Last week, we covered the Last Mile Problem In Legal Analysis, the idea that robust legal analysis sometimes stops just short of the conclusion the logic appears to require. Usually, that’s because the conclusion is inconvenient. You walk through a detailed analysis only to discover that your own reasoning leads you somewhere you didn’t want to go:

At that point, the analyst has, broadly speaking, three options:

Option 1 - Acceptance. Inconvenient or not, this is the result; accept it.

Option 2 - Silence. Leave the inconvenient part unsaid. You can sometimes sense this pattern in court opinions.

Option 3 - Denial. Since “absurd” results cannot ensue, go back and change the conclusion.

John Lothian is, literally, a Hall of Famer. Despite that, or perhaps because of it, he can’t bring himself to admit that sports event contracts can be federally-regulated swaps; he ultimately concludes they are not. Today, we’ll walk through his reasoning step‑by‑step, examine where the analysis holds and identify where it breaks. We will be loyal to his nodes of analysis; we will simply repackage his framework and look at it through the Lexicon Lens.

Perhaps the cleanest way to analyze Lothian’s argument is to track his LinkedIn post and, in particular, the comments he made underneath it. Lothian wants to see where the premise that “sports event contracts are swaps” takes him, and his analysis leads him to four conclusions. He is not fond of them–he writes, “The CFTC's broad interpretation of the swap definition creates four key legal and regulatory problems:”

Issue #1 - The Retail Trader Violation (CEA Section 2(e)): If prediction market contracts are classified as swaps, retail participants (who are non-Eligible Contract Participants or non-ECPs) may only legally trade them on a Designated Contract Market (DCM). Trading these products on non-DCM platforms, such as offshore or decentralized exchanges, constitutes a violation of federal law under CEA Section 2(e).

Issue #2 - The Sportsbook Illegality: The same logic implies that the functionally equivalent products offered by state-licensed sportsbooks are also swaps. Since state-licensed sportsbooks are not DCMs and deal with non-ECP customers, these transactions may violate federal law, creating a situation where the CEA’s field preemption could render state-authorized sports gambling potentially illegal.

Issue #3 - Contradiction of Congressional Intent: The CFTC’s regulatory openness to these products contradicts the legislative record of the Dodd-Frank Act, which specifically placed “gaming” on a list of activities the CFTC was authorized to prohibit. Congress originally intended to bar event contracts that “exist predominantly to enable gambling”.

Issue #4 - Erosion of Definitional Integrity: The interpretation stretches the swap definition, which historically requires a bilateral, executory exchange of a series of payments over time, to include a prediction contract, which is a single, binary, terminal payout. This structural mismatch sacrifices definitional integrity for the sake of regulatory expansion.

Let’s turn this into a table and compare Lothian’s views to ours.

You might observe: “You are mostly agreeing with him.”

We do! For the most part, it’s not his analysis that we take issue with. It’s the moment he re-evaluates his premise when he sees the conclusions; it’s akin to denying that it rained just because we didn’t like getting wet. We must evaluate the existence of rain based on standalone reasoning, not the outcome.

To do that, we need to separate three concepts that are often blended together–sometimes consciously, sometimes not.

The 3P-Framework: Preemption, Permissibility, Parallelism

We’ve discussed this in many places. This podcast is a great place to start:

LexBeyond

The False Binary - Ep. 17

Key Takeaways…

Listen now

2 months ago · 1 like · Lexicon Labs and Alper Ozgit

The key insight: Prediction markets give us a three-in-one special. Three legal questions, all of which must be resolved:1

Question 1 - Is sports a commodity/are sport event contracts swaps?
(federal jurisdiction)

Question 2 - Are sports event contracts permissible?
(gaming/economic purpose)

Question 3 - Can there be an overlap between federal and state powers?
(off-exchange futures trading)

We aren’t the only ones who see this. Here’s Andrew Ross Sorkin chatting with Michael Selig on CNBC–touching on all three:

ARS’s first statement:

This is a federal issue vs. a state rights issue. That’s what this seems to be about.

That’s the preemption part of it. Not all of it, but the right starting point.

Then ARS observes:

But Mike, you do recognize… For a very long time… there were remarkable debates… about whether there should be sports betting. Whether it should be allowed.

That’s the permissibility part.

A few minutes later he asks:

There’s a question about, if you’re a state, whether you should have any say… at all?

That’s the parallelism part. Now the trio is complete.

Within five minutes, Andrew Ross Sorkin got to the bottom of the issue. That’s what smart journalists do.

The problem? The courts are not dealing with all three questions. They’re not even dealing with two. They are still at the preemption stage, and their hands are full with over 50 lawsuits.

To understand why, you may want to engage with the concept of litigation sequencing:

Lothian’s Framework, Re-Delineated

Lothian actually touches all three questions. He isn’t missing a key issue. He simply doesn’t delineate them cleanly, and that lack of separation drives him to the wrong conclusion. Once we separate the strands, the outcome changes dramatically.

The Retail Trader Violation

We haven’t talked much about this, but we’re in full agreement. If sports event contracts are swaps (and we believe they are), that’s where the law takes you.
This is a preemption and parallelism issue.

The Sportsbook Illegality

We’ve discussed this extensively. One example:

Again, in full agreement with Lothian. If sports event contracts are swaps (and we believe they are), that’s where the law takes you.
This is a preemption and parallelism issue.

Contradiction of Congressional Intent

This is where things get interesting. We agree that Congress did not intend the CFTC to regulate sports event contracts. But what we’re observing today is not a result of these contracts being swaps. It’s the result of the CFTC treating the “gaming” prong very differently than it did just a few years ago, when ErisX attempted the same thing (and theirs were arguably less intrusive because they proposed a self-imposed retail limit).

This is the key distinction. Lothian looks at this and says:

We look at it and say:

The CFTC’s refusal to review Kalshi contracts, and more broadly, its general stance, actions, statements, non-actions and silence regarding sports event contracts, are themselves reviewable agency actions (or failures to act) under the Administrative Procedure Act. Congress did not mandate that the CFTC review every contract, but it certainly expected the agency to conduct a review when the contracts at issue may involve gaming, and the legislative record makes clear that Congress felt strongly about that obligation:

KalshiEx LLC, vs. Mary Jo Flaherty, et al.

523KB ∙ PDF file

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New Finance Institute (now Lexicon Labs) filed an amicus brief in the Court of Appeals for the Third Circuit in support of neither party.

Download

In fact, the CFTC itself took its discretionary authority one step further and wrote Reg. 40.11(a), a prohibition clause; one it completely ignores today.

If Lothian looks at this picture and finds it impossible to reconcile, we agree. But the solution is not to interpret the statute in a way that denies the CFTC exclusive jurisdiction Congress granted to the Commission. The much better solution is acknowledging the fact that the regulator is simply acting inconsistent with congressional intent, and the legal mechanism that closes that gap is the APA.

Erosion of Definitional Integrity

Lothian dislikes that the swap definition has expanded to cover binary-outcome contracts. A couple quick points:

• That’s what Congress ordered.

• This shift predates Dodd-Frank. The real expansion happened in 2000 with the CFMA:
  

What Lothian really dislikes is not the expanded definition, but the fact that the CFTC is turning away from what Congress strongly expected them to do. That’s not a definition or preemption problem.
That’s a permissibility problem.

Lothian posted a recap, summarizing his prediction-market pieces. How he described the one we’re analyzing proves the point:

I walk through how the Commodity Exchange Act’s broad swap definition can technically catch these contracts, but I maintain that treating them as swaps obscures the crucial distinction between risk‑transfer instruments and gambling‑style wagers.

Yes, the definition catches these contracts. Treating them as swaps isn’t the problem. Treating them as permissible swaps is.

And by adding just that one word, the conclusion turns upside down. Prediction markets can’t offer these contracts–not because they aren’t swaps–but because they aren’t permissible swaps. And because of how Congress revised the CEA through Dodd-Frank, state-regulated sportsbooks cannot offer them either.

Prediction markets are top-of-mind for many people these days, including myself.

What’s different for me is that I started thinking about these issues long before prediction markets entered public consciousness. Before Kalshi and before Polymarket. Before ErisX and before Murphy.

How? How did I become that person?

It’s a long story, but the time has come to share it. Next up: How and why I wrote a 2013 Supreme Court petition. The question I asked:

Is sports performance an excluded commodity under the Commodity Exchange Act?

There’s a recurring pattern in legal analysis. The framework is sound. The doctrine is applied correctly. The reasoning is careful and disciplined. And then—at the final step—the conclusion softens, hedges, or disappears entirely.

In other fields, this would be familiar. In supply chains, it’s called the “last mile problem”: Everything works smoothly until the final handoff, where delivery becomes the hardest part. Legal reasoning has its own version of that problem, and it shows up more often that people admit.

A recent post by John Lothian provides a clean example of this dynamic. His analysis is thoughtful, grounded and largely correct. But it stops just short of the conclusion the logic appears to require.

This isn’t unique to one commentator. Courts do it. Regulators do it. Entire areas of law are shaped by this tendency to follow the reasoning—right up until the answer becomes inconvenient.

John Lothian, Chicago-based journalist and entrepreneur, has been around the block (futures broker, trader, commodity trading advisor and electronic trading early adopter). Let’s hear from the Futures Industry Association, which inducted Lothian to its 2024 Hall of Fame:

As the founder in 2000 of the John Lothian Newsletter and publisher of John Lothian News (JLN), he pioneered blogging in the futures industry, where his newsletter has become a must-read among financial markets industry executives and professionals globally.

When Lothian talks, markets listen. And he did speak out this week on Monday, April 13th, offering his views on prediction market legality:

It’s a strong piece, tracing the first-ever swap agreement, the evolution of the CEA, and the regulatory knots tied along the way.

Where we part ways is simple: Lothian, like many others, stops short of acknowledging that that the entire state-regulated sports betting regime may have been illegal off-exchange swap trading all along–a conclusion we’ve been pointing to for quite some time:

Lothian’s arguments deserve to be examined with the same rigor he applies to the CEA. In our follow-up post, we’ll break down his reasoning in detail. But today, I want to focus on something else: What Lothian may have felt when he followed the law to its logical end. He’s far from alone–many courts have confronted the same tension, including the Ninth Circuit Court of Appeals today, which is deserving of a post unto itself.

I understand the discomfort. You follow the statutes, carefully stitch the provisions together, and what emerges is… lawlessness. And not in some distant corner of the economy, but in the very industry you’ve spent your life inside. Non-enforcement is always troubling, but when it hits your own backyard, it lands differently. That realization must have been jarring for someone who lived and breathed futures markets and who, by all indications, believes deeply in the rule of law. So, Lothian pivots, concluding instead that sports event contracts are not swaps.

When a rigorous legal analysis leads to an intolerable truth, the conclusion often changes.

This is the same dynamic driving why states have been winning in district courts, by a wide margin. The sheer implausibility that states have been running illegal off-exchange swap markets for years has become a legal argument itself. Courts have a duty to follow the law, but they also recoil from outcomes that feel absurd. Many judges walked the same analytical path that Lothian walked, reached the same unsettling endpoint, and made the same pivot. Consider this passage from the Ohio opinion (PDF):

This conclusion is further supported by the Court’s obligation to avoid absurdity. Ohio argues that absurd results would flow from defining a “swap” to include a sports-event contract. The Court agrees. The CEA makes it “unlawful for any person . . . to enter into a swap” outside of a DCM. 7 U.S.C. § 2. Under Kalshi’s construction, a sports-event contract is a swap because it is a contract for payment based on the outcome of a sporting event. But if that is true, then all contracts for payment based on the outcome of a sporting event—all sports bets—would be forced onto DCMs like Kalshi and every sportsbook in the country would be put out of business. In the absence of congressional intent to effect such a sea change, that result is absurd. (emphasis added)

Absurdity, absurd, absurd–three mentions in one breath. The Court is wrestling with the same inconvenient endpoint. You can almost hear the internal deliberation: “Are you telling me that the states have been facilitating an illegal business? That can’t be right.”

It sounds absurd. I acknowledged that myself:

Maybe I have a higher tolerance gene for uncomfortable conclusions. Or, maybe I happen to be someone that looked at sports contracts with a critical eye and reached those conclusions before they became uncomfortable (I will share that story later in this series). Maybe it’s a combination.

Either way, I recognize that absurd results can follow, especially when enforcement responsibility sits with a single agency that may have been wary of the political fallout. Perhaps they thought: “SCOTUS hasn’t spoken on the CEA’s role in sports gambling, so why should we?”

But here’s the key: While some courts lean heavily on avoiding absurd results, others place less weight on that canon when it conflicts with statutory text. The Third Circuit offered a real-time example on April 6, 2026 when the majority ruled sports event contracts are swaps under the CFTC’s exclusive jurisdiction (opinion).

This is a good moment to remind our readers what happened during the oral argument stage (September 2025) in the Third Circuit (audio, PDF transcript):

MR. EHRLICH: I’d like to start with the Commodity Exchange Act’s definition of swaps, and quite simply, Your Honor, the Congress did not intend a massive sea change in gambling regulation when it inserted the word swap into the Commodities Exchange Act in 2010 as part of the Dodd-Frank reforms. The reason this is such a massive sea change is because swaps have to be traded on CFTC regulated exchanges on a designated contract market, and it’s, in fact, a federal crime to trade them outside of those scenarios, and so what we have here is a definition by Kalshi that would essentially make all casinos and sportsbooks currently federal felons…

JUDGE CHAGARES: So I -- it seems that that the definition of swaps is actually quite broad, and I understand you point out some things that seem undesirable to your side… Are we obliged to, to apply what the elected branches have gotten us here, and to the extent any fix is necessary, and we’re not saying it is, isn’t that for the elected branches to deal with and not us? (emphasis added)

The state’s position: “This can’t be right, the result is absurd.”
The judge’s response: “Even if it is, that’s Congress’s problem, not ours.”

It’s not that the court didn’t feel the same discomfort New Jersey raised. It’s that the Court weighed the competing principles differently.

One useful heuristic: Every court must follow the law, but the commitment to doing so–even when it leads somewhere uncomfortable–tends to intensify as you move up the judicial ladder. Judges who reach higher courts are hand selected, in part, because they are more willing to follow statutory text wherever it leads.

So let’s put this entire landscape into plain terms:

Lower courts tend to side with the states because absurdity and commercial disruption weigh heavily for them.

Appellate courts may side with prediction markets (one already has) because they are more willing to accept inconvenient truths.

SCOTUS is even more likely to follow the statutory analysis to its logical endpoint–especially once it becomes clear Congress intended exactly that.

In our next post, we’ll walk through Lothian’s reasoning step‑by‑step, examine where the analysis holds, where it breaks, and why so many smart people stop just short of the finish line. The last mile is always the hardest, and that’s exactly where the real clarity begins.

We thought last week’s bombshell–the DOJ & CFTC suing three states, Arizona, Connecticut, and Illinois, over prediction markets–would be the natural place to begin this week’s post. But then an even bigger development landed: The long-awaited Third Circuit decision (PDF), a 2-1 split win for Kalshi that reshaped the landscape in an instant. Both stories matter, and both are connected, so before we unpack what the new ruling means, let’s briefly rewind to last week and pick up the thread of how we got here.

Notes From The Conference

The Indian Gaming Conference took place last week in San Diego. I wasn’t there, but prediction markets were everywhere–with Monday being exclusively dedicated to the topic, and the rest of the week was peppered with related sessions.

The headline? Money is pouring into the prediction-market litigation war chest:

There was even chatter about sports betting returning to the California ballot in 2028:

The overall tone was unmistakable: A rallying cry for the tribes:

But, will it succeed?

The Outside-Lane Illusion

In the late ‘90s, after shedding the baby fat that overstayed its welcome, I joined my college track & field team. Sprinting wasn’t my cup of tea–genetics made sure of that. I had stamina, but not speed. At 6’2’’ weighing in the 180s, I wasn’t built like a featherweight distance runner either. My sweet spot became the 1500m: Long enough to hide my lack of explosiveness, short enough to keep my frame from becoming a liability.

One Saturday, the middle-distance group gathered for a 400m time trial. I’d never raced a 400 before. I’d heard about “the wall,” but never met it personally.

The coach put me in the outside lane and said, “Let them chase you.”

I took off like a rocket. I crossed the 200m in ~27 seconds–fast for me–and I was “leading.” Or so I thought.

Then the curve ended.

The other three runners were all of a sudden ahead of me.

I hadn’t lost the lead.
I never had it.

The outside lane had fooled me. It does that. It gives you the illusion of being ahead and then reality hits. I knew that, but in the heat of the moment, I was fooled anyway.

And then came the wall.
The last 100 meters felt like 100 days. The others cruised to personal bests. I practically walked across the line.

A fake lead. A brutal wall.
A lesson I’ve never forgotten.

And that lesson is playing out again–this time in prediction-market litigation.

Is The States’ Lead Real?

As of April 1, 2026, the scoreboard reflected a comfortable 13-21 lead for the states:

But our last post’s subtitle said it plainly: Why the states’ lead in prediction market litigation seems fragile:

Some leads are illusions, like an outside-lane mirage.
Some leads are real but brittle.

Nathan Martin catching Kenya’s Michael Kimani in the closest finish in race history? Kimani’s lead was real. Mine wasn’t.

So what about the state’s lead?
Are they actually ahead?
Or are the federal district-court and state-court skirmishes just noisy outside lanes masking the true race?

