‘Congress Should Not Be Silent’ — House Committee Signals Urgency on Prediction Markets
Dusty Johnson (Official photo courtesy of U.S. House of Representatives)
As the jurisdictional battle over prediction markets rages on between state regulators and the CFTC, federal lawmakers must choose whether to intervene.
In principle, an amendment to the Commodity Exchange Act is all that’s needed to avert a Supreme Court showdown, whether to ban sports event contracts or to clarify that, yes, Congress does intend for the CFTC’s authority to supersede state gambling laws in that regard.
As slow as the justice system can be, however, the legislative apparatus is often slower still, particularly on divisive issues. That’s true even at the best of times, and the current political climate does not lend itself to teamwork.
Even so, the tone at today’s today’s hearing in the House Agriculture Subcommittee on Commodity Markets, Digital Assets, and Rural Development suggested that there’s a sense of urgency to do something.
For Subcommittee Chairman Dusty Johnson, the fear seems to be that if Congress doesn’t act to clarify its intentions here, the Supreme Court could set a precedent that would erode its authority elsewhere.
“It seems to me,” Johnson said, “that if courts allow states to exclude exchange-traded and cleared derivative products from the authority of the Commission because they resemble or are competitive with sports wagering products that are regulated under state law, that feels a little bit like pre-emption of the federal government.”
Those words came as a preamble to a question for the witnesses about whether there exists a limiting legal principle that would stop states from similar encroachment in other areas.
CFTC Instructions to Ignore Court Order Spark Crisis
Much of the discussion at the hearing consisted of a rehashing of familiar talking points. Yet the context felt different due to the latest escalation in the conflict between states and the CFTC.
Representing the American Gaming Association and the Indian Gaming Association, respectively, Christopher Cylke and David Bean made the case that sports prediction contracts are gambling products illegally competing with state-regulated sportsbooks. Speaking on the other side of matters, Robert Schwartz, Carl Kennedy, and Asaf Meir argued for the safety of prediction markets and the importance of respecting the CFTC’s exclusivity over anything structured as a financial derivative.
The escalation in question came late last week, when CFTC Chairman Michael Selig directed Kalshi to ignore an order from a Michigan state court, something committee participants on all sides of the debate agreed was “extraordinary.” To justify it, he invoked emergency powers that haven’t been exercised in half a century. Schwartz described it as “a flex.”
In the end, nothing came of it because Kalshi had already complied with the court order to liquidate any outstanding sports contracts held by Michigan residents. However, it could have put Kalshi in a position of needing to choose between defying the judicial system or its regulator.
An Extraordinary Response to an Extraordinary Ruling
That event was first brought up by Congresswoman Kristin McDonald Rivet of Michigan, who naturally expressed indignation on behalf of her state.
“It’s a stark reality,” she said. “We have philosophical conversations here in this committee room, and then what we actually see implemented is a complete violation of good faith.”
Later, Chairman Johnson raised the issue again to make the point that the Michigan court ruling was itself unprecedented. Other courts, upon finding against Kalshi, had ordered it to suspend trading in their states. However, they had stopped short of, as Johnson put it, “tearing up federally regulated contracts.”
Fears of a Slippery Slope
Sports event contracts aren’t the only controversial bets offered by prediction markets. However, they’re the natural point of attack for states that are trying to exert some control over the platforms’ expansion, due to their similarities to sports betting.
It’s easy for prediction markets to say that if they shouldn’t be offering sports contracts, then it’s up to Congress to clarify that. There’s seemingly little chance of that happening at the moment, given the current administration’s support. However, Chairman Johnson’s remarks make it clear that there’s some anxiety even among Republican lawmakers at the thought of stepping back entirely.
Given how divided lower courts have been on the issue, it’s hard to know how the Supreme Court will rule if it gets that far. Johnson’s worry is that a ruling against the CFTC might embolden states to try their luck in other areas, making an end run around federal supremacy by doing effectively what the prediction markets have done, but in reverse. That is, regulating something qualitatively similar to a federally regulated product, and then asserting jurisdiction over the intersection.
Schwartz, responding to Johnson’s question, affirmed the same fear.
“If the courts, on their own, ultimately carve out sports contracts,” he said, “I think it will be hard to see an end to court involvement in this question, and to states asserting jurisdiction over different products.”
Of course, opponents of prediction markets have precisely the opposite fear: that a favorable Supreme Court ruling would open the door to an even wider variety of gambling-like products, so long as they’re structured as financial products.
Legislative Stalemate Looks Likely
Schwartz’s opening remarks included an argument often made by the prediction markets themselves: that if sports contracts aren’t desirable, all Congress needs to do is legislate against them, and they’ll disappear overnight.
“Congress, of course, has any number of ways to put the controversy to bed,” he said, “as it did in 1958, when it prohibited onion futures, or in 2010, when it forbade futures on box office receipts.”
This is, of course, a gambit predicated on the knowledge that such a move is unlikely to happen, given that the industry has the support of the executive branch. President Trump and his appointees have been beating the drum of “financial innovation,” and he and his family have ties to Kalshi and its competitors. Any legislative ban on sports contracts would likely be vetoed even if it somehow made it through Congress.
It would be almost equally difficult for Congress to clarify that such contracts are within the intended role of the CFTC. Many Republican legislators have constituents who have moral or religious objections to gambling. The party’s majority is thin, and dissent with the President’s agenda has become common.
If anything is going to happen legislatively, the window for that may be short. Kalshi bettors currently put the odds at around 85% that Democrats will seize control of the House in November. They’re nearly a coin flip to take the Senate as well. At that point, further government shutdowns seem almost inevitable, and almost nothing is likely to get done for the remainder of Trump’s term.
That, too, may be factoring into the urgency expressed by Johnson, who ended the meeting by saying:
“Courts are acting in the space. The Commission is acting in the space. I do not believe that the Committee, that Congress should be silent.”
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