SBJ Betting: ‘Rules of the road’ coming for prediction markets

Here’s a must-watch interview if you’re following the prediction markets kerfuffle.

Gary Gensler, who led the CFTC from 2009-14 and more recently chaired the SEC, asserts that Congress never intended for the agency to regulate sports betting when it extended its powers under Dodd-Frank Wall Street reforms in 2010. He filed an amicus brief supporting state shutdowns of Kalshi in the 6th Circuit on Thursday afternoon.

In a rules proposal it released Wednesday, the CFTC said it believes Congress was aware that contracts on sporting events could be submitted but chose not to prohibit them.

We’ll dive deeper into that rules proposal in this morning’s missive, below.

If you came here ahead of tonight’s hyper-hyped U.S. World Cup debut expecting a timely forecast of what the sportsbooks see coming, we’ve got that, too.

Forza! (I hear that’s available this year).

The 267-page rules proposal that the CFTC released Wednesday regarding prediction markets largely deals with a “public interest” test that the commission wants to apply to contracts now traded in areas once declared out of bounds for the suddenly popular derivatives.

As part of 2010 regulatory reforms that expanded CFTC oversight of the contracts created as hedges against risks such as drought, Congress approved a “special rule” allowing the agency to prohibit those in five emerging areas that it saw as problematic, or even toxic: terrorism, assassination, war, gaming and illegal activity.

Turns out those categories weren’t specific enough for some.

The CFTC’s proposal, which now will take public comments for 45 days before finalizing new rules, went a long way toward banning the sort of contracts that drew public outcry when they surfaced in recent months.

Markets that settle on whether a world leader is out of office by a certain date, for example, would be out because they could include assassination. Those written to specify electoral defeat, resignation or natural death as reasons for the change would be allowed. It worked through similar explanations suggesting more specific guardrails around markets that could be seen as involving terrorism and events of war.

The proposal also defined “gaming” in a way that supports its intent to ban contracts based on casino games, such as blackjack and roulette, but continues to allow most that present as bets on sporting events, including the most common player props.

The proposal would take down some of the low-hanging fruit that U.S. leagues and players unions have been most vocally opposed to: contracts involving officiating, injuries, fights and the ball-or-strike betting that resulted in criminal charges against two Cleveland Guardians pitchers. Results of individual shots in basketball and plays in football also would be out.

Other than that, the environment would remain unchanged for Kalshi and the legion of new competitors vying for the 39% of U.S. adults residing in states that haven’t legalized online sports betting, such as California and Texas.

An idea of how the CFTC intends to approach the myriad permutations of sports contracts that could come across its transom as predictions morph ever closer to bets — with odds replacing prices on offerings that already include point spreads, over-unders, player props and parlays — can be found in the appendix of the new rules proposal, in a summary of factors to be considered in a public interest review.

“The Commission believes that event contracts based on the aggregate outcomes of professional or collegiate sports events, based on objective and verifiable settlement criteria, listed by prediction markets that maintain appropriate surveillance, trading prohibitions, and coordination with relevant sports governing bodies, are, depending on the full record and the Commission’s evaluation of all relevant factors, unlikely to be found to be contrary to the public interest.”

The rightful ‘cop on the beat’

In an interview discussing the rules proposal Wednesday afternoon, CFTC Chair Michael Selig outlined the thinking behind the agency’s approach to a sports segment that makes up more than 80% of event contract volume on its regulated exchanges.

“We’ve laid out the factors we’re going to consider, assuming it gets finalized,” said Selig, who has emerged as the nation’s de facto sports betting czar as the commission’s chair and its only sitting voter. “We believe it does weed out a lot of the edge-case concern products out there; some of the types of injury contracts or other things that are against public policy. But it does allow for sports derivatives contracts to be traded on our markets.”

That’s not a surprise. Selig has been a vocal proponent of the agency as the rightful “cop on the beat” to regulate the contracts, which have upended the state-by-state path to sports betting legalization that began eight years ago when the Supreme Court overturned Congress’s prohibition of sportsbooks outside Nevada.

