The US Commodity Futures Trading Commission has told prediction market operators that blocking users in particular states is inconsistent with federal law, escalating its fight with states that want sports event contracts treated as gambling.
In interpretive guidance announced on 5 November (press release 9323-26), the Commission said the Commodity Exchange Act and its rules “generally do not permit” a designated contract market to limit access based on the location of an otherwise eligible participant. Access should instead depend on a participant’s financial and operational soundness.
What exchanges must do
- Within 30 days, end domestic geographic restrictions that breach the impartial access requirements, or explain to the Division of Market Oversight why compliance is not feasible.
- Do the same for restrictions imposed by intermediaries such as brokers and futures commission merchants.
- The Commission will consider the facts and circumstances before taking any action.
The guidance rests on Regulation 38.151(b), which requires “competitive, open, fair, and impartial access”, and on several of the Act’s core principles. It also says election markets may be particularly sensitive to harm from geographic restrictions. It takes effect on publication in the Federal Register.
CFTC Chairman Michael S. Selig said:
“Derivatives markets must operate on a uniform basis at a national scale”
“Geographic access restrictions are inconsistent with those purposes and the Act’s impartial access requirements.”
Collision with the courts
The guidance cuts across state court orders that require Kalshi to geofence users in Nevada, Washington and Michigan, and follows a run of rulings against the exchange:
- On 28 August, the Ninth Circuit ruled 3-0 in a Nevada case that sports contracts are not swaps and that state law is not preempted, splitting from the Third Circuit.
- On 3 November, the Second Circuit refused Kalshi, Coinbase and the CFTC an injunction pending appeal in cases against New York and Connecticut.
- On 4 November, a federal judge in California barred Kalshi sports contracts on the lands of two tribes, the Blue Lake Rancheria and the Chicken Ranch Rancheria of Me-Wuk Indians.
The CFTC itself has sued several states over their treatment of prediction markets, starting with Arizona, Connecticut and Illinois in April and most recently Utah on 27 October.
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Reaction
Benjamin Schiffrin, Director of Securities Policy at Better Markets, criticised the move:
“Yesterday, the CFTC took its lawlessness to a whole new level.”
“In this country, when courts issue orders, we follow them.”
Kalshi told InGame it was evaluating the new guidance. Election-related trading has been heavy: Reuters reported that Kalshi had taken $1.33bn across midterm markets by 2 November.
Gamblita has followed the legal fight closely, including the Second Circuit ruling and how operators are responding on player protection.
Sources: CFTC press release 9323-26 and Better Markets.
