CFTC Draws Line on Prediction Markets, Event Contracts Deemed Derivatives, Not Gambling – Prepares for Supreme Court

CFTC Proposes Rules to Define Event Contracts as Swaps, Delineating from Gambling

The U.S. Commodity Futures Trading Commission (CFTC) unveiled two proposed rules on Friday, aiming to draw a clear distinction between prediction markets and traditional gambling. The first proposal explicitly defines “event contracts” as “swaps” under the Commodity Exchange Act (CEA), while the second proposal carves out casino-style gambling products.

Both proposals are subject to a 30-day public comment period, but their intent is clear: the CFTC seeks to solidify legal definitions before a potential Supreme Court intervention. Chairman Michael Selig stated unequivocally that these products are commodity derivatives and fall under the exclusive jurisdiction of the CFTC.

The first proposal incorporates event contracts into the definition of “swaps,” covering events in sports, politics, culture, and climate. The proposal notes that these contracts are already commonly referred to as swaps in trading markets, and the CFTC is merely clarifying ambiguity.

The second proposal takes a different tack: the CFTC excludes sports betting and casino games from the definition of “swaps.” Selig was direct, stating that casino-style gambling products are not derivatives, and the CFTC will not overstep its regulatory boundaries.

This “two-pronged approach” logic aims to bring prediction markets under federal derivatives regulation while leaving traditional gambling under state jurisdiction. In other words, the CFTC is not expanding its power but rather asserting: “We regulate derivatives; you regulate casinos. Let’s not confuse the two.”

The CFTC’s actions are not without precedent. Several states have sued prediction market platforms Kalshi and Polymarket, accusing them of illegal gambling. The CFTC, in turn, has counter-sued, arguing that event contracts fall outside state regulatory authority.

Last September, the U.S. Sixth Circuit Court of Appeals ruled against Kalshi, supporting Ohio and Tennessee’s jurisdiction over sports event contracts. The court found that Kalshi failed to demonstrate these contracts qualified as swaps under CFTC jurisdiction.

However, a ruling in April by the Third Circuit Court of Appeals allowed Kalshi to continue operating in New Jersey, deeming federal law to preempt state regulations. These conflicting judgments make it highly probable that the case will proceed to the Supreme Court, and the CFTC’s proposed rules are intended to build the legal arguments for this constitutional-level jurisdictional battle.

For the prediction market industry, the CFTC’s proposals represent a long-term positive development. Defining event contracts as swaps grants them legitimacy within the federal derivatives framework and provides a clear regulatory path. Excluding gambling prevents the entire category of products from being broadly categorized as gambling and suppressed.

In the short term, however, states are unlikely to back down simply because of a CFTC proposal. Ohio and Tennessee have gained an advantage with the Sixth Circuit’s ruling, and New Jersey continues to exert pressure with amicus briefs, including one from the NFL. The timing of the Supreme Court’s decision to hear the case and its eventual ruling remain uncertain.

In essence, the CFTC has laid its cards on the table. The next move belongs to the Supreme Court, which will decide which side to favor. For Kalshi, Polymarket, and the entire prediction market ecosystem, this could be a decisive battle for survival.