Last week on LinkedIn I wrote:

The scoreboard may not reflect it yet, but Team Prediction Markets is playing well.

And now, after the past 72 hours, that statement has aged like a fine wine.

Federal vs. State: A Plot Twist

The DOJ/CFTC lawsuit against three states was a plot twist no one saw coming:

The DOJ once sent Jay Cohen to prison over the Wire Act for offering “sports futures.”
Now it’s suing states so “sports futures” can succeed.

The CFTC once gave ErisX no choice but to withdraw their sports event contracts.
Now it’s suing states so sports event contracts can succeed.

The law hasn’t changed.
The Wire Act is still there.
The CEA is still there.
It’s the federal government’s position that has changed.

And just as that shockwave was settling in, the Third Circuit dropped its long-awaited decision.

The Third Circuit Decision

A 2-1 split win for Kalshi.

Not shocking to me–I wrote just last week that a shutout was unlikely and that a 2-1 for Kalshi would shake the Jenga tower.

The Third Circuit decision is imminent. A shutout seems rather unlikely.... A 2-1 split win for Kalshi would shake the Jenga tower. A 2-1 for New Jersey would make the tower even more sturdy… for now.

Well, the tower certainly shook.

But here’s the twist:
The correct legal interpretation isn’t fully in the majority opinion.
And it isn’t fully in the dissent either.

The best reading of the statute is stitched together–majority on some issues, dissent on others. That’s both unusual and telling. We will follow-up with a full analysis in another post.

Walking Into a Trap

Warren Buffett once quoted a saying in poker:

“If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

Patsy. Fool. Same idea.

And speaking of fools, Arizona dropped this gem a week before April Fool’s Day, fittingly:

Certainly the Supreme Court isn’t composed of fools.
But one can argue that someone in this litigation is acting like one.

The Chicago Lesson: Not Looking Back

I’ve lived in three major cities: Istanbul, LA (twice) and Chicago.

We started with a running story from Istanbul.
We added another one from the LA Marathon.
So let’s finish with Chicago by watching Adriana Pirtea’s heartbreaking finish:

Adriana Pirtea had passed the reigning champion, Berhane Adere, and never looked back.

She celebrated early, assuming the race was already won.
She was high-fiving spectators.
She was waving.

Little did she know, Adere began sprinting.
Pirtea didn’t know.
She didn’t want to know.
In her mind she had already won the race.

Pirtea was the patsy and she lost the race she should have won.
Confidence is powerful–when you manage the downside.
Ignoring the downside isn’t confidence.
It’s foolishness.

Are The States Celebrating Too Early?

I’ve been critical of the states’ litigation strategy for a long time. Not because I don’t understand it–I do. I just don’t believe they’re playing their best card:

Rob Schwartz sees the tension.
Andrew Kim calls it a trap.
Paul Grewal publicly puts the odds at 90% (prediction markets prevailing on jurisdiction)
When the CLO of Coinbase is that confident,–maybe, just maybe–you should look back before you round the corner.

The DOJ/CFTC suit was the first warning sign.
The Third Circuit decision is another.

This could get ugly for states and tribes real fast.

Co-Existence Is a Myth

There will never be parallel federal sports gambling and state-regulated sports gambling in this country.

The Third Circuit tucked that issue into a footnote in the opinion (PDF):

We need not address the parties’ extra-textual arguments related to whether the Act preempts all state gambling regulation, because Kalshi does not argue that the Act preempts all state gambling regulation.

The Supreme Court won’t.
And even if it does, the prediction markets won’t.

Here’s what happens the moment prediction markets win on preemption:

1. They sue the states and tribes arguing that state-regulated sports gambling is illegal off-exchange swap trading (Quintenz has already said as much).

2. States will cry foul, accusing Kalshi of conducting an about face, pointing to that footnote in the opinion and arguing how Kalshi put the parallelism issue aside only to backtrack it.

None of it will matter.

Courts will read the statute and conclude–comfortably–that there is no room for state-regulated sports gambling.

This isn’t the Chicago Marathon.
There are no prizes for second place.

If the feds cross the finish line first, the states and tribes may lose everything.

The prediction market industry is getting a ton of coverage these days, so let’s begin with a quick who’s who.

Tarek Mansour is the natural starting point. As CEO of Kalshi–valued at $22B in the latest round–he has the ear of nearly everyone. He is widely followed and what he says quickly becomes part of the news cycle.

Shayne Coplan, CEO of Kalshi’s archrival Polymarket, just inked an MLB deal. Polymarket is still mostly international, but their U.S. footprint is growing in size, so we’ll certainly hear more from him.

A number of attorneys are also shaping this conversation. Daniel Wallach, a vocal states’ rights advocate, recently appeared in the PBS documentary titled Breaking the Deadlock: Gambling With Your Life. Andrew Kim has been quieter lately but remains a frequent commenter. Rob Schwartz, former CFTC General Counsel, litigated the Kalshi election contracts matter and is now a partner at Morgan Lewis–recently published a short prediction market piece (PDF) in Futures & Derivatives Law Report. Each brings a distinctive lens.

Journalists are on the beat as well. Nick Devor at Barron’s has been excellent, especially his coverage of the CFTC’s Chicago enforcement team. His recent Q&A with Paul Grewal is a must-read (we posted a follow-up on Monday). Ben Horney at Front Office Sports broke the MLB news. Dustin Gouker, posting at Event Horizon and The Closing Line, was early to this space and brings the advantage of having covered DFS extensively a decade ago.

Last but not least, politicians are now showing up to the party. Gavin Newsom issued a press release and an executive order (PDF) last week. AOC has chimed in and so has DeSantis.

And, this one is hot off the press:

And the accompanying press release.

Love her or hate her, when Elizabeth Warren enters a conversation, she amplifies it. More broadly, politicians arriving in droves could be a precursor of what’s coming. Are prediction markets about to become the next big campaign issue? (Listen to our latest quick-hit podcast)

A natural question has emerged: Who is the most influential person in the prediction market industry right now? If you were putting someone on the cover of a magazine, who would it be and why?

We’ll stick our necks out with an unlikely candidate:

Judge Gordon.

The States Are Leading Big Time–Most of It Traces Back to Judge Gordon

It’s the end of the month, and the end of the quarter, so here’s the updated scoreboard:

Yes, the states are crushing it. We’re running out of space on the left-hand side.

But if you trace the story back to the beginning, one figure sits at the center of nearly every major outcome: Judge Gordon, the judge who handed the first sports event contract victory to…

Kalshi.

As Alanis Morissette would say: Isn’t it ironic? Don’t you think? How can the same federal judge rule in favor of a prediction market early on, yet become the most influential force behind the states’ winning streak?

This is how:

Nevada, the mecca of sports betting, sent a C&D letter to Kalshi on March 4, 2025. Kalshi did not comply. Instead, they used the letter as fuel to sue the state in federal court. Judge Gordon granted Kalshi a preliminary injunction (PDF) on April 9, 2025 and they lived to fight another day in Nevada.

That opinion likely influenced what came next: another Kalshi win, this time in New Jersey. Judge Kiel cited (PDF) Judge Gordon’s opinion, six times. That was entirely expected; the cases were nearly identical.

Then came Maryland. It felt like the drive that would either make the game 7-14 (back in it) or 0-21 (game slipping away). The latter wouldn’t have been insurmountable, it was still very much mid-first quarter, but momentum matters. Anticipation matters. Perceived defeat often changes behavior long before actual defeat arrives.

Maryland became the turning point. Judge Abelson ruled for the state (PDF). Some immediately called it the first step toward a SCOTUS showdown (including us). We agreed with the trajectory, though not with Judge Abelson’s preemption analysis; on that front, we believed Kalshi had the advantage. Still, the wheels were in motion.

Then things became even more interesting. The Third Circuit appeal (stemming from New Jersey) was already underway, with oral argument (audio, transcript) held on September 10, 2025. Meanwhile, another nearly identical lawsuit had landed on Judge Gordon’s desk.

He looked at it with fresh eyes and… reversed himself.

Everything began to unravel from there.

Judge Gordon’s Reversal Sets The Tone

In Nadex v. Nevada1 (PDF), Judge Gordon wrote:

Despite my prior ruling in Hendrick, I reach a different conclusion in this case.

It was the second loss for prediction markets–and the first for Nadex. The scoreboard moved to 2-2, which wasn’t unusual. What was unusual was the same judge sat on both sides of the scoreboard.

Nevada seized the moment, asking him to dissolve Kalshi’s preliminary injunction (PDF), while also citing the Maryland decision.

Unsurprisingly, Judge Gordon did just that (PDF)—a couple of days before Thanksgiving. For good measure, he added another state win (against Robinhood) the next day. The Robinhood decision (PDF) cited both Hendrick (the Kalshi PI dissolution) and Nadex.

Just like that, the states took a commanding lead. The scoreboard read 4-1, with three of those wins originating from the same judge.

We were not convinced. Many of the arguments in those decisions seemed unlikely to hold up on appeal.

We were not alone. Andrew Kim called Judge Gordon’s Nadex position “not solid legal reasoning” and suggested he may be “setting up himself for reversal.”2

But other federal judges didn’t necessarily see it that way. Kalshi scored in Tennessee but lost several more. As of March 11, 2026, the scoreboard was 9-2. As of March 31, 2026, it’s 13-2.

States appear to be winning and Judge Gordon is the gravitational center of that momentum.

He built a tower that looks sturdy at first glance.

Will it hold? Or will it topple?

Incentives In Disguise

There is an idealized version of the world in which decisions are made on the merits. You pick friends because you genuinely enjoy their presence, not because others like them. You hire based on quality, not popularity. You invest based on value, not because other fund managers like the company.

I clung to that view far too long, and deep down, I haven’t completely given up hope that we might get there one day, or at least make strides toward it. That’s how I think the world should work. Infamously, and we all know this, that is not how the world actually works.

What I described can perhaps be characterized as peer pressure, but I think that’s too lazy of a conclusion. What we call peer pressure is often just incentives in disguise.

Back when I was on the job market coming out of the Ph.D. program, I had applied to a big-name firm. I didn’t receive a call back. I figured my resume didn’t make the cut so I moved on. A few months later, an acquaintance encouraged me to apply. It didn’t make sense to me. “I had already applied and didn’t receive a call back,” I told him. My resume didn’t change, so why would the outcome? He looked at me funny and said, “Trust me.” I re-applied and got the interview.

At the time, I didn’t understand it. Did the company like me or not? Why did they reach opposite conclusions, a few months apart, with the same resume?

Years later, reviewing hundreds of resumes for PwC, I finally understood what happened and why. When you’re buried under volume, you start looking for quick signals. You feel like you have to. There isn’t enough time to deeply evaluate everyone, so you rely on shortcuts. Someone else’s prior validation becomes a filter.

The outcome was different the second time because there was a new signal; my application was delivered through a person one of the recruiters trusted. What I thought was the exact same application wasn’t so, it was delivered differently, and therefore, it was received differently. The episode wasn’t about inconsistency. It was about efficiency–a way to allocate limited time and attention in a world overflowing with noise.

And the irony is that a very similar dynamic exists in the industry designed to make the world more just.

When it comes to incentives in disguise, law is no exception.

The Power of Precedent

Judges often operate under the same constraints as the rest of us. The docket must move. There are more cases than time. Shortcuts are inevitable.

Precedent becomes the shortcut.

This is not a slight on the judiciary–it’s reality. Even judges without preconceived outcomes (a common critique) must make high-stakes decisions quickly, often without full visibility into the broader historical context.

So they look to precedent.

To be fair, precedent can be powerful. It can bring in consistency, stability and predictability.

At the same time, it can be misleading. Weak arguments can survive for years simply because no one has the time or incentive to challenge them until a better case comes along. SCOTUS only takes about 2% of cases presented to them. The rest settle into the legal landscape–right or wrong.`

Back to prediction markets: When Judge Gordon ruled for the state and against Nadex, Kalshi, and Robinhood, he provided the building blocks for every other courtroom.

His tower became the template.

Judge Gordon’s Jenga Tower

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Thoughtful Q&A by Nick Devor with Paul Grewal raises exactly the right questions about jurisdiction and the future of prediction markets. Grewal’s answers follow a familiar, and revealing, pattern: Confidence on preemption, caution on permissibility and calibration on parallelism.

That structure is not incidental. It reflects where Coinbase’s chief legal strategist knows he is strongest, where he knows he is weakest and where he is playing the long game.

Let’s break it down:

Grewal’s Confidence On Preemption

Grewal oozes confidence on preemption, and for good reason. Yes, the scoreboard today appears lopsided in favor of the states (Currently 13-21):

But, Grewal doesn’t seem bothered—and his confidence is not misplaced.

He knows the law is on his side, and it’s not a close call.

The states’ Achilles’ heel has always been the same: Their theory has no limiting principle, and courts generally do not endorse positions that have no logical stopping point. For a while, states tried to keep the fight contained to sports. That doesn’t mean they would be able to produce a coherent answer when they face the more difficult question: If you can regulate sports event contracts, can you also regulate election contracts?

A natural tension emerges here. Once a state asserts authority over one category of federally regulated event contracts, it becomes more difficult to articulate why that authority wouldn’t extend to others. Even if a state wanted to draw a boundary, it’s not obvious where that boundary would come from or how it would be justified under the structure of the Commodity Exchange Act. That uncertainty is what keeps the limiting principle problem alive.

That uncertainty could, in theory, hide behind a shield if the states only challenged sports event contracts. They aren’t, so that rhetorical shield is now gone.

Nevada’s recent state-court ruling (PDF) against Coinbase reaches elections. Kalshi was criminally charged in Arizona two weeks ago, and four of the counts are related to election contracts. Minnesota’s bill lumps elections together with sports and other commodities.

The states are no longer cabining anything–they’re reaching for everything. As Grewal himself put it, “... they want it all.”

When states claim jurisdiction over sports, elections and whatever else they can grab, they recreate the exact regulatory chaos Congress worked so hard to prevent with the 1974 Commodity Futures Trading Commission Act. They’re trying to reinvent the wheel that Congress already fixed decades ago.

Grewal knows this and knows how these stories end.

The scoreboard may not reflect it yet, but the momentum has shifted. This feels like one of those games where the team in the lead is beginning to lose control–and everyone watching can feel the start of the comeback (If you remember the Falcons vs. Patriots Super Bowl you know what I mean).

Grewal’s Caution On Permissibility

“Not every silence is pregnant,” the Supreme Court once said (quoting another case).
But this one is.

Grewal knows his strongest argument is preemption.
He also knows his weakest argument is permissibility.

So when Barron’s asks the most obvious question:

Prediction markets ask users to put money on the likelihood of future outcomes. Is that not gambling?

Grewal disregards the gambling notion and immediately pivots back to preemption. His first sentence:

Prediction markets are a type of derivative contract and derivatives have been regulated by the federal government going on many, many decades now.

I don’t believe anyone can disagree with that response because it’s the truth. His last sentence reinforces his position:

[T]he words of the CEA are very clear: Event contracts of all types, including those related to sports, are derivatives, and therefore not subject to state gaming laws.

Both sentences are true. Both are also safe. Sandwiched between those two bookends he offers a historical aside about how “gambling” has been used to describe futures contracts for a century:

“Gambling” is a term that has been used to characterize certain futures contracts going back to the origins of the CEA. For example, labeling futures contracts on grain as gambling. So while we certainly understand there is a common regular usage of the term in everyday conversation, in the law, words matter.

This is also true and safe.

But notice what he does not do:

• He does not address what “gaming” means under the CEA. He does point out (correctly) that this is the CFTC’s call to make, but doesn’t truly elaborate on what he thinks the call should be.

• He does not reveal the fact that the only appellate court that has recently analyzed the statute through a gambling/public interest lens, the Court of Appeals for the D.C. Circuit, seemed poised to conclude that “gaming” may be problematic for elections–let alone sports.

We recounted that story in a previous post:

The bottom line is simple and Grewal probably senses this too:

Grewal’s Calibration On Parallelism

When asked what role the states can play, Grewal offered a carefully balanced answer:

The states have an important and ongoing role in regulating gaming writ large. If there is gaming activity outside of CFTC-regulated markets that don’t involve these event contracts, the states absolutely should play a role in overseeing that activity. But when there’s a contract sitting on a CFTC-regulated market, states have no business under the law set by Congress in attempting to restrict it. And where that happens, I think it clearly is an overreach.

This is the standard prediction-market position:

States can regulate sports gambling within their borders, but they cannot reach into CFTC-regulated markets.

The problem?
That’s not the law.

If sports event contracts are swaps, they can only trade on CFTC-regulated exchanges. Multiple courts have said so. A former CFTC Commissioner said the same thing:

Because that’s not the law, prediction markets will inevitably challenge state-regulated sports betting the moment they secure a preemption win:

Prediction markets are playing the long game.
There’s no reason to try to consolidate power now.
Preemption first.
Off-exchange swap trading later.

And states, for the most part, are letting prediction markets dictate the rules.

Why We’re Here: Litigation Sequencing

Whether intentional or not, prediction-market litigation is unfolding in a way that should make Grewal smile. Preemption–their strongest argument–is the only issue courts are seriously engaging with right now. And, to date at least, the states have taken a commanding lead on that front. That said, much of that is just noise.

Grewal can afford to ignore the noise.

