Prediction Markets Coalition, a group representing Kalshi, crypto.comand many other platforms filed an Amicus Brief in support of the lawsuit (KalshiEX LLC v. Schuler et al.) takes aim at Kalshi and his preference for the Commodity Futures Trading Commission to have regulatory authority over these platforms. Amicus written by Former Attorney General. Elizabeth Preloger.
Although the document has not yet surfaced online, Paul Grewal, coinbase The Chief Legal Officer released a summary of the discussion.
As shared on X, Grewal summarizes the argument as follows:
- PMs (Prediction Markets) collect market information in a unique way. “First, the market mechanism provides a simple way for various users across the country (or even the world) to share their views. Different participants may base their predictions on different specific information (e.g., macroeconomic factors, cultural trends, or weather patterns). The market mechanism requires them to translate this information into a simple numerical form that can be aggregated with numbers provided by other market participants.”
- PMs are not sports betting. “Prediction market operators do not have the same incentives or follow the same business strategies as sports betting sites. Although prediction markets charge transaction fees, they allow users to enter into contracts at rates that other market participants are willing to accept. A losing prediction also does not convert a losing prediction market into more money than a winning prediction market. Platforms do not have control over contract prices, but they also have legal obligations to provide unbiased access to their contracts.”
- State gambling laws are a mismatch for PMs. State gambling laws are “unsuitable for regulating prediction markets because they have no interest in promoting safe, fair markets. They do not address price discovery, information gathering, hedging, or market manipulation. Instead, state gambling laws largely attempt to balance two countervailing goals: (1) restricting so-called immoral behavior and (2) promoting local economic development.”
A litmus test for all prediction markets, the nascent industry has its work cut out for it as many states are unwilling to give up their belief that the Fed is usurping the authority of state gaming commissions and regulators by bypassing them.
The states assembled an all-star group to support the fight, including the former SEC Chairman and the former CFTC Chairman. Gary Gensler. Gensler, perhaps best known for his widely criticized failure to establish rules for the innovative digital asset industry during his tenure on the Commission, joined advocates to argue that Federal preemption would undermine state consumer protections and create regulatory loopholes.
CFTC filed Own Amicus Brief supporting Kalshi. Briefly, the CFTC notes that since the early 1990s, CFTC-regulated exchanges have listed event contracts related to elections, weather, corporate credit events and more. With respect to sports contracts traded on CFTC-registered Designated Contract Markets (DCMs), these are considered exchanges under the Commodity Exchange Act (CEA) and are merely an extension of previous regulations. After all, states can’t override federal preemption while upending decades of established oversight of event-based contracts.
Of course, this is not to mention the regulatory chaos that would ensue if 50 different states attempted to assert regulatory authority over prediction markets. This fragmentation will threaten the entire sector.
The legal fight is all about money, not about what’s best for users or the development of fast-growing prediction markets in the US and around the world. States fear surveillance and the resulting loss of revenue. Prediction Markets fear chaos, turmoil and the destruction of a business that operates in the US and has become quite popular.
