The recent investigation into Crypto.com and Kalshi’s sports contracts has raised an important question about the classification of event contracts under the Commodities Exchange Act. According to crypto lawyer Aaron Brogan, the key issue at hand is whether these contracts are considered to be based on sports “gaming” within the legal framework of the Act.
The Commodity Futures Trading Commission (CFTC) is currently looking into the Super Bowl event contracts offered by Crypto.com and Kalshi, as reported by Bloomberg. Brogan highlighted that if sports betting is not classified as gaming, then the CFTC may not have the authority to regulate these contracts.
However, the situation is more complex than it appears on the surface. Brogan referenced a previous ruling involving Kalshi, which allowed the platform to proceed with its election betting contracts after determining that they did not fall under the CFTC’s restricted categories.
In this ruling, the Judge defined gaming as playing games or playing games for stakes, with specific mention of past congressional discussions during the drafting of the Commodities Exchange Act. While this may seem unfavorable for these contracts, Brogan noted that the Judge’s findings are non-binding, and the legislative history only applies in cases of ambiguity.
Brogan also pointed out the Merriam-Webster dictionary definition of gaming, which refers to the practice or activity of playing games for stakes, indicating gambling rather than sports. He suggested that prediction markets could make strong arguments based on this definition in a legal dispute.
Furthermore, the appointment of Republican Caroline Pham as the Chair of the CFTC may signal a shift towards a more hands-off regulatory approach. Despite previous skepticism from Democrats regarding event contracts, Brogan emphasized that the regulatory landscape is evolving.
The ongoing probe into post-inauguration contracts on Kalshi suggests that the CFTC may still maintain a cautious stance on certain event contracts. Brogan concluded that while the regulatory direction remains uncertain, there is potential for differing interpretations of the law in future legal proceedings.