The real question is why preemption is the only live issue. We answered that question in a four-part series on litigation sequencing, and if you read it, we are confident that you’ll find at least one idea you haven’t seen anywhere else:

Predictions: Grewal vs. Lexicon

Devor asked Grewal the right question:

What are the odds that they rule in favor of prediction markets?

Grewal didn’t answer that question.
He answered a different one (jurisdiction):

They will rule in favor of the CFTC’s exclusive jurisdiction over prediction markets. I have no doubt in my mind about that.

That’s the key phrase: CFTC’s exclusive jurisdiction.
On that point, he’s right and we agree.

But here’s what’s really happening:

1. Prediction markets are framing this entire fight as a preemption debate.

2. They’ll continue to avoid, defer and dodge every question about permissibility.

Because they know what’s at stake:

1. If SCOTUS takes only the preemption question, then prediction markets win; but

2. If SCOTUS considers the rest, things may not go so well for them. Even if prediction markets win on preemption, they may lose the battle over whether they have a right to exist.

So, for clarity, let’s separate SCOTUS ultimately taking the case from the questions they will tackle if they take the case.

Grewal makes a conservative estimate when asked about the former, stating “the odds are better than 50/50 that the Supreme Court ultimately weighs in.” It’s not clear whether he truly believes that or downplays its significance. We assigned a much higher probability to SCOTUS eventually taking the case than Grewal:

But the second question in the graph above (middle) is the more consequential one. Grewal predicts there is a better than 90% chance that SCOTUS affirms the CFTC’s exclusive jurisdiction. That probability is a conditional one and shouldn’t be viewed as the same estimate as a favorable SCOTUS outcome for prediction markets: It assumes the Court will frame the case around the narrower preemption question. Our prediction is that SCOTUS is unlikely to confine itself to that framing. In other words, the issues currently being litigated in lower courts may not be the full set of questions the Supreme Court ultimately chooses to resolve.

Here are the rest of our predictions and our reasons:

In closing, what do you think will happen? Will it boil down to Grewal’s “nothing-to-see-here” vibes and prediction markets win on preemption or do you assign higher odds, like we did, that SCOTUS will not take the narrower path?

The media interest in prediction markets is growing by the minute. That’s not surprising: Lawsuits are piling up, Kalshi was forced to leave Nevada, Arizona filed criminal charges (our podcast coverage), congressional bills are flying around and even AOC has now chimed in:

Despite the chaos, or perhaps because of it, Kalshi has managed to raise another $1 billion at a whopping $22 billion valuation.

No wonder, then, Bloomberg Businessweek’s March issue made prediction markets its cover story.

It’s a solid read, but today we’re focusing on one specific piece of it: Mansour’s supposed distinction between “artificial risk” and “natural risk,” and Bloomberg’s claim that this is what separates Kalshi from sportsbooks.

If this is truly Mansour’s position, it’s one of his most incoherent yet.

Alternatively, Bloomberg may simply be muddying the waters even more–likely unintentionally, but the result is the same.

Could this be the blunder that erases a $22 billion valuation overnight?

Read more

Aaron Brogan put out a piece a couple of weeks ago titled What’s Going to Happen to Prediction Markets? The subtitle: Why are so many people so concerned about fairness in niche financial products?

We are concerned, because we are strong believers in enforcement. If the laws stop being enforced on a massive scale and multi-billion-dollar industries can be created not because the products are innovative but because the legal maneuvering is, that’s the beginning of the end for a country. Before you dismiss us for being extra-alarmist, let us be clear. Yes, these are long cycles. America is not going down this year or the next or the year after because of prediction markets. At the same time, what is happening is clear if you look closely: Instead of cementing its lead on financial innovation, America chooses vice under the guise of innovation. Laws are applied unevenly, or not enforced at all. From the Roman Republic to the Ottoman Empire, history tells us these episodes don’t end well.

With that framing, let’s turn to Brogan’s position. His central claim is this:

There is a panel of nine judges in Washington D.C. that is going to eventually determine whether prediction markets based on sports and entertainment are legal, and preempt state enforcement, or are illegal and do not, and every single other decision between now and the day that the Supreme Court does eventually rule is just noise. Plain and simple.

There is a lot going on in this single paragraph; much more than it appears at first glance. We have blog pieces and podcasts on the critical issues hiding underneath, but let’s start with the key framing:

Is this the choice: Federal & legal vs. illegal under state law? No, that’s a false binary.

LexBeyond

The False Binary - Ep. 17

Key Takeaways…

Listen now

2 months ago · 1 like · Lexicon Labs and Alper Ozgit

Brogan sees one of the three Ps: Preemption. He sees that not because it’s the only question that matters, but because litigation sequencing forces that issue to the front:

The real question is more broad.

Is the Law Really Clear?

Brogan believes “the law is so clear.” In a footnote, he clarifies:

And by clear here, I mean that the core issue is already well known and there is little question that the Supreme Court is the only authority that can ultimately decide it.

Again, yes–SCOTUS will ultimately decide it, but what they decide matters most. Deciding a preemption question is very different from deciding the legality of sports gambling. Brogan seems to assume SCOTUS will only address the former, but the fact that preemption is what’s being litigated now does not mean that that is the only question the Court will consider.

So is the law clear? We agree it is, but only if you take a holistic approach and view the debate through The Lexicon Lens:

Our summary: The 3P framework is what matters most: Preemption, permissibility, and parallelism. On those three fronts, our conclusions are:

→ Federal law preempts state gambling laws.
→ Sports event contracts violate the law1:

• They are impermissible under the CEA because of the “gaming” prong

• They also face an additional hurdle because they are illegal under the Wire Act

→ State-regulated sportsbooks are offering illegal off-exchange swap trading.

We have no doubt whatsoever that this is the law. The real question is what happens when SCOTUS confronts it.

Will SCOTUS Fully Resolve the Issue?

Brogan’s view leans toward legal realism:

Here is what actually matters. Money. Power. That is the key to understanding this fight.

He seems to believe the highest court will not upend an entire industry, he said as much before. I’m not so sure. The Justices have their own reputations to consider. They are justices for life. They cannot think too much about this administration or the next or the one after. Confidence in the Court is at a record low and I cannot imagine that is irrelevant to them. One Justice who is seen as “deeply committed to rule-of-law principles” has publicly stated that she views her duty as to “follow the law wherever it may take [her].” I’m fairly certain that most, if not all, of the Justices subscribe to the same view.

So when SCOTUS takes the case, I believe that they will be inclined to resolve the entire framework–not just the narrow preemption issue.

Murphy didn’t really solve much. I have always believed it was one of the more inconsequential cases decided. On that note, Brogan’s characterization of Murphy is misplaced.

What Murphy Did and Didn’t Do

Brogan writes:

Historically, state gambling was illegal. But on May 14, 2018, the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association, 584 U.S. 453 (2018) legalized state sports gambling in the United States. It turned out that the law PASPA—the Professional and Amateur Sports Protection Act of 1992 that the federal government previously used to prohibit states from legalizing gambling actually violated the anti-commandeering doctrine of the Tenth Amendment. This created an important source of state-controlled revenue, and created a new locus of power in state regulators by locally empowering them to oversee substantial gambling markets.

Well, SCOTUS obviously didn’t “legalize state sports gambling in the United States,” but we know what Brogan means, so we’ll give him a pass.

This excerpt, however, is correct:

It turned out that the law PASPA—the Professional and Amateur Sports Protection Act of 1992 that the federal government previously used to prohibit states from legalizing gambling actually violated the anti-commandeering doctrine of the Tenth Amendment.

Right. That violation is precisely what SCOTUS concluded—nothing more, nothing less.

What Murphy didn’t do is just as important. It did not decide whether sports gambling is lawful under federal law. It did not address the CEA, the Wire Act, nor did it evaluate the permissibility of sports event contracts under either statute. It did not pave the way for states to legalize sports betting. Murphy struck down PASPA because the Supreme Court held that it violated the anti-commandeering doctrine–and left every other constraint exactly where it was.

There were two doors that looked identical but opened into completely different rooms: PASPA (violated the anti-commandeering doctrine) and the CEA (it reached sports but SCOTUS remained silent on that issue). Those two doors collapsed onto each other and somehow states were able to walk through. The CFTC did nothing and here we are. We dug into this as well:

The industry cannot have it both ways.

If federal law preempts state law today, then it did so in 2018 as well–and state-regulated sports gambling was (and continues to be) illegal under the CEA.

Or, it doesn’t preempt, and prediction markets may be criminal under the laws of states like Arizona (and why companies like Kalshi are now facing criminal charges within the state).

Which one is it? Well, we provided the long answer in our latest podcast:

LexBeyond

The Arizona Divide - Ep. 19

📌 Key Takeaways in Arizona vs. Kalshi…

Listen now

a month ago · Alper Ozgit and Lexicon Labs

The short answer: State law isn’t the problem-federal law is.

Let’s Predict

Brogan’s prediction:

My best prediction is that entertainment and sports prediction markets have a 70% chance of surviving. That assumes that the forthcoming CFTC NPRM on prediction markets liberalizes the treatment of these markets, and that the question of preemption eventually accedes to the Supreme Court. Once it gets there, all that counts, through all the sound and fury, is counting to five.

Right, under his assumption, Brogan is probably correct.

Where I differ is not whether SCOTUS will take the case–they will.
Nor is it whether prediction markets win on preemption–if that’s the question, prediction markets win.

My disagreement is about what question SCOTUS will take.
My prediction is that they will look at everything together, not just the narrow preemption issue.

And if that’s what they do, here is how we believe it will shake out:

We’ll leave it there for this week. The law is clearer than the industry wants to admit, and the sequencing is already in motion. The next stop is coming–and we’ll be here to walk you through it.

On Monday, I introduced the idea of litigation sequencing–the observation that in complex regulatory disputes, the most important question is often not who is right, but which question gets answered first. On Tuesday, we covered Stop #1: Permissibility. The train has already left that station. Yesterday, we covered Stop #2: Preemption. The train is still idling on the tracks, and at this pace, it may sit there for a while–at least until SCOTUS intervenes, that is.

But today, we will play Nostradamus.
If you could see the different futures ahead, what would you do differently now?

Especially if you are in the states’ shoes.

Let us speculate on some alternative futures…

Stop #3: Parallelism

The final stop on the route is Stop #3: Parallelism.

One idea is that federal and state regimes can peacefully co-exist; the utopia where sports event contracts and state sports betting models run side by side. For many, that’s the happily-ever-after scenario.

Is that even realistic? Michael Selig believes so.

It’s true that federal law allows some state action to coexist with federal oversight. But the law does not allow parallel trading of swaps on-exchange and off-exchange.

That’s black letter Dodd-Frank, the very reason the statute exists:

Still, let’s imagine that somehow we still arrive there. Perhaps SCOTUS rules that federal law preempts state gambling law. In that scenario, the train will have reached its final destination:

Are we there yet? No.
Could we plausibly get there? Yes.
Could the train stay there? Momentarily, yes. Permanently? Unlikely.

Gazing Into Our Crystal Ball

Our point isn’t whether this issue ends up at SCOTUS, we already believe there’s a 90% chance or higher that it does. Nor is it that SCOTUS won’t rule on federal preemption. I personally think that is quite likely. Chad thinks it’s a little less likely.

But here’s what I have zero confidence in:
Even if we get there, I don’t believe we will stay there.

Economists learn early that everything is about incentives. Once you look at the incentives prediction markets will have, the next steps become obvious:

1. A prediction market sues state-regulated sportsbooks, arguing they are engaged in illegal off-exchange swap trading.

2. The CFTC files an amicus brief supporting that position–because it expands the agency’s power;

3. The courts agree, because the statute is clear; and

4. State-regulated sports gambling collapses, replaced by a federally regulated, national regime.

States, tribes, state-regulated sportsbooks and their investors should be pricing this in, but most don’t seem to be doing so.

Prediction markets are not trying to coexist. They are isolating the fight to preemption because that is where their strongest arguments lie. Once they win on that front, their coexistence argument disappears; it will have served its purpose and will no longer be needed.

And if you are the states, there’s only one way to stop it.

Revisiting the “What If” Scenario

Remember, there are two ways to litigate permissibility:

• Approach #1 (broader): Argue for public interest

• Approach #2 (narrower): Zoom in on “gaming”

In our Stop#1 post, we observed:

For decades, the CFTC relied on Approach #1.

…until it abandoned its playbook for an intermediate approach that we labeled Approach #1.5.

We then asked a hypothetical:

What if the CFTC adopted Approach #1 [in Kalshi litigation]?

Our answer:

The CFTC [might] have lost the battle but won the war–and the American public would have won with them.

Let us continue with the train route imagery powering this entire litigation sequencing series:

In this reality (the top route):

• Election markets might have stayed;

• Frivolous contracts like mention markets would not exist;

• Sports event contracts would never have been permitted;1 and

• There would be no Stop #2 or Stop #3. State-regulated sports gambling would have continued uninterrupted.

Not because preemption disappears, not because off-exchange prohibitions vanish, but because litigation sequencing never begins.

Preemption and parallelism would have remained academic inquiries. I even raised preemption in an amicus brief (PDF) during Murphy, arguing sports bets function as futures contracts and are governed under the CEA, meaning the CFTC has exclusive jurisdiction. SCOTUS declined to engage.

Had the CFTC stayed on track, the train never would have left Stop #1.

Obviously, that’s not what happened. The CFTC opted for Approach #1.5, which cracked open the equilibrium. It shifted us into this alternate world where:

• Frivolous markets abound;

• Sports gambling organizes daily life; and

• The people who control sports gambling are powerful.

We’ve seen this movie before. Literally.

We Live in An Alternate Legal Reality

In Back To The Future 2, one moment in the past rewrites the entire timeline. In prediction markets, that moment was when the CFTC abandoned its playbook and discarded public interest.

Marty McFly slams the table in anger:

The son of a bitch stole my idea. He must have been listening, when I…

…and immediately realizes that he was the reason for this mess.

It’s my fault. The whole thing is my fault. If I hadn’t bought that damn book, none of this would have ever happened.

Had the states not advanced the “book,” none of this would have ever happened. The states gave prediction markets an idea–and they ran with it.

So now the states face a decisive choice:

• Become the angry version of Marty McFly and keep fighting the preemption battle; or

• Become the restorative force, acknowledge their role in creating this mess and forge a winning path that gets this train back on the right path.

The States’ Strategic Dilemma

We briefly talked through the states’ choice here, let’s recap:

Option A: Fight Jurisdiction (the current route)

Argument: States regulate gambling; federal law cannot preempt state sports betting regimes.
Upside: If they win, the state model and only the state model, survives.
Downside: If they lose, the litigation sequence continues:

Permissibility ✔
↓
Jurisdiction ✖
↓
Off-exchange enforcement

At that point, sportsbooks start to look like illegal off-exchange swap markets.
That’s the catastrophic outcome.

Option B — Reopen Permissibility

Argument: Sports event contracts should never have been permitted under the Commodity Exchange Act.
Upside: The sequence collapses immediately.
Downside: States implicitly concede that sports wagering markets resemble derivatives markets–undermining their own sportsbooks.

That’s the choice.

The Crescent Tactic Trap for the States

Growing up in Turkey, we learned about the crescent tactic (hilal taktiği):
A feigned retreat draws the enemy forward until the wings close around them.

The coexistence narrative works the same way.
It lures the states deeper into the jurisdictional fight.
If they lose there, the sequence advances to off-exchange enforcement–the point where the legal structure closes around the state-regulated sports betting model.

The sequence appears linear.
But if it reaches the off-exchange stage, it becomes a crescent.

This is a trap in the making.

The States Still Control Their Own Destiny

There is a world where SCOTUS sees through this litigation sequencing and addresses the 3P Framework in its entirety. In that world, SCOTUS may shut down the route entirely (the entire sports gambling industry).

You can’t hope for that outcome.
The states must manufacture it.

The best way to predict the future is to create it.

If states keep fighting preemption, they might win.
But they might also end up with the crumbs of a national sports gambling pie.

A better strategic choice exists.

Rewriting the Sequence

The states don’t have to ride the sequence to the final stop.
They can reroute back to Stop #1.

Yes, reopening permissibility puts their own sports betting regimes under uncomfortable scrutiny.
But by focusing exclusively on jurisdiction exposes them to a far greater risk:
Losing not just the case, but the entire sports betting model.

Going “back to the future” where prediction market sports betting dominates solves nothing.
The states must go back to the past and fix the problem at its origin.

Just like Marty McFly.

Embracing The Past

States often argue they have historically regulated gambling.
Casino gambling? Yes.
Sports gambling? Name a state–east, west, north, or south of Nevada–that regulated sports gambling before May of 2018.

As Charles Fain Lehman reminds us, it is easy to forget:

Everyone forgets how recent the new vice economy is. Turn the clock back to January 2016, and recreational marijuana is illegal in all but four states; sports gambling is illegal essentially everywhere; there’s no betting on your phone; OnlyFans is still months from launch; the fentanyl crisis has barely taken off; etc.

Leaning on historical regulation doesn’t match reality.
Leaning on congressional intent is even more risky–Congress was clearly anti-sports gambling.

But if states lean on these arguments the right way–acknowledging they enjoyed sports betting not because they had the right, but because they escaped enforcement–better days may lie ahead.

And if you are a state that didn’t choose sports betting? You have very little to lose.
We’re looking at you California. And Texas. And Utah.
And others similarly situated.

