Federal regulation looms as 11 states go after prediction markets

Kalshi is facing off with state regulators around the US, who claim that prediction markets are a form of gambling and recognize that they are a significant source of potential revenue.

Momentum is building across US states to regulate or restrict prediction markets, with multiple legal actions targeting platforms such as Kalshi.

On March 20, Carson City District Court Judge Jason Woodbury in Nevada made his state the first to issue a temporary ban on prediction market Kalshi from operating. Gaming officials said that the platform violated state gambling laws.

Nearly a dozen other states have also issued various forms of legal proceedings. Most have filed cease-and-desist letters, while Arizona has even brought criminal charges against Kalshi. Other states are considering new legislation for prediction markets.

The patchwork enforcement across states has brought national attention, and regulations at the federal level are looming.

In 11 states across the US, local authorities have taken legal action against prediction markets like Kalshi and Polymarket.

The state of Nevada managed to initiate a temporary ban, which blocked Kalshi from operating in the state for 14 days. The motion was initially put forward by the Nevada Gaming Control Board. 

The board’s chair, Mike Dreitzer, said that prediction markets “facilitate unlicensed gambling” and are therefore illegal in the state. “We have a statutory duty to protect the public," he said.

Sports betting and gaming lawyer Daniel Wallach wrote that the order prevents Kalshi from offering “event-based contracts relating to sports, politics and entertainment to people within Nevada without first obtaining all required licenses.”

Just a few days earlier, the neighboring state of Arizona filed criminal charges against the firms behind Kalshi. Arizona Attorney General Kris Mayes’ office filed a complaint, alleging that Kalshiex LLC and Kalshi Trading LLC were “running an illegal gambling operation and taking bets on Arizona elections, both of which violate Arizona law."

The announcement claimed Kalshi ”accepted bets from Arizona residents on a wide range of events in violation of Arizona law. These events included professional and college sporting contests, proposition bets on individual player performance, and whether the SAVE Act would become law.”

Betting on sports requires a gaming license, and Arizona law outright bans bets on elections.

Other states have either put forward or are considering new regulations. In Utah, State Representative Joseph Elison put forward HB243, which would define proposition betting as “a gambling bet on an individual action, statistic, occurrence, or non-occurrence.” 

In Pennsylvania, Representative Danilo Burgos announced plans to introduce legislation that would regulate prediction markets and put them under the regulatory purview of the Pennsylvania Gaming Control Board. The bill will propose:

a 34% state tax and 2% local share assessment on gross revenue, 

to include self-exclusion lists for user protection, and 

strict Anti-Money Laundering (AML) and Know Your Customer (KYC) protocols.

Numerous other states have issued cease-and-desist letters to prediction markets and attempted to block their activities through the courts. Not all of them have been successful. In Tennessee, Judge Aleta Trauger of the US District Court for the Middle District of Tennessee blocked a state injunction that would prevent Kalshi from operating there. The court concluded that the event contracts were “swaps” under the Commodity Exchange Act (CEA), which gives the US Commodity Futures Trading Commission (CFTC) exclusive jurisdiction.

Kalshi did not respond to Cointelegraph’s request for comment at publishing time. 

The patchwork of different enforcement actions — and varying reactions to them by different courts — has brought into question who should regulate prediction markets and how. Prediction markets and their proponents believe that the power should lie with the federal government and the CFTC. 

Elison, the sponsor of the law in Utah, told local media, “It’s a huge gray area and there’s lots of lawsuits all over the country right now [...] debating this very thing, trying to find out what are the actual definitions.”

“They’re flying under what’s called prediction markets, and prediction markets are regulated by the Federal Commodities Exchange [sic]. That’s why they’re able to do it,” he said. 

A Kalshi spokesperson previously told Cointelegraph, “States like Arizona want to individually regulate a nationwide financial exchange, and are trying every trick in the book to do it. As other courts have recognized and the CFTC affirms, Kalshi is subject to federal jurisdiction.”

“It's different from what sportsbooks and casinos offer their customers, and it should not be overseen by a patchwork of inconsistent state laws,” they stated.

Aaron Brogan, founder of crypto-focused law firm Brogan Law, wrote, “Prediction markets’ ‘crime,’ the reason that so many states have pursued and will continue to pursue action against them until they win or are stopped, has nothing to do with the merits of these markets.”

Since they are currently regulated under the CEA, and therefore under the oversight of the CFTC, “states will not be able to control them, and more importantly, may not be able to tax them,” Brogan said. According to the American Gaming Association, at stake is billions of dollars in tax revenue across the 40 states where online sports betting is legal.

Some state lawmakers aren’t so shy about this. Burgos wrote that the “regulatory arbitrage” of prediction markets skirting state laws “leaves our constituents vulnerable and deprives the commonwealth of significant tax revenue.”

Speaking to local media, he said that the state should have the ability to tax an activity, particularly when it can harm constituents. "It's another opportunity to expand the tax base. [...] And like everything else that has a potential harm for our community, for our communities. It can create bad habits or worse habits in our communities. That's one of the dangers that I see."

There is also pressure at the federal level on prediction markets. Senator John Curtis of Utah introduced a bill called the Prediction Markets Are Gambling Act. This would amend the CEA to prevent “event contracts involving sports and casino-style games.”

Curtis told Utah state media that the act would put power back with the states. “Our bipartisan legislation clarifies regulatory jurisdiction, ensuring that states can maintain their authority over sports betting and casino gaming. The Prediction Markets Are Gambling Act is about respecting states' authority, protecting families and keeping speculative financial products out of spaces where they don't belong."

In the meantime, the CFTC is seeking public input on its rulemaking for prediction markets. The CFTC currently has just one sitting commissioner, Chair Michael Selig. He has previously stated the agency would defend prediction markets. 

According to Brogan, if the CFTC further liberalizes prediction markets, and the issue of preemption goes to the Supreme Court, “all that counts, through all the sound and fury, is counting to five.”

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Source: CoinTelegraph