The Commodity Futures Trading Commission (CFTC) has issued two proposals: one that would define event contracts as “swaps” under federal law, and another that excludes traditional casino gambling from that definition.

Event contracts pay out based on the outcome of real-world events — sports results, political contests, cultural happenings and weather among them — and are the core product of prediction markets. How they are classified is the crux of the widening dispute: if they are swaps, they fall under the CFTC’s exclusive federal jurisdiction; if not, state gambling laws can reach them.

Several states have sued prediction-market operators, including Kalshi and Polymarket, alleging illegal gambling, and the CFTC has countersued to defend its federal jurisdiction over event contracts, which it claims are beyond the purview of state regulators.

Event contracts defined as swaps

The first proposal clarifies the definition of “swap” to include event contracts, including those tied to sports, politics, cultural events and weather. It notes that these contracts are financial instruments commonly known to the trade as swaps and proposes to resolve any ambiguity regarding them.

“These products are commodity derivatives squarely within the CFTC’s regulatory remit under the Commodity Exchange Act and are within the agency’s exclusive jurisdiction,” Chairman Michael Selig said.

That exclusive-jurisdiction claim is the legal foundation of the CFTC’s countersuits against state regulators, and it mirrors the federal-preemption argument Kalshi has pressed in court.

Casino-style gambling carved out

The second proposal, an interim final rule, codifies the CFTC’s view that casino-style gambling products, including wagers placed on sportsbooks and casino games, are excluded from the “swap” definition.

“Casino-style gambling products are not derivatives,” Selig said. “Just as the CFTC has done with respect to other products historically regulated by the states, the Commission today provides clarity regarding the limits of its regulatory remit by codifying the exclusion of casino-style gambling products from the ‘swap’ definition.”

Both measures, filed on Friday, carry 30-day comment windows, giving market participants and the public an opportunity to weigh in before they are finalized.

Path to a potential Supreme Court battle

The two measures help set the stage for a potential Supreme Court battle over federal and state jurisdiction.

Cointelegraph reported in late September that prediction market Kalshi on appeal when a court ruled that Ohio and Tennessee can regulate sports-event contracts under their state gambling laws. The Sixth US Circuit Court of Appeals ruled against Kalshi after a three-judge panel unanimously sided with Ohio and Tennessee, finding that the prediction market failed to demonstrate its sports-event contracts are “swaps” under the CFTC’s jurisdiction.

Still, an April decision by the Third Circuit Court of Appeals allowed Kalshi to do business in New Jersey as its appeal process proceeds. That ruling said Kalshi was likely to succeed with its argument that federal law preempts New Jersey’s regulations — all of which has set up the potential Supreme Court case. The divergent rulings — one deferring to state gambling regulators, the other favoring federal preemption — underpin the push for Supreme Court review.

In a related matter, Cointelegraph reported that a group of state lawmakers filed an amicus brief with the US Supreme Court, urging it to weigh in on the dispute between Kalshi and state gaming authorities — a step that could resolve whether state authorities or federal agencies have jurisdiction over prediction-market companies. The NFL has separately backed New Jersey authorities in their petition urging the Supreme Court to take up the Kalshi case. Whether the justices agree to hear it is the pivotal next step in the dispute.

Taken together, the measures draw a regulatory line between federally supervised derivatives and casino-style wagering left to state oversight.

Source: Cointelegraph