States Step Into Self-regulation

The irony is rich.
The states now face the same opportunity the CFTC faced in Kalshi but declined: Argue for public interest.

The CFTC doesn’t regulate prediction markets–it advocates for them. (Hardly something you’d expect from a well-functioning regulator.)
Prediction markets don’t regulate themselves–they just pretend.

So states may need to step in and fill the void.
They may need to step up and fight the permissibility fight, because the CFTC didn’t.
But they need to be prepared to kill the golden goose that is sports gambling.

Is there a world where truth becomes both reality and the best strategy?

When Truth Becomes Profitable

People often tell me:

You’re probably right, but there’s just too much money involved. They’re too powerful.

I get the reality check. “The truth doesn’t matter.”2
But incentives–not morality–drive outcomes.

Being an underdog has never fazed me. Margaret Mead once said:

Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.

More importantly, I’m not naive, not anymore. I understand the powerful incentive structures. I’m an economist, after all. The key is to make sure that the moral compass and and the incentives are aligned.

The modern adaptation to one of Mother Teresa’s quotes is even better:

I alone cannot change the world, but I can cast a stone across the waters to create many ripples.

I am a stone-thrower.
For the states, the incentives are clear:
Their strongest legal argument–permissibility (not preemption!)–also benefits them.

Lose sports gambling, and casino gaming becomes more competitive.
Casinos still have social/vice costs, but not legal ones.
States can always change course later.

It’s Now or Never for the States

Will the states insist on staying the course and taking their chances on preemption?

Very possible, but the lead is fragile.
One appeals court ruling would flip the entire game for them.

If states continue on this path, they will likely lose–and lose everything.
They are marching straight into the crescent tactic trap.

If they lose sports betting, can they later argue permissibility?
Yes, but it will certainly appear disingenuous. Prediction markets will simply say:

And SCOTUS may not take the case again.
The winning moment will have already passed.

The time for states to act is NOW.
States can save casino gaming by taking a stance against sports gambling.
It’s a monstrous pill to swallow, but they must rewrite the sequence.

We’re looking at all states–
But especially you, California. You have nothing to lose.

Hop on the train. It’s about time.

On Monday, I introduced the idea of litigation sequencing–the observation that in complex regulatory disputes, the most important question is often not who is right, but which question gets answered first. Yesterday, we covered Stop #1: Permissibility. The train has already left that station. So today, we’ll put permissibility aside for a moment, shift to the next stop on the route and will discuss: Who gets to control these markets?

A Quick Recap on Permissibility

If you’re joining the series here–or just want a refresher–here’s the core question from Monday:

Permissibility: Are event contracts allowed under the Commodity Exchange Act?

In Kalshi v. CFTC, the question was narrower:

Are election market contracts allowed under the Commodity Exchange Act?

The best way to map parties’ positions is an infographic, so let us reproduce that here.

The circle: Represents the universe that contains all contingent event contracts.
The orange: The subset that the CFTC has specific review authority on.
The dark blue: The subset that the CFTC doesn’t have review authority on.

During litigation, the parties agreed on one key point: Sports events contracts involve gaming. The court concurred (PDF):

[E]vent contracts related to any of the sporting events the senator mentioned on the floor could implicate the gaming category.

… and used it as a basis to distinguish it from election contracts:

In fact, if the Court were to take anything from this floor exchange, it would be that the senator would not have intended “gaming” to include elections given the examples offered.

So, basically, the court did touch on the colloquy (PDF), and started to draw some limiting principles around the sports event contracts:

• They might involve gaming; and

• They were different from election contracts.

But because sports event contracts weren’t before the court, the issue was left unresolved; that gap would later matter.

This was litigation sequencing at its finest.

Kalshi didn’t win because the court decided election markets were good for society. They won because the court concluded the CFTC lacked authority to review them. The only venue to fix that was the appeal, and Kalshi went through the briefing, oral argument, etc. Throughout, they continued to distance themselves from sports event contracts. But that position, while not legally unreasonable, was certainly commercially undesirable. Kalshi realized the grand prize was now within reach, and they didn’t mind doing a colossal 180.

Next came the move that would not have happened under any other administration: Kalshi self-certified its sports event contracts (PDF). Predictably, litigation followed.

The Train Is Leaving The Station

By early May 2025, the preemption fight was already underway. Kalshi was leading on the scoreboard 2-0, having scored two early wins in Nevada (PDF) and New Jersey (PDF). In other words, the train had already begun its boarding process.

That’s when the CFTC believed it was on the wrong train, and hopped off; they dropped their appeal. They would reappear later, but in different clothes.

And just before the doors closed, I stepped through.

May 5, 2025 was the day my wonderful 19-year journey with PwC ended. I had been following prediction markets closely, and now was time to go all in. Three days later, New Jersey appealed (PDF) its loss to the Third Circuit. An amicus opportunity presented itself, and I began drafting immediately.

Because I had been tracking the litigation, the issue was obvious: The courts had moved to Stop #2 without ever resolving the permissibility of “sports event contracts” while at Stop #1. This is what created the false binary:

LexBeyond

The False Binary - Ep. 17

Key Takeaways…

Listen now

2 months ago · 1 like · Lexicon Labs

The DC litigation resolved the question:

Are election contracts allowed under the Commodity Exchange Act?

And not:

Are sports event contracts allowed under the Commodity Exchange Act?

But somehow, this “little” detail called “sports event contracts” got lost in the shuffle.

The Express Train Problem

When I lived in the Greater Chicago area, I preferred the express trains–fewer stops, faster rides. The issue is that stations are skipped and people get left behind.

Prediction market litigation is an express train.

Zoomed in, it looks like a federal vs. state fight, and today, that’s mostly true. We are squarely at Stop #2: Preemption.

Zoom out slightly, though, and you see the real reason we’re here: The permissibility question for sports event contracts is not just missing from the docket today. It never appeared on the docket, ever. The litigation train went straight to the preemption stop:

We are living inside a false binary created by Kalshi’s strategy and the CFTC’s inaction.

The states’ frustration is understandable. Sympathy may even be warranted, but sympathy cannot trump the statutes. The CFTC had the discretionary authority and chose inaction. The states were fighting against the wrong party.

That became the premise of our amicus that was filed by one of my favorite partners, Scott Brenner with Parlatore Law Group.

Our Amicus Position

6.23.2025 NFI Amicus Brief in Support of Neither Party

523KB ∙ PDF file

Download

NFI Amicus Brief filed in KalshiEX v. CFTC in Support of Neither Party

Download

Here is a summary of our position (also located on Lexicon Labs website1):

• This is a case of agency inaction, not preemption;

• The Commodity Exchange Act preempts the field; sports is an excluded commodity;

• The CFTC has sole authority over sports-related event contracts;

• Sports gambling cannot occur on a CFTC-regulated exchange–or off-exchange–unless Congress changes the law; and

• The APA and Loper Bright provide the tools to serve as a checks and balances on agency inaction.

And if you’re wondering how my personal story led to that moment, this video is a good place to start.

Kalshi itself agreed that a state dispute was the wrong vehicle to resolve the underlying legality of its contracts. They wrote (PDF):

This case is not a proper vehicle to determine whether Kalshi’s contracts are swaps. In arguing that Kalshi’s contracts are not swaps, Defendants in substance challenge the CFTC’s decision to permit these contracts. The proper forum for that claim is through an APA lawsuit against the CFTC, not an action against Kalshi in which the CFTC is not a party.

At bottom, our amicus was an effort to alert the Court that the dispute in front of it would not, and could not, resolve the matter from a public-interest perspective. The evaluation had to be holistic. It was our way of saying: Your Honor, this case is only here because of litigation sequencing.2

The consequences of affirming are not abstract. Affirmance would leave Kalshi running a marketplace largely relying on a product the CFTC would have denied had it conducted the review the statute permits. We analyzed those contracts through the Lexicon Lens and determined that those contracts were both: i) not permissible under the CEA; and ii) almost certainly illegal under the Wire Act:

We did not raise the Wire Act issues in our amicus; we are pretty certain that the Court would have ignored it. We did, however, emphasize that the APA is the proper vehicle to prevent an outcome that makes no sense–legally, structurally or from a public-interest standpoint.

The Third Circuit’s decision is due out any day. Whichever way it goes, unless the Court decides to opine on permissibility, the consequences will be significant, and ironically, neither will aid the American public.

Taking Stock

Roughly 40-50 active cases are now orbiting the same core question. The scoreboard today: 9-2 for the states3, though three of those Nevada wins came from the same judge. If Judge Gordon’s analysis falters, and there are visible cracks, the pendulum could swing quickly, especially if the Third Circuit sides with Kalshi.

We’re building a visual tracker to help make sense of the landscape, so stay tuned. For now, you can make use of Mick Bransfield’s version.

What Happened at Stop #2

Viewing through the Lexicon Lens, this stop should have never been on the map in the first place. Whether this works itself out or not, remains to be seen, but from the state’s side, it appears to be a doomed fight. I recently wrote:

States are fighting what we believe is an unwinnable fight, and the cost is borne by millions of Americans who gamble away what’s left in their wallets and sometimes their lives, subsidized by taxpayers (through litigation or otherwise) whose elected representatives consistently enact laws disfavoring sports gambling.

It’s truly an absurd result.
We normalize outcomes we never voted for and we end up paying for the cleanup.

Taxation without representation is the grievance that ignited our Republic.
Taxation with representation is where progress runs in reverse.

Of course, some sectors benefit from this chaos:

• Lawyers (litigation is a financial boon for lawyers4);

• Media (prediction market stories abound, many good, some underdeveloped); and

• Selfishly, myself and Lexicon Labs–because we are part of the media ecosystem.5

As the saying goes, “all good things must come to an end,” and that will likely happen in the future when this train pulls into its final destination: SCOTUS.

When SCOTUS takes up this case, we expect that they will analyze each stop, not just preemption. There’s a significant possibility that this is where the prediction market train, and potentially the entire sports gambling industry derails and is retired from service.

This would make it a complicated case with many different potential outcomes. We have assigned different odds internally to these outcomes. I personally believe the likely outcome is not a favorable one for the states (Chad has a different take).

What if SCOTUS takes the case and decides narrowly on preemption? That means the inspector halts the train before it even departs for the next stop. So it is possible that the train just sits at this stop for a while.

That possibility leaves the states in a rather precarious position…

Where We Go Tomorrow

Tomorrow, we close out our Litigation Sequencing series with a roadmap.

The current roadmap being followed by the states: “Double down on preemption; you’ve regulated gambling for a long time.” And if you look at the scoreboard above, the strategy seems to be working.

There is another path for the states.
A less traveled one.
The one we’re advocating for–and the one we believe the states should take too.

There is a catch. Some states will need to sacrifice what they’ve enjoyed for so long. Others, like Texas and Utah, have little to lose. And, as a product of the Golden State, we’ll say it very plainly:

We’re looking at you, California.

Hop on the train. It’s about time.

This week we are focusing on the prediction markets litigation that is unfolding across three specific stops, each bringing the industry closer to its final destination, SCOTUS (unless SCOTUS intervenes earlier):

Stop #1: Permissibility
Stop #2: Preemption
Stop #3: Parallelism

Today we will focus on Stop #1: Permissibility, and then finish out the week with the other two.

The Threshold Question: Do Prediction Markets Have the Right to Exist?

The litigation sequence began with a foundational question in KalshiEX LLC v. Commodity Futures Trading Commission: Are the election markets contracts allowed to exist at all under the Commodity Exchange Act?

When the CFTC blocked Kalshi from listing congressional control event contracts, the dispute was not about preemption, state gambling laws or the structure of the sports betting market. It largely turned on the meaning of a single statutory provision: The Commodity Exchange Act’s discretionary authority over certain contracts involving “gaming.”

Late 2023 was a permissibility battle. This was the landscape:

Two Ways to Fight the Permissibility Battle

As we explained in our previous post, there are two ways to litigate permissibility:

Approach #1 (broader): Argue for public interest
Approach #2 (narrower): Zoom in on “gaming”

For decades, the CFTC relied on Approach #1:

• In 2012, the CFTC denied Nadex on the lack of public interest grounds;

• In 2021, ErisX ultimately saw the same writing on the wall and withdrew their contracts; and

• In 2023, Kalshi was denied on exactly the same grounds–prompting their lawsuit.

Kalshi likely expected a public-interest fight. They even sent a letter to the CFTC touting the economic purpose of election contracts.

But, that’s not the fight the CFTC opted for.

The CFTC Abandons Its Own Playbook

Instead of defending the public-interest standard, the CFTC pivoted. Section 5(g) had been repealed in 2000, but the agency continued to rely on the economic purpose test for another 23 years. It was the CFTC’s North Star–until the Kalshi litigation, when the Commission abruptly abandoned it.

Why the shift? It’s unclear.

• Deregulatory winds? Trump was not yet reelected for a second term back then. But arguably, the deregulatory winds were getting stronger even under the Biden administration, and perhaps there was some anticipation that if Trump were to be elected, they would be even getting stronger. It is entirely possible that the Commission concluded trying to be the last cop standing was going to be a futile exercise. If that was the expectation, it ended up being on point. Trump was elected, deregulatory winds have gotten stronger1 and CFTC enforcement has gotten weaker.2

• Internal disagreement?
  Commissioner Quintenz had suggested the statute was unconstitutional or at least unenforceable.3

• Regulatory confusion?
  Bloomberg reported that staff struggled with basic questions: What is “gaming”? Does the CFTC have to consider public interest? How would they measure it?4

• Strategic miscalculation?
  Perhaps the CFTC expected deference under Chevron–before Loper Bright changed the landscape.

Whatever the reason, the CFTC adopted an approach that was, in Kalshi’s words, an “intermediate approach [that] fits” (the CFTC’s position was lazy–it didn’t commit to any coherent legal theory) and “too clever by half” (it was strategically cute, intellectually contorted and ultimately, self-defeating).

They didn’t take Approach #1.
They didn’t take Approach #2.
They took Approach #1.5.

Under the CFTC’s theory:

• They had no authority over event contracts on interest rates, inflation or weather; but

• They did have authority over event contracts involving sports, elections and Academy Awards.

It was a bespoke interpretation–one that appeared to be crafted for the moment rather than one grounded by statute.

Kalshi’s Unexpected Gift

Consider this infographic that we created more than a year ago:

Going from narrow to the most broad (left to right):

Left circle: Approach #2

Middle circle: Approach #1.5

Right circle: Approach #1

For Kalshi, this was a gift from the heavens. I doubt they were expecting it. Had the CFTC adopted Approach #1, I believe Kalshi’s position would be weaker than the Commission’s. With the CFTC adopting Approach #1.5, the tables turned. Unforced error? The CFTC’s position was now simply weaker than Kalshi’s–and in litigation, that’s often enough.

Litigation is not a philosophy seminar.
Too often, it functions like a football game. One of the sides has the better case.
So, the argument that prevails isn’t always the argument that makes the most sense in the broader legal framework. You don’t need to be the best, you just need to be better.

Kalshi won.
The CFTC lost–at least on paper.

But the real loser?
As is often the case, the American public.

That may sound populist, but if you look through a fairness lens, it becomes clear that it’s simple math, not politics. If a statute is designed to protect the public, and the agency abandons the interpretation that actually serves that purpose, the public inevitably loses.

What If…

The CFTC would have adopted Approach #1?

If the CFTC had fought the public-interest fight, they may still have lost. To see why, it is helpful to think of the public interest determination as a spectrum (PDF, Page 13) with entertainment at one end and economic purpose at the other.

Will President Trump say “six seven” during the State of the Union? That contract doesn’t do anything economically useful for anyone, and is best described as: Frivolous.

What about event contracts on inflation, or interest rates? Those sit toward the other end of the public-interest spectrum.5 Sure, some will still use it for pure speculation, but there is arguably enough of a constituency that uses it for genuine risk hedging. On balance, it’s reasonable to conclude that these contracts matter to the functioning of the economy and therefore serve the public interest.

Election markets sit at an awkward middle ground. They aren’t essential like interest rate or inflation contracts, but they aren’t frivolous either. In a previous post, we described this middle ground as recreational–just purposeful enough that you can make a credible argument for them, but not clearly align with the public-interest bar the statute envisions. Twice in history, the CFTC concluded they didn’t meet that bar. Had the agency maintained that position, the Court might have agreed. Or, it might have found just enough public interest to let them through.

What actually happened (Approach #1.5): Kalshi won. Election contracts were allowed.

What could have happened (Approach #1): Kalshi might still have won. Election contracts might still have been allowed.

To a casual observer, these outcomes may look the same. The scoreboard records a win for Kalshi under either scenario and election contracts are good to go.

But from a legal precedent and regulatory evolution perspective, there is a big difference between the two. Under the former scenario (what actually happened), the public-interest framework is dismantled. Under the latter (what could have happened), the public-interest framework would have remained intact. But, under the latter, the post-litigation world would have looked very different:

• No frivolous contracts;6

• No regulatory vacuum;7 and

• Certainly no sports event contracts.

The CFTC would have lost the battle but won the war–and the American public would have won with them.

There was a little hope though because the CFTC would get a second chance.
Unfortunately, they chose to concede that opportunity.

The CFTC Gets a Second Bite at the Apple

The general consensus in this universe is that most people get a second chance. They should. Mistakes happen. Wrong turns happen. People fall off the wagon. Life can be forgiving–or at least tries to be.

