- The US Commodity Futures Trading Commission proposed two rules for review that would establish what prediction markets may legally offer throughout the country.
WASHINGTON – Two rules have been sent by the US Commodity Futures Trading Commission (CFTC) to the White House for review that could affect the way that prediction markets operate throughout the country. Both submissions by the CFTC push for further definitions of the term “swap.”
- RIN 3038-AF82: The goal of this proposal is to include event contracts in the definition of “swap.” This rule would be most important for the sports contracts that users often purchase on Kalshi, as it would clarify that prediction market swaps fall under the purview of the CFTC. RIN 3038-AF82 is considered the lead proposal of the two.
- RIN 3038-AF81: The goal of this proposal is to prevent prediction markets from offering casino-style games like slots, blackjack, and craps by clarifying the definition of “swap” so that it becomes known that the platforms can’t offer those styles of games. RIN 3038-AF81 is currently an Interim Final Rule by the CFTC, which means that it would go into effect immediately if given approval from the White House.
The current definition of a “swap” that legal prediction markets operate under, as detailed in the CFTC glossary that impacts both RIN 3038-AF82 and 3038-AF81, is:
The statutory definition of “swap” is detailed and comprehensive, though certain agreements, contracts, and transactions are excluded from the definition. It includes, for example, interest rate swaps, commodity swaps, currency swaps, equity swaps and credit default swaps. Congress directed both the Commission and the Securities and Exchange Commission to further define the term “swap” (and security-based swap) jointly. The Commissions in 2012 adopted rules and interpretations to clarify that a few types of transactions in particular are swaps. These include foreign currency options, commodity options, non-deliverable forwards in foreign exchange, cross-currency swaps, forward rate agreements, contracts for differences, options to enter into swaps and forward swaps.
Time Frames for RIN 3038-AF82 and 3038-AF81
There are no established time frames for either RIN 3038-AF82 or 3038-AF81.
If RIN 3038-AF82 is not finalized soon, states with legal sports betting regulators will continue to push for prediction markets to fall under their own legal purview instead of the CFTC. If those states are successful, then the availability and functionality of prediction markets will greatly change.
For example, Tennessee recently won a case in a federal appeals court that allows it to continue to enforce its cease and desist order against Kalshi. The Tennessee government has repeatedly told Kalshi that it must stop operating in the state unless it follows local regulations and is taxed as a sports betting company. Kalshi has responded by stating that it is governed federally by the CFTC and is not subject to state sports betting regulations.
If Tennessee, or any other states that regulate legal sports betting sites, win their cases against Kalshi, then the prediction market would have to make changes like raising its minimum age to 21 years old, and it would not be allowed to offer player props for college sports.
Similar changes would likely be required throughout the country if RIN 3038-AF82 is not finalized.
Additionally, it is possible that states will continue to attempt to enforce their own local sports betting laws on prediction markets regardless of what happens to the proposal.
