federal agency responsible for regulating wheat futures. In fact, there is some sentiment that the Grain Futures Act of 1922 served as the foundation of the Commodity Exchange Act.
Yet, there isn’t a single jurisdiction on the state level that regulates trading on oil or wheat futures, Sterling explained.
“How many contracts are event dependent – oil, wheat, interest rates, or foreign exchange rates?” Sterling told iGB following the panel. “‘Hey, if you can cause one thing to be licensed, you can cause everything else to be licensed’. This is an industry-wide issue that has very little to do with events.”
Next steps
Asked on where to draw the line between a sports wager that is regulated by a state and a sports event contract that has characteristics of a financial derivative, Sterling cited a relevant federal statute. In response to a question from Fluharty, Sterling invoked Section 2(a)(1)(A) of Title 7 of the United States’ code. According to Sterling, any contract that is a swap, a futures contract or an option is traded on a CFTC licensed-marketplace and is subject to the exclusive jurisdiction of the CFTC.
Still, some question whether a single-event sports contract should be classified as a financial instrument. A trade by the City of Philadelphia on the Eagles to win the Super Bowl can hedge the costs of a Super Bowl parade.
But does a $100 trade on a Chiefs’ defeat from an individual who dabbles in the market serve the same financial purpose? Hoenig contends that sports event contracts are a “profound affront” to tribal sovereignty and are fundamentally the same as wagers on sports.
While the panel became contentious at times, the litigants still maintained civility. Moments after it concluded, the four panelists congregated for a group photo. The litigants appeared on the panel with Sporttrade CEO Alex Kane and Prediction News analyst Chris Gerlacher.
Before leaving the stage, Sterling and Hoenig firmly shook hands. Although the Maryland litigation remains active, they will leave the battle for another day.
As the debate on federalism rages on for the regulation of sports event contracts, panelists at the NCLGS summer meeting engaged in a fiery war of words.