The judicial system seems to reflect this as well. You may not raise new issues on appeal, but you can argue differently. You can correct course and have another bite at the proverbial apple.

Historically, the government gets even more leeway.

For a moment during oral argument, it looked like the CFTC might seize that opportunity. Rob Schwartz opened with:

To build and maintain a thriving derivatives industry that is distinct from the gambling business has been the work of 175 years, and it’s important.

He later joked on X that his opening was a real banger. Beneath the humor was an unspoken truth: This is the heart of the prediction markets debate.

Was the CFTC about to reestablish itself as the beat cop?
Was the CFTC about to return to Approach #1?

No. They weren’t.

The Court of Appeals seemed puzzled–even frustrated. Not because “gaming” might mean “gambling,” but because the CFTC wasn’t arguing for that interpretation. The judges practically nudged them toward it, like a teacher guiding a student to the right answer.

The CFTC refused to change course, though.

The Court had the authority to reject both sides’ interpretations—a possibility that was either a glimmer of hope or a terrifying prospect for the CFTC, depending on their vantage point.

Defining Success

Did the CFTC truly believe they would lose?
Former acting chair, Caroline Pham, thought so (see the 37:56 mark).

I disagree.

I believe there was a 70-80% chance the Court of Appeals would have reversed, or at least remanded—instructing the district court to resolve the case on public-interest grounds using the economic-purpose test.

Kalshi might still have won.
But they would have won the right way.
The CFTC would have lost the battle but won the war.

So let’s ask the consulting question:

What does success look like?

If success meant preventing election markets from reaching consumers, the path was obvious:

1. Wait for the appeals result;

2. Petition SCOTUS if necessary;

3. Initiate review of Kalshi’s new self-certified products; or

4. Initiate review on other prediction-market products.

None of that happened.

If a high-school senior insists college is the top priority but never studies, never takes the SAT and never applies, do we take them seriously?

So maybe the agency’s definition of success was something other-worldly.

Could losing the Kalshi fight have actually been the “win”?

Cynical? Maybe.
But let’s trace the steps:

1. Dismiss the appeal - you can’t afford a remand, let alone a reversal;

2. Don’t initiate a review if contracts that are likely contrary to public interest are self-certified;

3. Decline to conclude reviews already initiated; and

4. Withdraw legacy rulemakings that might constrain future flexibility.

These are the steps that actually did happen; all of them.

Define success one way and none of the expected actions occurred.
Define success another way and every expected action occurred.

Which definition seems more plausible?

We don't have to guess blindly. There is a smoking gun:

The “Obstacles”

Between declining the invitation by the Court of Appeals to argue broadly (January 2025) and choosing to dismiss the case in its entirety (May 2025), the CFTC described its own historical positions–and Kalshi’s–as:

Key obstacles to balanced regulation of prediction markets.

Among the “obstacles”8:

• Prior Commission orders issued to designated contract markets (DCMs) pursuant to regulation 40.11 and related Commission interpretations;

• Event contract rulemakings;

• Federal court opinions, including that “gaming involves games”;

• The CFTC’s legal arguments and litigating positions;

• CFTC-registered entities’ legal arguments that sports event contracts constitute “gaming” and are therefore prohibited under the Commodity Exchange Act;

• Staff interpretations, other guidance, and current practices on event contracts;

• Existing law and regulation applicable to DCMs and futures commission merchants (FCMs);

• CFTC examinations, enforcement actions and investigations;

• Constitutional considerations; and

• Federalism, tribal sovereignty and state-regulatory issues.

These weren’t obstacles.
They were the legal landscape.

Calling them obstacles screams “arbitrary and capricious.”

The roundtable that was supposed to address them?
The CFTC canceled it without providing any clarity around the decision. We know because we attempted to participate in the process.

The Train Moves On–and a New Character Boards

Had the CFTC adopted Approach #1, we wouldn’t be here discussing how Kalshi and Polymarket are eyeing $20 billion valuations. Election markets might have survived, but the platforms would have looked more like Iowa Electronic Markets without the cap–not financial behemoths oscillating between media darling and villain.

States wouldn’t be litigating preemption.
There would be no litigation sequencing.
The train would have already reached its final destination.

The last “obstacle” was a potential court order restoring the economic purpose test and reversing (or remanding) the case on those grounds.

On May 5, 2025, the CFTC removed itself from the permissibility fight for good. Tarek Mansour celebrated. Prediction markets had the “right to exist”:

Stop #1 was complete.
The engine was running.
The train was leaving the station.

Just as the conductor announced “doors closing,” someone in a UCLA hoodie sprinted through the narrowing gap:

May 5, 2025 wasn’t just the day the CFTC dropped its appeal. It was also the day PwC dropped me–after 19 years, three offices and two countries.

One door closed.
Another opened–just enough, and not for long.
The message from the universe was clear:

Hop on the train. It’s about time.

But step back and the pattern becomes clearer.

This isn’t a single dispute. It’s a sequence that will determine who wins, who loses and what comes next.

In complex regulatory battles, the most important question is often not who is right. It’s which question gets answered first. Once the order of the questions becomes clear, the structure of the fight comes into focus.

Prediction market litigation is advancing through exactly that kind of structure—one question at a time.

When you map the dispute that way, the litigation stops looking like a pile of disconnected lawsuits and starts looking more like a subway map with defined stops along the way. There are three stops on this route:

1. Permissibility: Are event contracts allowed under the Commodity Exchange Act?

2. Preemption: If they are allowed, who regulates them: The federal government or the states?

3. Parallelism: And if they are derivatives, where are they legally allowed to trade?

That’s the sequence. Each question naturally leads to the next.

Litigation Sequencing vs. Doctrinal Sequencing

If those three words ring a bell, it’s because we introduced them recently as: The 3P Framework.

LexBeyond

The False Binary - Ep. 17

Key Takeaways…

Listen now

2 months ago · 1 like · Lexicon Labs

But, and this is the key point, the order was different.

In our framework, we had placed preemption first, then permissibility, then parallelism. That was not a stylistic choice, it was doctrinal. Proper legal analysis must begin with jurisdiction. If the federal government has authority, one set of laws governs permissibility. If the states do, a different set of laws applies. The legal status of sports gambling rests on an interconnected web of statutes, and you cannot properly adjudicate permissibility without resolving jurisdiction first.

That said, here’s the critical observation:

Litigation sequencing is not the same thing as doctrinal sequencing.

In theory, the logical order of legal analysis begins with jurisdiction, followed by permissibility and then parallelism addresses the co-existence question. In practice, courts address the questions that land in front of them, in the posture in which they arise. Litigation rarely unfolds in the tidy order that doctrine would prefer. Instead, disputes are resolved through threshold decisions that reflect timing, strategy and procedural happenstance. And, in the case of prediction markets, the sequence we displayed above is the sequence the courts actually followed.

This naturally raises the next question:
Was this sequencing intentional, or did it emerge organically as litigation evolved?

Evaluating the Intentionality Behind Litigation Sequencing

There are many cases and many parties in various court dockets today, but the modern era of prediction market litigation began with Kalshi. If intentionality exists anywhere, that’s where you’d expect to find it.

So, how much of this sequencing was deliberate?

The honest answer: We truly don’t know. Perhaps one day executives will be deposed and forced to answer under oath. Even then, attorney-client privilege may keep parts of the story sealed.

Still, I will share my foresight with you–not insider knowledge, just my analysis:

Kalshi likely didn’t sit down on day one and map out a multi-year sequencing strategy.
Early on, they likely expected to fight to center on public interest analysis.

As litigation unfolded, an opportunity emerged:
The dispute could be narrowed, staged and sequenced.

First, Kalshi was handed a golden opportunity to isolate the permissibility question and win on election contracts, temporarily sidelining the “gaming” issue. That required a concession on sports event contracts–one they made without hesitation. They sacrificed sports event contracts to win elections.

Once that bridge was crossed, there was no real reason to not bring sports event contracts back. Yes, collateral estoppel was a theoretical concern, but apparently not a deterrent. It took Kalshi just a few days to pivot 180 degrees and self-certify sports event contracts.

The CFTC declined to initiate review on Kalshi’s self-certification, even though it did so on Nadex’s. That opened the door for the preemption phase of the litigation sequence. Kalshi quickly scored two early wins in Nevada (PDF) and New Jersey (PDF). Score: 2–0, Kalshi.

When the CFTC dismissed its appeal of the election contracts case, the next stage of the sequence opened up in earnest: Preemption.

At each stage, Kalshi had little incentive to broaden the fight prematurely.

• Preemption didn’t need to be argued when the opponent was the CFTC. That phase was all about permissibility.

• With permissibility resolved for elections, and with the states now the primary opponents in sports‑event‑contract cases, there was no reason to dwell on the past. It was preemption’s turn.

• Permissibility for sports was never litigated—it was conceded, then reintroduced through self-certification and CFTC inaction. The industry seemed to miss that detail entirely; permissibility never made its way back to the docket.

So what about the future? What about parallelism?

As The Cranberries would say, no need to argue. Parallelism doesn’t need to be litigated when the opponent is the state. Just extend the olive branch: We can co-exist. The unspoken rationale: This is a preemption dispute, your Honor. Off-exchange trading isn’t before the court.

And the CFTC—now functioning more like an industry advocate than a regulator—is singing the same tune: We can co-exist.

None of this required a master plan to be drafted on day one. Even if such a plan existed, executing it would have been nearly impossible. Litigation sequencing often emerges in real time. It evolves organically.

Litigation sequencing reflects the order in which courts confront issues—not necessarily the order in which those issues are logically related.

That said, experienced litigators recognize which issues are decisive. They isolate them when possible and avoid expanding the dispute until the earlier gates are resolved. Once one stage closes, the next becomes unavoidable.

Intentional or not, this was elegant sequencing from Kalshi. Back in November we observed:

Kalshi is making a decent effort to isolate the questions and adjusting its strategy on the fly. That is their legal strategy—moving the ball incrementally.

That’s how we derived the route plan depicted above. Prediction market litigation is advancing—one question at a time.

Looking Ahead

Right now, the train is sitting squarely at the second stop: Preemption. Depending on how you do the counting, there are somewhere between 40 and 50 cases currently being litigated across the country, and likely more on the way.

Understanding litigation sequencing is essential. It explains why certain arguments appear when they do, why others remain dormant and why the industry finds itself locked in a preemption battle today.

The route isn’t random. It’s emergent. Now that we can see the path clearly, the next stop becomes easier to anticipate. Before we move forward though, we need to examine what happened at the first stop, which we will detail in tomorrow’s post.

Stay tuned.

Around the 23:41 mark, he offered what may be the clearest articulation yet of how he views prediction markets–and, more importantly, how he views the relationship between prediction markets and state-regulated sports gambling:

… They are treated just like any other futures exchange where we have clearing, we have certain risk controls, there’s advertising and marketing requirements on the brokers. So, this is a very fulsome regime, and it’s very much, I’d like to liken it to, you’ve got a federal pharmaceutical regime, that’s got very stringent requirements and then you’ve got supplements that can be offered in many different ways and don’t have the same sorts of regulatory requirements and overlay. We’ve got state gambling and gaming, rules and regulations and licenses. And they’re able to offer certain products. They are able to serve a bunch of alcohol for free to people, let them go bet on sports, they’re able to use a bookie and be able to set the spread. Our products are very much heavily regulated and have stringent requirements. It’s a different regime. They can exist in parallel. We certainly don’t go into casinos to evaluate whether they are offering illegal over-the-counter swaps… (emphasis added)

This is the heart of the problem.

The Gist Of The Issue

They can exist in parallel.

No, they can’t.

We certainly don’t go into casinos to evaluate whether they are offering illegal over-the-counter swaps.

Why not? That is exactly what Dodd-Frank was designed to prevent?

Selig’s framing isn’t just a policy preference–it’s a legal position. Secondly, it directly contradicts the position taken by the person who was widely expected to lead the CFTC not long ago.

Quintenz Reads The Law Very Differently

Brian Quintenz came within inches of becoming CFTC Chair. Had the Winklevoss twins not derailed his confirmation, he–not Selig–would be deciding the fate of sports event contracts today.

And we have the luxury of knowing his views on the issue. When ErisX attempted to backdoor sports gambling into the U.S., Quintenz publicly explained the statutory structure. Quintenz’s view of the law? The polar opposite:

… All events are commodities, which means all contracts on future events are commodity futures contracts, which means all future event contracts need to be traded on a regulated and registered futures exchange. But if the Commission deems any event contract that involves one of the enumerated activities to be contrary to the public interest, that contract is banned from trading on any registered futures exchange. The contract cannot trade anywhere else either since it is still a commodity futures contract and, if traded off of an exchange would be illegal. (emphasis added).

This is the point that seems to be getting lost. The question is not just whether sports event contracts are permissible. The question is also whether state-regulated sportsbooks can trade them.

They cannot.

Preemption is one issue–the one being litigated now.
Permissibility is another.
Parallelism is the third–and the CFTC is now contradicting itself on two of the three.

This is what we call the 3P Framework and we covered it in our latest LexBeyond podcast:

LexBeyond

The False Binary - Ep. 17

Key Takeaways…

Listen now

2 months ago · 1 like · Lexicon Labs

The CFTC Used to Enforce Off-Exchange Trading Violations

The agency’s own enforcement history makes Selig’s “parallel-regimes” theory impossible to square with reality.

Take Polymarket. The CFTC’s order took the following position:

… such event market contracts, each of which is composed of a pair of binary options, constitute swaps under the CFTC’s jurisdiction, and therefore can only be offered on a registered exchange…

The issue wasn’t whether the contracts were good or bad. It was that they were trading off-exchange. Same with Intrade. The CFTC charged the company for offering commodity options to U.S. customers “in violation of the CFTC’s ban on off-exchange options trading.”

You can’t trade swaps off-exchange, period.

This is black-letter Dodd-Frank.
There is arguably a shade of ambiguity in other parts of the statute, like what “gaming” means. But not here.

And, if you have been following our work, you also know this is the direction that the courts are headed:

So the question becomes: Does the CFTC genuinely believe these contradictory positions will survive Supreme Court review in a post Loper Bright world?

It’s Your Word Against Yours

The prediction market saga is full of contradictions:

• Kalshi distancing itself from sports event contracts and then self-certifying its sports event contracts;

• Blanche Lincoln going from architect of the “gaming” prong (PDF) to advocate for sports event contracts; and

• Sara Slane flipping from states’-rights champion to federal preemption evangelist.

There’s a critical turning point in Zootopia where Officer Judy Hopps “convinces” Nick Wilde to join forces with her:

The idea is simple. Nick’s verbal representation of having made beaucoup bucks conflicts with the tax returns he filed, where he showed zero income. Judy extends the carrot, but what’s inside the carrot is the stick: Nick is incentivized to cooperate otherwise he will be punished for a tax felony.

Our legal system is supposed to detect material contradictions and take them into account toward a proper adjudication of the cases. The doctrine of judicial estoppel (PDF) formalizes that idea.

And now the CFTC has joined the list:
From off-exchange-trading cop → to non-enforcer → to parallel-regime theorist.

As we’ve said repeatedly (PDF), litigation against prediction markets is futile:

• Kalshi self-certified under the statute;

• The CFTC has broad discretion; and

• The agency is choosing to use it.

Congress erred in giving the CFTC this much discretion in a sensitive area of law. But the Administrative Procedure Act (“APA”) still exists–and Selig’s “parallelism” comments1 add yet another arbitrary and capricious action to its diary.

What Happens If Prediction Markets/CFTC Win?

If SCOTUS greenlights sports event contracts, the next steps are obvious:

1. A prediction market sues state-regulated sportsbooks, arguing they are engaged in illegal off-exchange swap trading.

2. The CFTC files an amicus brief supporting that position–because it expands the agency’s power;

3. The courts agree, because the statute is clear; and

4. State-regulated sports gambling collapses, replaced by a federally regulated, national regime.

States, tribes, state-regulated sportsbooks and their investors should be pricing this in, but most don’t seem to be doing so.

Prediction markets are not trying to coexist. They are isolating the fight to preemption because that is where their strongest arguments lie. Once they win on that front, their coexistence argument disappears; it will have served its purpose and will no longer be needed.

The States’ Choice Under Uncertainty

States and tribes now face a classic existential threat and economic decision under uncertainty2:

• Option A: Fight preemption. High upside, catastrophic downside.

• Option B: Accept federal preemption and fight permissibility instead. A “win” here implies that they revert to casino gambling that does not compete with sports wagering.

Risk aversion matters here.
Most people prefer a sure $45 over a 50% chance at $100.
And as stakes rise, risk aversion increases.3

States with no sports betting (California, Texas, Utah, etc.) are naturally aligned with Option B. For them, it’s mostly upside, with very limited downside.

For states with sports betting, the position is a bit trickier. The ruling would come attached with the acknowledgement that they have been running illegal swaps markets years, sort of an egg-in-the-face moment. But that doesn’t mean the strategy should automatically be discarded. Even those states may find the risk-averse strategy optimal.

Why? That’s not exactly a sure outcome, is it?

