The rise of prediction markets is reshaping the gaming and finance sectors, yet it's leading to conflicts among states and tribal communities across the U.S. On Thursday, the Indiana Gaming Association (IGA) hosted a webinar discussing the implications of regulating prediction markets and their effects on federally recognized tribes. IGA Conference Chairman Victor Rocha and Executive Director Jason Giles facilitated the discussion, which featured Gary Gensler, the former Chairman of the Commodity Futures Trading Commission (CFTC) and currently a professor at the MIT Sloan School of Management.
The conversation covered the influx of sports event contracts and the CFTC's responsibility to oversee event contract trading. A particular point of contention was Gensler's challenge to the CFTC's support for these products, reflected in an amicus brief he filed with the Sixth Circuit Court of Appeals regarding a legal case involving Kalshi. This ongoing lawsuit centers around whether sports event contracts qualify as swaps, a classification Gensler contests. He contends that the Dodd-Frank Wall Street Reform and Consumer Protection Act does not override gaming laws to allow for the sale of sports event contracts through prediction markets.
Legal documents filed nationwide suggest prediction markets maintain that the CFTC holds exclusive authority to regulate sports event contracts as swaps under the Commodity Exchange Act (CEA). In contrast, other parties argue that these offerings are forms of gambling, which do not fit the definition of swaps. Rocha pointed out, "Prediction markets, as indicated in the brief, continue to insist that ‘sports betting’ falls under the definition of a swap, but a swap has a 12-part definition."
Gensler emphasized that this extensive definition stems from the wide range of products it covers, including interest rates and credit default swaps. Event contracts are also included in this multifaceted definition. He elaborated on the CFTC's original characterization of these financial products and how regulatory approaches evolved after the 2018 financial crisis, which had widespread impacts on global markets.
Gensler explained, "An event contract was based upon an event, a recurrence that was associated with a potential economic, financial, or commercial consequence. In 2010, we aimed to clarify that event contracts fell under federal jurisdiction as swaps, particularly because these contracts were linked to significant economic and commercial risks that contributed to the financial crisis."
He highlighted the implications of the Dodd-Frank Act, which does not classify sports event contracts within its regulatory framework, effectively allowing prediction markets to operate nationwide under federal oversight. "This was buried in a statute from 16 years ago, this Dodd-Frank statute," stated Gensler. He expressed concern that the legislation inadvertently stripped away some autonomy from states and tribes, placing regulation of sports betting under the jurisdiction of the CFTC, a lesser-known financial regulatory body.
In addressing how swaps and sports event contracts are presented, Gensler contested the idea that swaps could only exist in prediction markets and not in casinos. "Let me be clear: there is no definition in the statute or in the courts that is venue specific," he asserted. "If an event contract based on sports is classified as a swap in a prediction market, it is equally a swap in your tribal casino or a Las Vegas casino. There are no venue distinctions."
The former administration of President Barack Obama assessed the influence of swaps on the economy and established policies ensuring that only certain platforms could offer swaps to consumers. Gensler stated, "We agreed with Congress that the general public would not be able to trade swaps unless performed on a regulated, registered exchange, applicable to anyone with less than $10 million."
He raised the disparity in regulations between swaps and sports event contracts, noting, "If sports bets are swaps by law, they’re prohibited unless they’re on an exchange, and that would have been as of October 2012 due to the Dodd-Frank implementation schedule. That implies the last 14 years of sports bets in Vegas and your tribal casinos were illegal."
Gensler intends to continue advocating against sports event contracts in future legal filings, while discussions surrounding this topic will persist within tribal communities.
