During a Congressional hearing on Tuesday, former Commodity Futures Trading Commission (CFTC) counsels expressed that the agency's recent order to Kalshi is an "extraordinary" and unprecedented action. The discussion unfolded during a two-hour session held by the House Committee on Agriculture's Subcommittee on Commodity Markets, Digital Assets, and Rural Development in Washington, D.C. This meeting focused on prediction markets and contracts related to sports events.
Rep. Kristen McDonald Rivet (D-Mich.) questioned witnesses about a directive the CFTC issued last week to Kalshi, instructing the firm to continue executing its sports event contracts in Michigan, despite a state court ruling that prohibited such activities. The court had mandated Kalshi to void and refund existing and unsettled sports trades for customers in Michigan.
McDonald Rivet criticized the CFTC’s move, suggesting it undermines the agency's credibility as a federal regulator for prediction markets. "We have a singular federal official [able] to just order registrants to ignore court orders he disagrees with. This approach stretches credulity regarding the CFTC's suitability as a regulator of such products," she said.
Former CFTC General Counsel Rob Schwartz and ex-CFTC Special Counsel Carl Kennedy refrained from explicitly condemning the agency's decision but acknowledged its radical nature. Schwartz stated, "I think certainly it was an extraordinary action. It speaks to the need for clarity in this space. An exchange like Kalshi caught between its federal regulator and a court order presents a complex situation. Kalshi had followed the court order by the time the commission issued its order telling it not to, so it was too late. But it certainly was a flex."
Kalshi's predicament stemmed from a proposed emergency rule it filed with the CFTC on July 12, informing the agency that it would "force-liquidate" open sports trades for some Michigan users as per the court order. However, just two days later, the CFTC utilized its emergency authority to mandate that Kalshi complete those trades. Kennedy noted that it marked the first such order in 46 years, emphasizing the unusual nature of the situation and the need for improved cooperation among regulatory bodies.
Chris Cylke, Senior Vice President of Government Relations for the American Gaming Association (AGA), commented that the CFTC's directive constitutes a dramatic shift from its previous stance. Last fall, CFTC Chairman Michael Selig assured the Senate that the agency would respect court rulings regarding sports event contracts. Since then, Selig has not only supported prediction market platforms in ongoing court cases but has also initiated new lawsuits against several states. Cylke observed, "It’s an extraordinary flex, going from allowing courts to decide to telling one of their registrants to ignore a court ruling."
The hearing, titled "Examining Customer Protections and Market Integrity in Sports Event Prediction Markets," also revisited familiar debates. It raised high-level questions about whether the CFTC should override state gaming rights concerning sports contracts and the extent of its authority to regulate prediction markets.
Chair Rep. Dusty Johnson (R-SC) remarked on the rapid growth of prediction markets, stating, "They have grown to a size and a scope that few of us could have imagined even just two years ago. Our laws are being challenged to address issues we had not previously contemplated."
Schwartz and Kennedy reiterated that the CFTC holds both jurisdiction and capacity to regulate swaps and event contracts. Meanwhile, Cylke and Indian Gaming Association Chair David Bean argued that sports contracts merely repackage sports betting, a domain Congress has allocated to states and tribes for regulation. Cylke asserted, "Litigation has reached nine federal appeals courts, and lawmakers are acting because these platforms are essentially running backdoor sportsbooks."
Bean also highlighted the unusual situation within the CFTC, pointing out that it is currently headed only by Selig, a Trump appointee, without the five-member commission that is typical. "No one voted for this. Congress hasn’t passed any new legislation on this matter. It’s happening because one person has declared online sports gambling legal nationwide, taking the CFTC from crops to props."
Rep. Angie Craig (D-Minn.) echoed concerns about the CFTC's effectiveness as a regulator, questioning how Selig could adequately oversee prediction markets given his limited time in office and the existing expertise in the field. She expressed skepticism about whether the agency can manage the complexities of prediction markets that include sports events.
Johnson and G.T. Thompson (R-Penn), chair of the full Agriculture Committee, indicated that this hearing would not be the last on the topic of prediction markets. Following Bean's appeal for federal legislation banning sports and casino contracts, both acknowledged the potential for Congress to play a crucial role, despite ongoing litigation in various states. Thompson remarked, "Where the commission's authority is found to be insufficient, we will consider legislation as may be appropriate." Johnson emphasized that it is Congress's responsibility to explore this issue further, stating, "If we don’t ask whether there’s a role for Congress, we are not doing our job."
