With the sun setting on another fine spring afternoon in London, Rick Arpin, US Gaming Leader and Managing Partner at KPMG, bids good afternoon and good morning to global attendees as they settle in for the latest instalment of the organisation’s Gaming Webcast Series – which focuses on prediction markets and exchange betting.
The scheduling of the webcast could hardly be timelier, with the likes of New Jersey, Nevada and now – most recently – Ohio, all filing cease-and-desist letters in prediction market Kalshi’s direction, ordering the company to halt all unapproved betting operations. Subsequently, Kalshi CEO Tarek Mansour took to Twitter (X) to confirm the company’s plans to engage in legal action against at least the states of Nevada and New Jersey.
Indeed, this brief overview provides context for only the past week. However, the context behind the legal contention surrounding prediction markets stems back all the way to the 19th Century.
The history
As explained by Arpin, fundamental to understanding this newly raised legal contention is the history of the US derivatives market, which began in 1848 following the founding of the Chicago Board of Trade (CBOT) – which was incepted as a centralised marketplace for agricultural commodities – at the time. The CBOT authorised the trading of futures contracts in 1865, which were later deemed to be legitimate financial instruments in 1905 by the Supreme Court of Chicago, separating futures contracts from gambling entirely. Then, following the passing of the Commodity Exchange Act (CEA) in 1936, the Commodity Futures Trading Commission (CFTC) was founded in 1974.
In more recent history, 2010 saw the implementation of the Dodd-Frank Act, which amended the CEA to streamline its market transparency, improve consumer protection and alleviate systemic risk via the expanding of the CFTC’s authority over regulating swaps and futures.
As evidenced above, by the 2020s, legislation pertaining to prediction markets has been deeply engrained in US law, and subsequently fined tuned, for a period of over 150 years.
The legalities of election betting
Where then, does the legality fall for prediction markets? According to the CEA, prediction markets are, as reiterated by KPMG, perfectly legal. Simplified, the way they work is a buyer will acquire a yes or no contract on an event’s occurrence – and if that event happens / doesn’t, it pays out.
However, the CEA contains a special ruling which can trigger a review of an events contract. More specifically, this ruling contains six categories within which a prediction market could fall into and – if it does so – it opens itself up to CFTC review and possible termination. Of those six categories, three are applicable to election betting prediction markets and, by extension, Kalshi.
The first is if an activity is unlawful by federal or state law. The second and third applicable categories that can trigger a review are if a prediction market is considered to be a form of gaming – or contrary to public interest.
It will be telling what the states and the CFTC do in the coming months
Of course, these trigger points have already prompted a review by the CFTC, which argued that Kalshi’s election prediction markets should be illegal as they can be considered gaming or gambling in some states, whilst also triggering concerns around election integrity and foreign interference. Kalshi, however, argued that they were operating under the regulatory supervision while providing economic hedging and market integrity safeguards.
In this instance, the US District Court for the District of Columbia ruled with Kalshi – despite also expressing that they were sympathetic to the CFTC’s election manipulation argument.
Sports betting markets: What’s the score?
Now, as further specified in the KPMG webcast by Arpin, alongside KPMG Tax Partner Robert Stoddard and Advisory MD Duncan Hennes, the same laws apply to sports betting prediction markets. Yet – if they trigger the gaming category – that does not mean they will be automatically prohibited at federal level, as they must also present a conflict of public interest to be outlawed.
Despite this, there are a number of particularly dark grey areas within which these sports betting prediction markets also reside.
Let's circle back to the first CEA category which specified that prediction markets must not be illegal by federal or state law. This is applicable if Kalshi’s sports betting markets are to be considered gambling, as residents in states such as Texas or California – for example – where gambling remains illegal, are presently able to access Kalshi’s markets.
Additionally, in the same vein, prediction markets are currently being offered by Kalshi to anyone over the age of 18 – whereas many states prohibit gaming for under 21s.
Weighing in on the evolving legal contention and the potential implications for the industry, Alex Costello, VP of Government Relations at the American Gaming Association (AGA), expresses her unease.
The lack of guardrails is really concerning
These prediction markets could, however, be marketed as financial products rather than gaming products – which is an argument that could further allow Kalshi to continue to dodge the (potentially) relevant state and other related sports betting taxes – a point alluded to by Stoddard.
Despite this potential argument, prediction markets also abide by a completely different set of AML laws that are not within both the Bank Secrecy Act, and the Wire Act.
These sports betting prediction market also Intersect with the Indian Gaming Regulatory Act (IGRA), as they should be classed at Class III Gaming under IGRA. This is because tribes have entered into compacts with certain states that gives them exclusivity over gaming and sports betting, which adds to the long list of statutes that these events contracts don’t consider.
Where could this all go?
Weighing in on the evolving legal contention and the potential implications for the industry, Alex Costello, VP of Government Relations at the American Gaming Association (AGA), expresses her unease.
These products are – in all likelihood – going to be considered gaming by the CFTC.
The big question is, are they contrary to public interest?
This is, indeed, the question on everyone's lips. By all appearances, this highly complex legal situation is fraught with both legislative potholes and hidden regulatory loopholes. In many ways, it resembles a game of cat-and-mouse. There is little certainty surrounding the potential outcome, but one thing that is certain is that the CFTC and Kalshi, alike, are unlikely to let this contention fade away without a fight.