Litigation never offers certainty–only probabilities. States choosing the “risk‑averse” path are not choosing certainty—only a stronger legal footing. And even under that choice, they have two ways of approaching this:

Approach #1 (broader): Argue for public interest

This is a strong position. It rests on the argument that “gaming” means “gambling,” and economic purpose (hedging utility and price discovery) is how public interest should be determined. If this argument ends up being litigated in a court that evaluates congressional intent, legislative history and the statute holistically, it becomes the winning argument.

We’ve previously explained why the Court of Appeals for the D.C. Circuit would likely have adopted it. The only reason we didn’t find out is because the CFTC chose not to find out:

Approach #2 (narrower): Zoom In on “Gaming”

The position here would be: “Gaming” includes sports games. For starters, this is the same argument Kalshi itself relied on not long ago; it’s not easy to recover from that.

More broadly, prediction markets/CFTC would face a largely unanswerable question: If sports games are out, what does the gaming prong in the special rule do? Now the court would need to be convinced that not only is the colloquy (PDF) meaningless, but also that Congress, coming out of the most devastating economic crisis in history, was worried that people would offer event contracts on poker outcomes. That possibility collapses under its own weight.

Is this a guaranteed win? Certainly not, but it is arguably the closest the states can get to a sure outcome.

My Prediction: This Contradiction Ends the Sports Gambling Industry at the State Level

The CFTC cannot simultaneously argue:

• That event contracts are swaps when prediction markets offer them;

• That event contracts are not swaps when state-regulated sportsbooks offer them; and

• That event contracts can “exist in parallel” when both prediction markets and state-regulated sportsbooks offer them.

1. The law simply does not allow that;

2. The agency’s own enforcement history does not support that; and

3. The courts would have difficulty accepting that.

If prediction markets win on preemption, the contradiction collapses–and it collapses directly onto state-regulated sports gambling.

The states are not choosing between winning and losing.
They are choosing between winning big and losing everything.

Tick tock. Tick tock.

Yesterday, we published Normalized, Not Legalized: A Response to Matthew Yglesias. Our main thesis was simple: Yglesias was operating under the incorrect assumption that sports gambling is a matter reserved to the states.

If that premise is wrong, then the natural follow-up is: What is the legal status of sports gambling in America? What do the laws actually say?

To his credit, Yglesias doesn’t object to the idea that law, and only law, should dictate what happens with sports gambling:

… I also “don’t believe the courts should consider or care about the policy outcomes of their decisions at all.” They absolutely should not do this. The one and only responsibility of judges is [to] make legal rulings that correctly state the law, based on what the law really and truly is.

On this, we agree. So, what is the law?

A surprisingly large portion of the answer is hiding in a single comment left on Yglesias’s own post by Charles Fain Lehman, a Senior Fellow at the Manhattan Institute and a Senior Editor of City Journal (LinkedIn, The Causal Fallacy - his Substack):

Professional anti-fun guy here. Interstate sports gambling is illegal under the federal wire act. The prediction markets skirt this by selling futures contracts (therefore not gambling). But event contracts in “gaming” are already prohibited under Dodd-Frank’s rules about contracts contrary to the public interest. (See: https://www.law.cornell.edu/uscode/text/7/7a-2)

In other words, the line Matt wants (and which I agree with) already exists in federal law. CFTC just needs to enforce it. And Congress ideally needs to make extra clear what “gaming” meant.

Lehman gets about two-thirds of the way there. Let’s drive it to the finish line.

Read more

Matthew Yglesias argues in his recent post, legal sports gambling has gone way too far. It garnered significant interest with more than 500 comments. There is no debating his success as he’s built a Substack empire generating more than $1 million a year.

Success doesn’t always mean the legal conclusions are correct. We’ve seen this many times over and not just by Yglesias. In his post, Yglesias goes off-track almost immediately:

…[T]he recent explosion in legalized, normalized sports gambling, both in prediction markets and apps, has proven sufficiently widespread and problematic to have prompted a backlash in many quarters.

Stop right there. Zoom in on the threshold question buried in his claim:

Was sports gambling actually legalized?
Or was it simply normalized?

That distinction matters and is the reason why his entire argument unravels.

Where Yglesias Misfires on Jurisdiction

After asserting that sports gambling has been “legalized,” Yglesias continues:

… [T]his move by the C.F.T.C. is trying to preempt state regulation of sports betting, even though gambling has long been regulated by the states.

Gambling games? Absolutely. Casino games are local and squarely within states’ police powers. Naturally, they are regulated by the states.

Gambling via futures? No. Since 2000, when Congress clarified the breadth of the commodity definition and created the excluded-commodity category, sports events contracts have been under CFTC jurisdiction. The Dodd-Frank Act reinforced that structure in 2010; it didn’t create it.

Courts increasingly recognize sports event contracts as sports bets–listen to our recent LexBeyond podcast Ep. 16 surrounding the Tennessee opinion (PDF). The inverse is also true–sports bets are event contracts:

In fact, this is precisely why the state-licensed sports regime is in trouble, regardless of what happens with federally “regulated” prediction markets:

LexBeyond

When The Duck Meets the Mockingbird - Ep. 16

In this quick‑hit briefing, Lex and Bianca break down a surprising twist in KalshiEX LLC v. Orgel, where a Tennessee federal court granted Kalshi a preliminary injunction; but the real story lies in the reasoning. As they trace the logic, they reveal how Tennessee’s attempt to label Kalshi as a sportsbook backfired, because under the court’s own “duck t…

Listen now

2 months ago · Lexicon Labs

Asking the Wrong Question Leads to the Wrong Answer

Yglesias proposes:

What’s called for here is federal policy that tries to foster prediction markets while preserving states’ ability to regulate gambling on sports. In practice, the only way to do that is with a bit of somewhat arbitrary line-drawing.

But this presumes that states have the ability to regulate gambling on sports. What if they don’t–and never did (since 2000)?

He then veers into the “everything is gambling” territory:

The basic reality is that there is a certain gambling-like aspect to all financial markets. Wagering on a roulette wheel and purchasing a contract in a forecasting market about an upcoming election in Nepal are in some sense the same thing. You are “predicting” how the ball will fall. You are “betting” on the election.

They are not the same thing, no matter how much it might feel that way, and the law is explicit as to what counts as gambling. There is a much cleaner way to frame what we think (hope) that Yglesias meant:

• Games of chance

• Event contracts that entertain

Everything else stays outside the boundary. Some examples:

• Games of skill

• Event contracts that serve an economic purpose

• Stocks

• Crypto

• Collectibles.

Legally, none of these things are gambling. People can disagree over the policy, but the law is the law–and it was written by elected representatives at both the state and federal levels.

Adjacent Markets, Adjacent Mistakes

There are a couple of other places where Yglesias’s comments on event-contracts may seem to drift off-track; but in reality, all of these things are connected–remember, it’s one giant headache.

Yglesias writes:

But capitalist countries have actually managed to police the distinction between speculative investments and games of chance for as long as financial markets have existed.

Games of chance, sure. But speculative investments? It’s not clear what he meant by that. If he had prediction markets in mind, then no, those are not investments (LexBeyond podcast Ep. 13), so they can’t be speculative investments either. If you’re wondering what speculative investing actually looks like, this visual delight may help.

He then turns to daily fantasy sports:

The game of Rotisserie League Baseball evolved into “fantasy” versions of all the major sports, but remained pretty clearly distinct from gambling because gambling was illegal.

Yglesias cites fantasy sports as something “clearly distinct from gambling.” But that distinction exists only because the industry has insisted–loudly and repeatedly–that fantasy sports are “games.” Strip away that myth, and the gambling nature becomes obvious. Both traditional fantasy sports (“TFS”) and daily fantasy sports (“DFS”) are, at bottom, more complex (relative to binary options) event contracts/swaps.1 The mechanics are the same, but the branding is different.

Murphy Didn’t Do What People Think It Did

Yglesias writes:

But since the Supreme Court un-banned sports gambling at the federal level, individual states are essentially in a kind of prisoner’s dilemma.

But, SCOTUS did no such thing.

Murphy (PDF) struck down PASPA on anti-commandeering grounds. It did not authorize states to legalize sports gambling.

Yglesias continues:

The prior arrangement — federal law says you can bet on sports but you have to go to Nevada — was arbitrary and illogical, but it worked fine and overturning it has had major consequences for society with minimal democratic input.

This raises questions almost no one asks:

• Did Murphy elevate the other states to Nevada’s status?

• Or, did it bring Nevada back under the same federal statute that constrained everyone else?

Because SCOTUS never considered the Commodity Exchange Act, the public assumed the former. Prediction markets are now forcing the realization that it’s the latter.

States Get a Second Bite. The Federal Government Does Not.

Yglesias offers a familiar argument–the classic cost-benefit analysis that drives some gaming decisions:

There is some value in keeping sports betting mostly illegal and largely stigmatized, but there is also value to capturing gambling revenue.

States can absolutely legalize games of chance if they conclude the benefits outweigh the costs. That’s why casino gambling spreads: Revenues are immediate and measurable; costs are delayed and diffused. Further complicating the math is the fact that costs are highly subjective, and one can argue that, as a result, true costs are not even properly accounted for, but that’s an argument deserving of its own post on another day.

Having said that, the federal government does not get a second bite at the apple. For 175 years, U.S. policies have separated gambling from futures markets. Once a futures contract is deemed gambling, it’s out–permanently.

Yglesias assumes the state-level policy dynamic applies federally. It doesn’t.

The Real Harm Came from Regulatory Inaction, Not the Supreme Court

Yglesias’s view on how we’ve gotten here:

Once betting is legal enough that it is embraced by the key sports leagues and ubiquitously advertised, the value proposition to any given state of keeping it illegal is reduced. This is why we saw a huge wave of legalizations.

Yglesias’ argument that the states faced a prisoner’s dilemma and joined in on the gold rush is faulty for a simple reason. What he calls “legalization” is simply the CFTC declining to enforce the laws for years. That’s normalization–not legalization.

Yglesias concludes that the CFTC is “exacerbating the harm done by the Supreme Court.”
But the Supreme Court never caused the harm–the CFTC did–by:

• Declining to act on state-regulated sports betting for years;2

• Signaling to prediction markets that national sports gambling might be possible;3

• Treating contrary arguments, case law, litigation positions, etc. as mere “obstacles”;4 and

• Continuing to avoid action on sports event contracts.5

The Supreme Court did not pave the way for states to legalize sports gambling.

The CFTC doesn’t seem interested in protecting public interest anymore. The cop went off-duty and perhaps the best way to characterize the status quo is:

With Chevron now gone, the courts are the only venue left to clean up the mess.

Yglesias’s Policy Proposal Misses the Point

He suggests:

Create a federal regulatory status for prediction markets that is exempt from state regulation, then say that to qualify as such a market, sports-related contracts cannot exceed a certain relatively small share of revenue.

This is a vice-cap dressed up as a carveout. It introduces an arbitrary policy preference that breaks from the foundational principles separating genuine futures trading from pure gambling. It might slightly de-scale sports gambling, but it would still nationalize it–essentially a no-action letter on steroids.

There is a simpler, cleaner and legally sound path:

Enforce the laws Congress already passed.

When Judge Barry-Smith released his opinion in Massachusetts a few weeks ago, the scoreboard moved to 5-1. State-rights advocates rejoiced. Tribal regulators were pleased. The emerging narrative was simple: Prediction market litigation was becoming a nightmare for Kalshi.

Then, a month later, Judge Trauger issued her decision (PDF) in Tennessee–and this time Kalshi walked away with the win. Suddenly, it was the prediction markets’ turn to celebrate.

But, the real story isn’t that Kalshi lost in Massachusetts and won in Tennessee. With dozens of cases in motion, both wins and losses are expected. At this point, this whole thing resembles a basketball game: States on one side, prediction markets on the other, trading baskets back and forth.

The real story is that both judges–despite reaching opposite outcomes–effectively agreed on a foundation consisting of three closely connected statements. Once you follow that shared premise though to its logical conclusion, you arrive somewhere deeply inconvenient:

State-regulated sports betting may be nearing its end.

Massachusetts: The Silence that Matters

Judge Barry-Smith issued his opinion on January 20:

Massachusetts Memorandum Decision (jan 20, 2026)

4.63MB ∙ PDF file

Download

Download

In an earlier podcast, we argued that Kalshi may “out-Brady” Massachusetts–not because Kalshi won (they didn’t), but because the opinion unintentionally exposed a structural vulnerability in state-regulated sports betting:

LexBeyond

Can Kalshi Out-Brady Massachusetts? Ep. 11

⭐ Key Takeaways…

Listen now

3 months ago · 3 likes · Lexicon Labs

The core problem? An extremely consequential act of silence sandwiched between two correct conclusions.

Conclusion #1: Event contracts are sports wagers.✅
Judge Barry-Smith states:

The defendant… operates a nationwide ‘prediction’ market… on which traders can purchase… ‘event contracts,’ including the outcome of sporting events.

And:

Kalshi does not argue that its sports-related event contracts do not meet the definition of sports wagering in the Commonwealth.

Easy enough.

Conclusion #2: Only federally regulated exchanges can offer event contracts. ✅
Judge Barry-Smith observes:

Under the CEA, only federally regulated exchanges can offer event contracts.

No objections, Your Honor. That is the law.

Here is our question regarding the inverse proposition:

If event contracts are sports wagers… are sports wagers event contracts?

Silence.

Judge Barry-Smith failed to recognize or chose to remain silent on what truly matters:
That silence–the “redacted middle”–is the only thing standing between state-regulated sportsbooks and a federal prohibition.

With that executive summary in hand, let’s work through the details.

Judge Barry-Smith clearly identifies Kalshi as an event-contract platform:

• Kalshi launched its platform in 2021, with event contracts focused on topics including inflation, the consumer price index, unemployment and macroeconomic benchmarks.

• In January 2025, Kalshi began offering sports-related event contracts.

So the question becomes unavoidable:

Who is legally allowed to offer event contracts?

Judge Barry-Smith answers unequivocally:

Under the CEA, only federally regulated exchanges can offer event contracts. 7 U.S.C. § 2(e). (emphasis added)

There is one issue with how he frames the statute: While the CEA does use the phrase “event contracts,” the specific provision he cites, § 2(e), does not, and instead speaks only in terms of swaps.

Is that a problem? Not necessarily. If event contracts are swaps, then his bottom-line conclusion still holds.

But here is another loose end, which eventually leads to an existential problem for state-regulated sportsbooks: Judge Barry-Smith “assume[s] without deciding that Kalshi’s event contracts are swaps.”

→ Swaps can only trade on federally regulated exchanges - yes.1

→ The cited statute, § 2(e), does not mention event contracts, but the opinion implies that.

→ That’s not an issue if event contracts are swaps, but…

→ The opinion is silent on whether event contracts are swaps.

This doesn’t exactly hold together, does it? It feels… incomplete. For the critical reader, the opinion results in more questions than answers and it leaves the door wide open:

How should we characterize sports wagers?

1. Are sports wagers event contracts?

2. Are sports wagers swaps?

3. If yes to either, what does that mean for DraftKings and every other state-regulated sportsbook?

The answers are rather straightforward (but you won’t find them in the opinion):

1. Yes.

2. Yes.

3. It means state-regulated sportsbooks are engaging in unlawful activity, strictly prohibited by the CEA.

That’s the existential threat hiding inside the Massachusetts opinion.

Precision matters here. When a judicial opinion invokes “event contracts” and immediately cites a statutory provision, readers naturally assume the statute contains that term–especially in a case where the entire dispute turns on what an event contract is and who has jurisdiction. With nearly forty related cases moving in parallel, every court is watching every other court. In that environment, even small linguistic choices carry outsized weight.

Tennessee: Revealing the Redacted Middle

The Tennessee decision goes even further–it doesn’t just echo Massachusetts (different conclusions, yet the same reasoning); it highlights the existential threat facing state-licensed sportsbooks even more strongly. In our recent podcast, When the Duck Meets the Mockingbird, Lex & Bianca walk through that reasoning in less than five minutes:

LexBeyond

When The Duck Meets the Mockingbird - Ep. 16

In this quick‑hit briefing, Lex and Bianca break down a surprising twist in KalshiEX LLC v. Orgel, where a Tennessee federal court granted Kalshi a preliminary injunction; but the real story lies in the reasoning. As they trace the logic, they reveal how Tennessee’s attempt to label Kalshi as a sportsbook backfired, because under the court’s own “duck t…

Listen now

2 months ago · Lexicon Labs

That said, let us memorialize the logic here as well. Judge Trauger has no trouble reaching the exact same conclusions as Judge Barry-Smith:

Conclusion #1: Event contracts are sports wagers. ✅
From the opinion:

In other respects, it does resemble traditional sports betting. As the defendants argue, Kalshi has marketed itself as a traditional sports betting operation.

Indeed.

Conclusion #2: Only federally regulated exchanges can offer event contracts. ✅
Judge Trauger observes:

Under the CEA, only exchanges regulated by the CFTC—known as designated contract markets (“DCMs”)—can offer event contracts. (emphasis added)

Once again, no objections, Your Honor.

But where Massachusetts stayed silent, Tennessee takes a half-step further, which leads to a reveal of the “redacted middle”:

And, based on Kalshi’s description of its operations, although there may be differences under the hood between trading on Kalshi and placing a bet with a licensed sportsbook, for any sports-betting enthusiast unfamiliar with the CEA, it appears to the court that a user would find Kalshi’s offerings similar, if not identical, to a sportsbook. (emphasis added)

In other words, the court says Kalshi’s offerings appear “similar, if not identical” to a sportsbook. And “identical,” as Merriam-Webster reminds us, means:

• Being the same, or

• Having such close resemblance as to be essentially the same.