In the new rule proposal, the CFTC defends that position. It starts by tracing the wildfire emergence of the contracts to a 2024 district court ruling that cleared the way for Kalshi to offer election contracts banned by the CFTC under the Biden administration.

Selig argues that by delivering blanket rejections under a framework that broadly allowed the CFTC to refuse all gaming-related contracts — and banishing Polymarket from the U.S. — the previous administration left a vacuum that the district court ruling has allowed Kalshi to fill.

“There was this rush to sue and push things out of the country,” Selig said, “but not to set clear rules of the road that are workable that allow for the product to exist within a reasonable and rational regulatory framework that protects investors. … We’re here to set rules and make sure we’re protecting investors, protecting consumers and making sure the markets have integrity.”

The proposal builds a case that by allowing the CFTC to apply a public interest test to gaming-related contracts as part of its 2010 Dodd-Frank reforms, Congress conveyed sweeping authority for it to both allow contracts based on sports outcomes and deny those built around casino games. It artfully — or perhaps perplexingly — defines gaming to include both baccarat and basketball.

Applying the public interest test

Given the latitude to consider sporting event contracts through a public interest lens, it concludes that almost all of the game and player prop contracts that the exchanges now commonly offer pass the test. It specifically cites contracts based on “final scores, point differentials, win-loss results, tournament advancement, individual or team statistical performance or season long performance metrics” as likely to pass public interest tests. It also finds those contracts “unlikely to raise … particular manipulation, settlement ambiguity, and information leakage issues.”

It reached the same conclusion about most player props, describing the risk of players intentionally underperforming as “detectable.”

An interesting aside, considering the debate that was waged around whether to require sportsbooks to use official league data, is the commission’s acknowledgement that “a variety of data sources may be appropriate for the settlement of event contracts.” It said it “does not intend to overly restrict prediction markets’ flexibility to determine which sources should be used in settlement.”

While Selig said the CFTC was not proposing a requirement that exchanges enter into information-sharing agreements, such as those the regulator struck with MLB and the NHL and is working on with other leagues, the proposal does reiterate guidance that it gave earlier this year when it encouraged them to coordinate with leagues and governing bodies on contracts prior to listing.

It also suggests that “information sharing agreements between prediction markets, the commission, and the relevant sports integrity monitoring organization may aid prediction markets in monitoring sports event contracts for manipulation, insider trading and other compliance issues.”

“We were given specific authority to review these products and discretion to reject them in certain cases and we’re going to use that authority,” Selig said. “And we’re going to put out really clear standards for how we’re going to evaluate the products going forward. We believe that’s how those markets should be regulated, and we’ll do so a soon as these rules get finalized.”

The public comment period ends July 27 — about one month before the opening of college football.

U.S. legal sportsbook handle from April is pacing even with that of the same month last year with only Illinois and Colorado left to report, which would break a string of four consecutive months of year-on-year decline that ranged from 2% to 5% from January to March.

New Jersey, Pennsylvania and Nevada all were down double digits in a month that included the Final Four. New York saved the bacon, coming in flat.

• Here’s the latest on the unfathomable case of Texas Tech QB Brendan Sorsby, and the court ruling that has set college football’s hair on fire.
• “He can figure out anything. That’s what he does” — that’s what Draftkings CEO Jason Robins said about his fellow co-founder, Paul Liberman, in my recent magazine profile of the company’s president of operations.
• Sportradar reached a multiyear deal with Kalshi to provide the prediction market platform with official sports data/live odds; fan engagement and customer acquisition solutions; and integrity services for its markets around several prominent leagues, reports SBJ’s Rob Schaefer.
• Edge Markets, which offers gambling-specific banking products, raised a $29.2 million Series A funding round, writes SBJ’s Chris Smith. VC firm CoinFund led the round, with participation from Bullpen Capital, Indicator Ventures, Mantis VC and Stepstone Group.