The Coalition for Prediction Markets, a group that represents Kalshi, crypto.com, and several other platforms, has submitted an Amicus Brief in support of the lawsuit (KalshiEX LLC v. Schuler et al.) targeting Kalshi and its preference for the Commodity Futures Trading Commission to hold regulatory authority over these platforms. The Amicus was written by Former Solicitor General Elizabeth Prelogar.
While the document is yet to surface online, Paul Grewal, Coinbase Chief Legal Officer, has posted a summary of the argument.
As shared on X, Grewal distills the argument as follows:
- PMs [Prediction Markets] uniquely aggregate market information. “First, the market mechanism provides a simple way for diverse users from across the nation (or even the globe) to share their views. Different participants might base predictions on different specialized information—e.g., macroeconomic factors, cultural trends, or weather patterns. The market mechanism requires them to translate that knowledge into a simple numerical form, which can be aggregated with the numbers provided by other market participants.”
- PMs are not sportsbooks. “Prediction market operators do not have the same incentives or pursue the same business strategies as sportsbooks. Although prediction markets charge transaction fees, they allow users to enter contracts at whatever odds other market participants are willing to accept. A losing prediction also makes a prediction market no more money than a winning one. And platforms lack control over contract prices, while also possessing legal obligations to provide impartial access to their contracts.”
- State gaming laws are a mismatch for PMs. State gambling laws are “ill-suited to regulating prediction markets because they do not concern themselves with fostering safe, fair markets at all. They do not address price discovery, information aggregation, risk hedging, or market manipulation. Instead, state gambling laws largely seek to balance two countervailing goals: (1) restricting supposedly immoral behavior, and (2) promoting local economic development.”
A litmus test for all prediction markets, the emergent industry has its work cut out for it, as many states do not want to cede their belief that the Feds are bypassing state gaming commissions and regulators, thus usurping their authority.
The states have lined up an all-star group to support the battle, including former SEC Chairman and prior CFTC Chairman, Gary Gensler. Perhaps best known for his widely criticized failure to create rules for the innovative digital asset sector during his tenure at the Commission, Gensler teamed up with counsel to argue that Federal preemption would undermine state consumer protections and create regulatory gaps.
The CFTC has filed its own Amicus Brief supporting Kalshi. In brief, the CFTC notes that since the early 1990s, CFTC-regulated exchanges have listed event contracts on elections, weather, corporate credit events, and more. With regard to sports contracts traded on CFTC-registered Designated Contract Markets (DCMs), these are considered swaps under the Commodity Exchange Act (CEA) and are simply an extension of prior regulation. In the end, states cannot override federal preemption while upending decades of established oversight of event-driven 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 would threaten the entire industry.
The legal battle all comes down to money, not to what is best for users or the development of prediction markets, which have grown rapidly in the US and the world. The states fear loss of oversight and affiliated revenue. The Prediction Markets fear chaos, mayhem, and destruction of a business operating in the US that has become quite popular.