If A is identical to B, then B is identical to A.
If sports event-contract trading is identical to sports betting, then sports betting is identical to sports event-contract trading.

Which then, logically, means:

Sports wagers are event contracts.

Of course the decision doesn’t reveal this in a quotable line—but it delivers it unmistakably in substance.

That is the “redacted middle”–revealed.

Once you accept that equivalence, the rest follows in line automatically, allowing us to fill in the blanks to complete the picture above.

• Event contracts are sports wagers;

• Sports wagers are event contracts; and

• Only federally regulated exchanges can offer event contracts.

Therefore, state-regulated sportsbooks are offering event contracts in violation of a federal statute.

“He shall from time to time give to the Congress information of the state of the union, so people can bet on it.”

Says Article II, Section 3 of the U.S. Constitution, not!

The Constitution requires only this: That the President “from time to time give to the Congress Information of the State of the Union...” That’s Article II, Section 3. A duty to inform. A duty to recommend. Not a prime-time spectacle. Not a meme laboratory. And certainly not a tradable asset.

Yet today, the constitutional obligation to report to Congress has become a nationally televised ritual–and now, a prediction market on whether specific words will be spoken. The distance between “information to Congress” and “Yes 11% / No 90%” is the distance between constitutional design and nationwide gambling.

So what will President Trump say during the State of the Union? Supreme Court?

It makes sense, right? The Supreme Court just ruled Trump’s tariffs are illegal. Justice Gorsuch’s concurrence in particular received much attention, with Professor Bainbridge accurately depicting it as him “spanking colleagues to his left and his right.” Trump didn’t like the decision. He immediately imposed an import duty of 10%, then just one day later upped the ante again and made it 15%.

For the opportunist with conviction, this is as close it gets to “free money.” As of Sunday morning, the contract could be had at 87 cents–meaning if President Trump utters those two words, that’s an almost 15% return in just two days. In 2025, you had to wait close to a year for the S&P 500 to return that and that was a good year. Why not “invest” in prediction markets (LexBeyond podcast Ep. 13)?1

And if you want to get ahead even faster –whether because you’re a reckless gambler chasing a Lambo or a disillusioned Gen Z who’s lost trust in America– the menu gets even more absurd. Sunday morning offered these:

Genius Act was at 47%, but traders were losing hope. Maybe Brian Armstrong is too optimistic?

Sleepy Joe at 36%. Yes: A financial instrument on whether the current POTUS will call out the former POTUS during the SOTU. Mockery is in prediction markets’ DNA, so why not?

Crypto/Bitcoin at 26%. If Bitcoin isn’t moving, why bother with the token when you can bet on the mention instead?–a potential 4x payout in just two days.

And if you want even more meme-level material to gamble on, don’t fret. There’s a market for that, too.

Will the President Say Six Seven During the State of the Union Address?

It’s more likely than not that you’ve heard “six seven” in recent times, but just in case you haven’t, this is the video that started it all:

It’s hard to believe that this was only a few months ago. It feels longer. My kids are telling me that the meme has already passed. Maybe. But it’s still culturally relevant enough to make it into SOTU trading markets. And while this commenter captured the ridiculousness of the meme…

…the real irreversible damage won’t come from the millions of kids joking around. It will come from those same kids having the ability to wager on whether the President of the United States will say “six seven” during the State of the Union address.

Article II, Section 3 requires the President to provide Congress with information. That is the constitutional architecture. What it does not require is a broadcast spectacle priced in real time–with odds attached to syllables. When we move from “information of the State of the Union” to pricing whether the President will say “six seven,” we are no longer debating policy. We are commodifying rhetoric.

It’s hard to imagine that’s what the Founding Fathers had in mind. So, just short of our beloved country’s 250th birthday, how did we get here?

If you’re a reporter covering prediction markets, a lawyer tracking nearly 40 cases, or simply a spectator wondering how all of this happened, we can offer some insight. We didn’t sit down one weekend and do superficial research. We’ve been at the center of this (albeit not always visibly), for the last 25 years.

2000 - When The Rope Comes Down

It started at the turn of the century.

The markets were humming. The dot-com bubble hadn’t burst yet. This time was truly different. The future was undervalued, according to Wired, which boasted that its WIRX index (a group of 40 companies “leading the transformation of the economy”) delivered an 81% return. It was a mixed bag: Microsoft and Amazon... but also Enron and WorldCom.

So, no, this time was not different, but the perception was that it was. And perception drives legislation. The result? The Commodity Futures Modernization Act (“CFMA”) of 2000.

It was a strange response. Brooksley Born, CFTC Chair from August 1996 to June 1999, had been genuinely worried that off-exchange trading would be the industry’s Achilles’ heel. She lacked visibility and didn’t like it. One of the few remaining responsible adults in the room, she took the challenge head-on. This Frontline documentary is a must watch:

Her warnings alienated the powerful trio of Federal Reserve chairman Alan Greenspan, Secretary of the Treasury Robert Rubin, and Deputy Treasury Secretary Larry Summers. Arthur Levitt, SEC Chair at the time, was also in that camp.

Born wasn’t one to give up easily. When Genius Failed, it briefly seemed like her warning signs might be heeded. But Greenspan charmed Congress, calling Long Term Capital Management’s collapse an anomaly. Just like the 1907 panic (LexBeyond podcast Ep. 15), it was a “rare occasion.”

The writing was on the wall. Nothing protective would be done about OTC derivatives markets. Born resigned. The Working Group, led by Paul Architzel on the CFTC side, went to work. One of its key findings (PDF):

A cloud of legal uncertainty has hung over the OTC derivatives markets in the United States in recent years, which, if not addressed, could discourage innovation and growth of these important markets and damage U.S. leadership in these arenas by driving transactions off-shore.2

When the storm passed, Congress inexplicably doubled down, enacting the CFMA.

The CFMA did three things–a lethal combination:

1. Removal of the approval process. That was the velvet rope that came down. Previously, the CFTC had to approve all products. After the CFMA, they approve only if exchanges specifically ask for it (almost no one does). Instead, exchanges can just self-certify and are trusted to self-regulate.

2. Repeal of the economic purpose test. Futures markets were for hedging and price discovery and the economic purpose test was the mechanism to separate economically useful futures from gambling. Through the CFMA, Congress instead opted for vague language about “financial, commercial or economic consequence.”3 The CFTC lost its formal grading authority.

3. Off-exchange trading legitimized. The CFMA created regulatory tiers allowing institutional actors to transact in largely unregulated OTC swap markets.

In other words, Congress gathered the wood, lit the fire, and then poured gasoline on it.

To many, 2008 was a black swan event. To those tracking the law in real time, it was entirely predictable. As the late Lynn Stout described so eloquently:

In other words, the credit crisis was not primarily due to “innovations” in the markets or the legal system’s failure to “keep pace” with finance. The crisis was caused, first and foremost, by changes in the law. In particular, the crisis was the direct, foreseeable, and in fact foreseen (by the author and others) consequence of the CFMA’s sudden and wholesale removal of centuries-old legal constraints on speculative trading in over-the-counter (OTC) derivatives.

Brooksley Born was proven right. Arthur Levitt would eventually apologize:

I’ve come to know her as one of the most capable, dedicated, intelligent, and committed public servants… I wish I knew her better in Washington. I could have done much better. I could have made a difference.

Too little too late.

2008 - When America Feels The Pain

The 2008 recession was the worst crisis since 1929. Congress responded with Dodd Frank–not streamlining, as Kalshi argued, but for cleanup. Reform was literally in the name.

If the CFMA brought America to its knees in three steps, Dodd-Frank walked back one and a half:

1. Off-exchange trading restricted. Off-exchange trading has always been disfavored. It just so happens that America has to go through cycles to remember that core principle. The first time it happened was when the bucket shops were the original financial grift (LexBeyond podcast Ep. 14). SCOTUS intervened (PDF) and crippled them, but it took a panic to finish the job. The same happened with the 2000 deregulatory wave, but the 2008 recession was what triggered the Dodd-Frank reform.
   
   America just needed to see the pain for Congress to bring swaps into the regulatory perimeter. Did that prevent all swaps from trading off-exchange? No. Refer to our sports gambling coverage in Tennessee (LexBeyond podcast Ep. 16). Orange is the new black.
   

2. Economic purpose restored. Somewhat. It returned in the context of event contracts. Congress was aware of the prediction markets trading in death, so terrorism, assassination and war were explicitly called out in the special rule. And since incentivizing an unlawful act through event markets trading is a bad idea in general, that principle was codified into law as well. But there were a ton of futures on other commodities, sports being the main one, that would serve no economic purpose, so the “gaming” prong rounded out the list to “to restore CFTC’s authority to prevent trading that is contrary to the public interest.” (Congress’s words).
   
   Event markets aren’t new–they predate America (LexBeyond podcast Ep. 12). The insurable interest doctrine exists (you can insure your health but not mine) because 18th-century England learned the hard way that betting on strangers’ lives was a terrible idea. America had to go through a similar experience to reach a similar conclusion.
   

3. Self-certification untouched. The rope remained on the ground. Anyone with a license could list anything. The beat cop had to kick out what didn’t belong. What could possibly go wrong?

   ---

2024 - When The Cop Goes Off-Duty

If you’re wondering why the “six seven” market exists–or why sports gambling exploded nationally–you must understand what Dodd-Frank did. It gave the CFTC discretion to separate genuine futures trading from gambling through the special rule.

We mentioned Paul Architzel earlier. He comes up in this blog not just because he helped architect the CFMA, but because he also served as our external counsel for years as we navigated the CFTC’s regulatory maze around our own products.

A surface-level read of history makes it easy to cast Paul as the villain–the guy who designed the blueprint for a mess. This view is too convenient though. Knowing the man, and having worked with him closely, it’s clear the problem wasn’t malice or an invitation to the Wild Wild West. It was something more ordinary, and in some ways more dangerous: He assumed people and institutions would behave better than they actually do. He believed market participants would self-regulate. He believed the CFTC would stay principled enough to police the boundaries. He believed the equilibrium would hold.

It didn’t.

Former Commissioner Quintenz commented regarding the axing of the economic purpose test:

In 2000, the CFMA repealed Section 5(g) of the CEA in its entirety. Exchanges no longer had to affirmatively demonstrate a public interest for their contracts by meeting an economic purpose test for their contracts’ hedging utility.

Yet when Paul advised us–before Dodd-Frank–he didn’t say, “Economic purpose is gone, self-certify whatever you want.” Instead, he urged us to develop contracts that “would have met the old ‘economic purpose test.’” That was the CFTC’s North Star, repealed or not.

In 2024, the CFTC turned its back to its North Star and shortly thereafter lost its case against Kalshi. The Court of Appeals briefly looked like it might save them. Perhaps that scared the agency, because it threw in the towel before a decision was rendered.

Surprising? Not really. Months earlier, the CFTC described its own litigation positions, court opinions, proposed rulemaking and even Kalshi’s position on sports event contracts as:

“Obstacles.”

That word was the tell.
Almost a year ago to the day, we couldn’t help but wonder:

Has the CFTC already decided that they will regulate prediction markets, including sports-related event contracts, and these things stand in the way?

Twenty three Senators now seem genuinely surprised (PDF) that Chair Selig told Congress one thing and is doing another. Surprise is the failure of expectation. The signs were there. If the CFTC truly didn’t know what to do with sports event contracts, it certainly wouldn’t have described its litigation positions, court opinions, proposed rulemaking and even Kalshi’s position as obstacles. Apparently, that’s what the minimum effective dose of regulation means–if you don’t like the position the entity you regulate took, one you agreed with no less, get it out of the way, whatever it takes.

Paul once told us (in the context of sports):

I doubt that the CFTC would ever find a contract acceptable that relies on specific-performance related outcomes.

We believe Paul’s mistake was twofold:

1. He believed market participants were as principled as he was; and

2. He believed the CFTC would remain principled enough to stop them if they weren’t.

He assumed an equilibrium of trust. But when the letter of the law disappears, the spirit survives only as long as principled adults remain in the room.

Eventually they don’t.

The revolving door accelerates the decline:

• Bart Chilton to HFT.

• Caroline Pham to crypto payments.

• Brian Quintenz to Kalshi’s board.

The responsible regulators get crowded out. The CFTC becomes an advocacy center for prediction markets.

Justice Gorsuch captured the danger in Learning Resources (the recent tariff case) (PDF):

Our founders understood that men are not angels, and we disregard that insight at our peril when we allow the few (or the one) to aggrandize their power based on loose or uncertain authority. We delude ourselves, too, if we think that power will accumulate safely and only in the hands of dispassionate “people . . . found in agencies.” Even if unelected agency officials were uniquely immune to the desire for more power (an unserious assumption), they report to elected Presidents who can claim no such modesty. (internal citations omitted).

We believe Paul had the country’s best interests at heart, but he likely deluded himself.

A Possible Path

Despite the chaos, prediction markets’ confidence isn’t misplaced. Federal preemption is real, but it’s only one part of the three-legged stool. The true debate: Preemption + permissibility + off-exchange trading, and that’s what we believe the SCOTUS will address. If SCOTUS resolves only the narrow preemption question, prediction markets will win.

In that latter scenario, the “six seven” market becomes expressly legal within a couple of years. The current view seems to be that it’s already legal on the federal level. But if SCOTUS stamps it?

All bets are on (pun intended).

Which tweet will go viral?
Is Joe next door cheating on his wife with Susie?
Will little Jack be bullied in school this week?

And of course, the grand prize: Sports.

Along with every imaginable bet that, at best, does nothing for America–and at worst, brings out the absolute worst in humankind, every State of the Union would turn into a gambling bonanza.

Just like the Founding Fathers drew it up.

Yesterday, we argued that Murphy remains unfinished business for the Supreme Court. As we summarized on LinkedIn:

A common takeaway from Murphy is that the Supreme Court “cleared the way” for states to legalize sports gambling.

The holding was narrower: PASPA violated the anticommandeering rule. Other federal constraints remain.

A scalpel, not a bulldozer.

Literally, within minutes of us publishing that piece, the Tennessee news dropped. And just like that, the scalpel moved south.

The reaction was immediate–and mostly celebratory. The prediction market industry has taken a beating recently, and this ruling finally gave them a reason to cheer the news.

Key Takeaways Around the Tennessee Decision

1. The Prediction Market Industry Desperately Needed a Win

Michael Selig, the CFTC Chair, has been on an aggressive public campaign:

• January 29: The proposed rule + advisory withdrawal announcement;

• February 4: The formal withdrawal;

• February 16: The WSJ opinion piece;

• February 17: The Fox appearance (Mornings with Maria);

• February 17: The CFTC amicus brief in the Ninth Circuit; and

• February 17: The “We will see you in court” video.

After that level of advocacy, a court win would be welcome news. It just happened to arrive yesterday from Tennessee in the form of granting a preliminary injunction to Kalshi (PDF Opinion).

2. The Court is Correct - Kalshi’s Sports Event Contracts Are Swaps and Fall Under the CFTC’s Jurisdiction.

This part shouldn’t surprise anyone who has been paying attention.

The statute is broad–extremely broad–and we’ve been saying this for years:

• We argued this position months ago;

• We argued it in 2017, before Kalshi even existed (PDF); and

• We even asked SCOTUS to clarify it back in 2013.

Our perspective hasn’t budged since 2013 because the law hasn’t changed. If you value decade-long consistency, you’ll find it here. If not, there is plenty of commentary out there for you–though even reputable outlets routinely miss the mark, and we call them out on it (i.e., NPR).

3. The Court’s Hidden Conclusion

The opinion contains three key excerpts:

1. “An event contract is a derivative contract for which the payoff is based on a specified event, occurrence, or value—for example, the level of snowfall from a certain storm or the dollar amount of hurricane damage.”
   

2. Under the CEA, only exchanges regulated by the CFTC—known as designated contract markets (“DCMs”)—can offer event contracts.
   

3. And, based on Kalshi’s description of its operations, although there may be differences under the hood between trading on Kalshi and placing a bet with a licensed sportsbook, for any sports-betting enthusiast unfamiliar with the CEA, it appears to the court that a user would find Kalshi’s offerings similar, if not identical, to a sportsbook.

Put those together and you have this riddle–one Lex & Bianca will answer in our upcoming LexBeyond podcast titled: “When the Duck Meets the Mockingbird - Ep. 16”:

4. Congressional Intent and Swap Classification Are NOT In Conflict

Daniel Wallach, a prominent gaming attorney and state-rights advocate, argues that congressional intent should override statutory text:

But the Tennessee court (PDF) said exactly what the courts must do:

The court begins its analysis, as it must, with the statute’s text.

Here’s the real twist: The statute and congressional intent are not in conflict here. They both point to the same outcome: Sports gambling remains illegal everywhere.

CFTC jurisdiction and permissibility are separate questions. Courts are currently resolving narrow issues and not looking at the complete landscape. Viewed through that narrow lens, Tennessee is correct: Sports event contracts are swaps. Now, what happens when you use the wide-angle lens and reverse the question–are traditional sports bets swaps? When the Supreme Court eventually follows that analysis all the way through (jurisdiction, permissibility, off-exchange trading, etc.), the conclusion is inevitable and affects the entire sports gambling industry.

