As the Commodities Futures Trading Commission (CFTC) continues to battle with state gaming authorities over regulation of prediction markets, the agency has also come under fire from Capitol Hill.
On Tuesday, a group of 20 Democratic Senators led by Elissa Slotkin (MI) and Adam Schiff (CA) issued a press release urging the CFTC to refrain from intervening in ongoing litigation involving prediction markets while the legal processes play themselves out. The senators’ statement came on the same day CFTC chairman Michael Selig published an op-ed in the Wall Street Journal announcing agency’s filing of a friend-of-the-court brief in support of Crypto.com in its case against the Nevada Gaming Control Board currently pending in Ninth Circuit Court of Appeals.
Crypto.com had sought a preliminary injunction to stop the state from initiating legal action against the prediction market over what the Gaming Board claimed is an unlicensed gambling site, but its motion was denied by the district court. Crypto appealed that denial to the Ninth Circuit, prompting the CFTC to intervene citing what it claims is its exclusive jurisdiction over the event markets.
“The CFTC will no longer sit idly by while overzealous state governments undermine the agency’s exclusive jurisdiction over these markets by seeking to establish statewide prohibitions on these exciting products,” Selig wrote.
“Under the plain language of the Commodity Exchange Act, event contracts are “swaps.” They are derivative instruments that allow two parties to speculate on future market conditions without owning the underlying asset,” he added. “In the wake of the 2008 financial crisis, Congress expressly granted the CFTC comprehensive authority over any such contract based on a commodity.”
In their statement, the senators reiterated a demand first made in a letter to Selig dated February 13.
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“First, we ask the CFTC to abstain from intervening in pending litigation involving contracts tied to sports, war, or other prohibited events, in alignment with your statements before the Senate Agriculture Committee,” the letter said. “Second, should the Commission initiate a rulemaking on event contracts, as you suggested, we ask that those rules adhere to the statute and prior regulations, and reiterate that contracts involving gaming (including sports), war, terrorism, assassination, or other enumerated activities are barred and may not be listed, traded, or cleared under the Commodity.”
Read more: The Feds Are Coming for Prediction Markets
Underlying the jurisdictional dispute is a fundamental conflict between the agency and the senators over the economic and policy merits of prediction markets themselves.
“Event contracts serve legitimate economic functions,” Selig claimed in his op-ed. “They allow businesses and individuals to hedge event-driven risks, enable investors to manage portfolio exposure, and provide the public with information about the outcome of future events. Farmers can manage risk related to temperature changes that may affect crops, and small-business owners can hedge against tax increases or energy-price spikes, to name two examples.”
The senators painted a very different picture of markets in their letter.
“Prediction market platforms are offering contracts that mirror sportsbook wagers and, in some cases, contracts tied to war and armed conflict. These products evade state and tribal consumer protections, generate no public revenue, and undermine sovereign regulatory regimes,” they wrote.
“We therefore urge you to realign the Commission’s actions with the statute and with the testimony you provided to Congress under oath. Declining to intervene on behalf of prediction market platforms and clarifying by rule that enumerated activities are contrary to the public interest would restore confidence that the CFTC is enforcing the law Congress enacted—not reshaping it through post-hoc policy shifts.”
The CFTC’s intervention in the Ninth Circuit raises the stakes in the Crypto.com case significantly. Should the appeals court uphold the district court’s denial of a preliminary injunction against the state, it could be interpreted as a rejection of the CFTC’s claim of exclusive jurisdiction, opening the door to more state oversight of the markets. Should it rule in favor of Crypto.com, CFTC would likely be strengthened in is effort to quash state restrictions on event contracts.
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