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The legal battle between the Commodity Futures Trading Commission (CFTC) and state regulators over who gets to regulate prediction markets is heating up. To this end, a prediction market executive with almost 20 years of experience in the industry says that the matter could likely go before the Supreme Court by June next year.
“When you have a high-stakes intergovernmental conflict where a federal regulator like the CFTC is opposed in their position to a supermajority of state attorneys general… then that can get the Supreme Court’s attention,” says Flip Pidot, the Chief Strategy Officer at PredictIt.
Prediction markets have spread quickly across the U.S. over the past two years. Notably, the Trump administration appears to have taken a more accommodating position to the platforms. The CFTC, a federal agency, claims jurisdiction over prediction markets, arguing that they are financial exchange platforms and that their offerings are event contracts. However, states have pushed back against this argument, saying that the event contracts are another form of unlicensed gambling.
A potential circuit split expected later this year
Pidot’s assessment is based on the possibility of a circuit split, which he says is highly likely. Prediction markets are engaged in ongoing legal battles across various states, and differing rulings could result in exactly this scenario.
In April, Kalshi won in its dispute with New Jersey when the U.S. Court of Appeals for the Third Circuit ruled that federal commodities law overrides the state’s gambling laws as pertaining to the platform’s event contracts.
However, a different Ninth Circuit panel hearing a dispute between Nevada and prediction markets appears to have differing views of the law as applied to prediction markets. Earlier this year, judges in the panel appeared skeptical of arguments made by three prediction market platforms against Nevada’s efforts to enforce gambling laws against platforms offering event contracts.
Additionally, Kalshi has appealed to the Second Circuit after federal judges in New York and Connecticut issued unfavorable rulings.
It is possible that one of these appeals courts could side with the states over prediction markets. The result would be a circuit split, which would potentially cause the Supreme Court to step in.
According to Pidot, a circuit split could occur as soon as November. He also predicts that the Supreme Court could issue a ruling by June next year – if it decides to hear the case.
Other factors that could lead to a regulatory dispute
Stephen Piepgrass, a prediction markets lawyer and partner at Troutman Pepper Locke law firm, says that the Supreme Court could also step in because of other factors besides a circuit split. Piepgrass termed the likelihood of the Supreme Court stepping in as “nearly inevitable.”
Constitutional questions that must be answered
Notably, the dispute between the CFTC and states raises constitutional questions that must be answered. In 2018, the Supreme Court ruled that states had the power to decide whether to allow sports betting and how to regulate it, noting that interference by the federal government would be a violation of the Tenth Amendment.
Based on this ruling, states argue that the CFTC is infringing on their rights since the event contracts offered on prediction markets resemble sports bets. However, the CFTC insists that the Commodity Exchange Act gives it exclusive jurisdiction over swaps and futures contracts.
Economic stakes
The rapid growth of prediction markets could have serious economic implications for various industries. For starters, it threatens established gambling businesses like casinos, which pay state taxes and drive the economies of Native American communities. Moreover, institutions and companies are turning to prediction markets to hedge risk.
“This is top of mind for so many Americans… It has a huge potential impact on the economy, and we’ve only scratched the surface of it,” Piepgrass said.