That may be a tough pill to swallow for Wallach, Chris Christie and other like-minded state advocates, but policy preferences are not legal analysis.

5. What About the People of Tennessee?

The Court emphasized the social costs of gambling:

If the defendants succeed on the merits, they can seek fines against Kalshi. But they will have lost months, if not years, of maintaining the integrity of sports betting and treating and preventing problem gambling and gambling disorders, including among those under 21 years of age, as the Act requires.

And:

And it is likely that some portion of Kalshi’s Tennessee members now have, or will develop during the pendency of this case, gambling disorders. If the defendants succeed on the merits, then the cost to the state for being improperly enjoined is the missed opportunity to help problem gamblers, would-be problem gamblers, and minors, some of whose behavior will lead to heartbreak for themselves and their families, with consequent deleterious effects on the state.

This justified an additional $500,000 bond.

But here’s the real question:
What about the Tennesseans who have been gambling since 2020 under a regime that was illegal from day one?

Who protects them?
What is the proper remedy?

The Volunteer State was an early adopter of post-Murphy “legalized” sports betting. Its mobile-first model made it a standout. Since launch, the state has handled more than $20 billion in wagers–impressive for a mobile-only market.

New York leads the nation with more than $26 billion wagered in 2025. Tennessee’s ~$5 billion annual handle isn’t in that league, but relative to population and structure, it’s punching above its weight. Residents bet heavily and consistently.

Which now brings us to our final point:

If the Court is truly concerned about social costs, the bond for Kalshi may be the smallest one on the table. Tennessee’s concern for the social costs of gambling is well‑placed, but it also exposes the uncomfortable truth the opinion never addresses: Millions of Tennesseans have been wagering under a regime that was never lawful to begin with. If Kalshi’s offerings (which, the Court acknowledged, resemble sports betting) trigger federal oversight and can only be offered on designated exchanges (if they can be offered at all), then Tennessee’s own sports betting apparatus sits on a fault line.

The court’s logic doesn’t just justify the paltry $500,000 bond.
It points straight to much larger liabilities: The entire Tennessee sports‑betting market with its attributable social costs and the bill that comes due when a state runs an illegal market for years.

Monday, May 14, 2018. I remember the day like it was yesterday.

I had just departed from Chicago en route to Los Angeles, midway through a four-month grind that had become my new normal. PwC had transferred me to the LA office earlier that year, but I had refused to uproot my kids in the middle of the school year. The compromise: Monday-Thursday in LA, Friday-Sunday back home. Repeat. For months.

If you’ve ever lived that life, you know the truth–it’s not glamorous. It’s exhaustion disguised as productivity. Mondays meant 6 a.m. flights out of O’Hare, which meant waking up at 3:30 a.m. Central. Land in LA, head straight to the office, work a full day, collapse in a hotel room. By Thursday, I’d finally feel human again… just in time to fly home and reset the cycle. You get the picture.

So on that fateful Monday, three months into the grind and nearing the finish line, I shifted in my seat, ready to grab a quick nap.

Then this popped up on my screen:

Sleep was no longer an option. My travel grind may have been ending, but the fight over sports gambling was just beginning.

The First Questions

Two thoughts hit me immediately.

First: What was the final tally?
Second: Did the Court consider the argument I had raised–that sports bets are commodity futures contracts and fall under CFTC jurisdiction?

When I finally read the opinion, the answers were clear:

6-3.
No.

Unsurprising but still disappointing.

Correcting the Record

There’s a persistent myth floating around that no one ever told the Supreme Court that sports gambling falls under federal jurisdiction.

That myth is demonstrably false.

These posts are the detailed play-by-play:

But here’s the TLDR version:
The Supreme Court was aware, or should have been aware, that the CEA covers sports bets. We know this because we told them.

Can We Be Friends?

An amicus brief is also known as a “friend-of-the-court” brief. The idea is to bring a novel perspective to a case that the court might find useful, especially if neither party is bringing it. So this was the amicus I drafted in consultation with FisherBroyles:

Christie v. NCAA

582KB ∙ PDF file

Download

Download

How does a tax consultant end up ghostwriting an amicus brief to SCOTUS on how the CEA impacts sports gambling? All good stories must be told and that’s exactly what we are doing in our upcoming book: Predictable. For now, let’s get back to the brief.

One of the questions I posed was:

Without a doubt, the CFTC has jurisdiction over political and box office contracts. Why should sports gambling be any different?

To our best knowledge, no one on the states’ rights side has ever answered that question. Not then. Not now.

The argument that “states have historically regulated sports betting” is misplaced. Just under ten years ago, Nevada was the lone exception. A few other states had largely irrelevant variations, but no betting on single-game outcomes. If states can claim jurisdiction over sports contracts, what stops them from claiming jurisdiction over election markets or weather derivatives? That’s precisely the kind of fragmentation that led Congress to create the CFTC to prevent.

SCOTUS didn’t engage with our amicus brief (PDF), but one former prosecutor and adjunct law professor did:

Finally got around to reading your amicus brief in Christie v. NCAA. Novel and clever. Well-done. I fear the Court may not grasp what you’re saying, but it won’t be because it’s not well-said.

We appreciated the compliment. And frankly–we believe the Justices would have understood had they truly chosen to engage. Sometimes even brilliant minds choose not to go there.

That choice had consequences. It jumpstarted what is now a $157-billion-a-year industry whose legality has been in doubt from day one. Today, the very federal vs. state conflict we raised almost a decade ago is being litigated in close to 40 cases.

The Key Question Everyone Got Wrong

Did SCOTUS pave the way for states to legalize sports gambling?

At the time, the universal answer was yes.

→ CNBC said it.

→ Legal experts concurred:

With the CBS legal analyst opining:

The ruling allows the states, if they want, to allow their citizens to engage in sports gambling. Any team, any time they want.

→ Maps were drawn:

CNBC continued its coverage the next day, adopting the same state-by-state legality view:

→ The AGA cheered:

Sara Slane, then senior VP for Public Affairs at AGA, was a staunch states’ rights advocate, insisting both sports gambling and casino gambling belong to the states:

States have been regulating that kind of activity, including state lotteries and slot machines, for decades, said Sara Slane, senior vice president for public affairs at the American Gaming Association, an industry group.

Sports betting, Ms. Slane said, “is going to require the same sort of rigor that’s been in place for the past fifty years.”

Yes, the same Sara Slane who now argues the exact opposite:

Is Kalshi on the right side of the law? No.

But the CFTC jurisdiction?
Yes, that’s what we said back in 2017.

What Murphy Actually Did–And Didn’t–Do

Murphy did one thing:

It held that Congress cannot commandeer state legislatures.

That’s it.

Murphy did not:

• Legalize sports betting

• Bless state wagering regimes

• Convert illegal contracts into legal ones

• Address the Commodity Exchange Act

• Dismantle federal gambling laws

It was a scalpel, not a bulldozer. A narrow constitutional incision, not a regulatory overhaul.

States rushed in anyway—not to ask whether sports gambling was legal in the first place, but to monetize it.

Licensing replaced analysis.
Revenue projections replaced doctrine.

And the judiciary silence coupled with the regulatory vacuum created by the CFTC’s inaction enabled a very dangerous situation. Silence and inaction were mistaken for permission.

This is not how law works. Or at least, not how it’s supposed to work.

Why It Happened

If you’re wondering how something this big could be missed, the answer is incentives, as usual. The incentives are what led to an epic misinterpretation of Murphy:

• SCOTUS didn’t need to address the CEA to resolve PASPA.

• The CFTC didn’t want the political costs of stepping into sports gambling and chose to be silent.

• States joined in on the gold rush and collected the tax revenue.

• Leagues wanted the new revenue streams.

• Consumers wanted to gamble.

When every incentive points in the same direction, critical thinking rarely stands in the way.

Laws aren’t ignored because people wake up one day and choose lawlessness.

Laws are ignored when powerful incentives collide with the checks and balances meant to reign them in–and nobody wants to be the beat cop that steps into that line of fire.

Where Do We Go From Here?

Two key questions remain:

Short Answer: No.

We’ll unpack the technicalities in future posts, but the core point is simple: Murphy made a narrow constitutional cut. The broader jurisdictional and regulatory structure remained intact.

The bigger question–the one no one has answered is:

Who will have America’s back?

Murphy is unfinished business. The issue will return to the Supreme Court, and this time, a narrow ruling won’t be enough.

A scalpel won’t cut it.
A bulldozer will.

Congrats to the Seahawks on a well-deserved Super Bowl win.

The game has always been big.
The money bet on it? That pile is ever-increasing.

The American Gaming Association estimates:

Americans will wager a record $1.76 billion legally on Super Bowl LX.

They frame it as proof of:

…continued growth and strength of the legal, state- and tribal-regulated sports betting market.

But let’s be honest here: That number doesn’t even include prediction markets.

Meanwhile, The Atlantic reported (paywall) an early volume snapshot and an estimate from Dustin Gouker:

…Kalshi has already seen more than $167 million in bets on the game, and that number could conceivably crack $1 billion…

Across all bets, Gouker’s estimate of $1 billion in volume on Kalshi turned out to be a fairly good one. On the game's outcome alone, Kalshi still cleared half a billion. Volume and handle are an important distinction, but still…

The question that matters here isn’t how much was bet via prediction markets, it’s this:

Is it legal?

Well, it depends on whom you ask.

Chris Christie Enters the Chat

Christie helped create this entire regulatory landscape. He contends that the prediction markets are not legal:

Let us be precise here: Christie, former Governor of New Jersey, believes prediction markets, and only the prediction markets, are flouting the law. Not the state-regulated sportsbooks, of course. They are the “good guys”: Paying taxes to the state, protecting game integrity, keeping minors out, etc.

Christie posted for all to see:

Christie isn’t just commenting from the sidelines, either. He’s advising the AGA on sports event contracts. That tracks. After all, the only reason states have sports gambling at all is Murphy v. NCAA (PDF opinion). The only reason Christie’s name is not etched in that docket forever is because he left the governor’s office before SCOTUS issued its opinion. But it was Christie’s fight from the very beginning.

It wasn’t even clear that Christie was going to win; the sports leagues were a formidable opponent. At the time, Attorney David Boies thought New Jersey was facing an uphill battle. Christie pushed anyway. He lost in the Third Circuit and for a moment, it seemed that the window of opportunity had closed when SCOTUS denied cert. Then, after some legislative maneuvering, he tried again. SCOTUS took the case and the rest is history.

The AGA backed him by filing an amicus brief (PDF) in the SCOTUS case. Now that prediction markets are eating the states’ lunch, Christie is returning the favor.

So, similar to the AGA backing Christie, who’s backing the proliferation of prediction markets?

Yep, you guessed it. The new CFTC Chair, Michael Selig:

And here’s where things get uncomfortable.

Is it appropriate for the head of a federal agency to publicly weigh in on an active legal controversy, even if it’s from a “personal” account?

Especially when it doesn’t match what he told Congress a mere two months ago. While working as outside counsel (Paradigm) in 2024, Selig co-authored a letter signaling his thoughts that it would be “arbitrary and capricious” to characterize sports event contracts as “gaming.” Did he truly intend to defer to the courts? The more plausible explanation is that he kept his views quiet until securing his position at the CFTC.

If this doesn’t bother you, then we have a very different vision for how public institutions should represent our nation.

Let’s return to the core question.

If Christie is right–if there is no federal preemption and sports gambling is purely a state matter (his position in Murphy v. NCAA)–then half a billion dollars was illegally traded on just one prediction market platform yesterday.

If Selig is right–not about legality–but about federal law preempting state law–then what does that say about the $157+ billion Americans have wagered across all sports, a figure that continues to climb every year?

Big Game Betting - It’s All Illegal

Yesterday, Americans wagered billions on the Super Bowl.

Openly.
Casually.
Cheerfully.

Various platforms advertised during the broadcast itself, $10 million a spot we might add, and are endorsed by leagues that once swore gambling would destroy the integrity of sports.1

And if you’re wondering why you didn’t see Kalshi or Polymarket ads, it’s because the NFL is still forming its stance. For now, prediction markets are still in the same category as tobacco, pornography and firearms. That could change soon.

Nobody wants to flow against the grain (except us really). Here’s the part that nobody wants to say out loud:

All of it is illegal.

Not “unregulated.”
Not “under-regulated.”
Not “a gray area.”

Illegal.

The fact that we pretend otherwise says something uncomfortable about how far American law has drifted from its own foundations.

To see how we arrive at our illegality conclusion, we first need to understand what Murphy didn’t do. Why that SCOTUS decision is unfinished business. That’s our next post.

Then, next week, we will bring it all together and tell you why we have a $150+ billion illegality problem.

Final Thoughts

So, if the house always wins, who is the house?

Theoretically it will be the institution that benefits most from a nationalized sports gambling scheme. It may extend beyond the platforms that offer the bets and it will be at the expense of the American public.

Which brings us to the bigger question: Who’s really going to have the public’s best interest at heart?

The AGA had Christie’s back. Now he’s returning the favor.
The CFTC has the prediction markets’ back and surely they will be returning the favor.

So, who will have America’s back?

Key Takeaways

• NPR’s framing of prediction markets misstates core legal issues, especially the meaning and role of “gaming” under federal law.

• The real legal battle centers on federal preemption (currently) and whether sports event contracts involve gaming (not now, but eventually), not questions of skill.

• “Gaming” is a statutory term with specific meaning, and misunderstanding it distorts how event-contract legality should be analyzed. This will ultimately determine the future of sports event contracts.

NPR published a prediction market piece yesterday. Unfortunately, the underdeveloped article doesn’t frame the issue correctly and contains several inaccuracies. This certainly wasn’t NPR’s best work and frankly, we expected better!

Our critique starts with this bit from NPR:

But the long-term outlook for this nascent industry could hinge on how a series of legal battles define a single word: Gaming.

Taken literally, that’s not wrong. The word gaming will shape the future of this industry. But once you read the full article, it becomes clear that the author doesn’t understand the actual legal landscape. The future legal battle may hinge on gaming, but the current wave of litigation is not about that at all.

NPR continues:

Kalshi allows people to place wagers on sports, news events and all manner of cultural happenings…

It’s true that most Kalshi activity is sports-related, roughly 90%, as NPR correctly points out. And yes, most of those contracts are bets. But describing all Kalshi contracts as wagers is simply inaccurate. Bloomberg made the same mistake and we called them out on it as well. When you group-wholesale an entire site like that, your journalistic credibility is cast in serious doubt. Why must it always be all or nothing? Nuance does exist.

NPR then claims:

Under federal law, “gaming” is a prohibited type of futures contract— something that is now being litigated in numerous federal courts.

The former statement is simply a mischaracterization of the law. Andrew Kim has already explained this, and his correction is worth reading:

The second statement? “Gaming” is not what’s being currently litigated, preemption is.

NPR continues:

The future of Kalshi, and perhaps the entire prediction market industry, could depend on convincing courts that placing monetary wagers on sports events is not a type of game.

The legal question is not whether sports betting is a game. It’s whether it involves gaming. These are entirely different concepts. Years ago, New York was looking into the argument of whether sports betting could be reframed as a “game of skill,” similar to daily fantasy sports. That argument never gained traction, and frankly, it shouldn’t have worked for DFS either, because DFS is not a game.

NPR also writes:

There are nineteen federal lawsuits pending at various stages grappling with the app’s legality against the backdrop of state gambling laws that have traditionally had oversight over the activity of bettors…

Did the state gambling laws traditionally have oversight over the activity of bettors? It appeared so, because the industry had misinterpreted Murphy. In reality, since at least 2000, oversight of these products has belonged to the CFTC. The agency simply chose not to act. Before 2018, there wasn’t much to act on. Yes, there was daily fantasy sports, but there was no single-game outcome betting except Nevada, and that was federally protected under another statute (PASPA). After 2018, state-regulated sports gambling got underway, so there were plenty of opportunities, and the CFTC still didn’t act. That inaction will shape the future of sports gambling far more than NPR acknowledged.

NPR again:

Kalshi has enlisted a cadre of high-profile lawyers to press their case that sports betting on the site is not a “game” and that state laws don’t apply to them, since they are federally regulated.

We follow prediction markets and the industry litigation heavily and we have not seen Kalshi argue that sports betting is not a game. Their argument is that it does not involve gaming; again, a completely separate legal issue that will likely be front and center in future litigation. This is an important distinction not only from a statutory interpretation perspective but also because Kalshi reversed their own 2024-25 litigation position that they do involve gaming. Dan Wallach has documented this. Flip-flopping appears to be quite fashionable these days.

NPR then cites a couple of sources, first being Kalshi’s lawyer, Neal Katyal:

“Mountains of authority confirm that the [federal law] preempts application of state law...”

We agree. Preemption is real, but it’s only a piece of the whole story. Even if state law is preempted, the next question is permissibility. Are these contracts even allowed to trade in the first place?

Next, NPR cites Strumpf, an academic:

“...the Supreme Court, and maybe even Congress, will have to weigh in… The fundamental thing it comes down to is what degree there is still technical skill involved [in the betting] and what the definition of 'gaming' is…"

Supreme Court involvement? Yes.
Technical skill? Irrelevant. This isn’t poker. (Andrew Kim points this out also)
Definition of gaming? Absolutely central.

NPR continues:

Still, there are guardrails. For instance, under the 1936 Commodity Exchange Act, which was updated after the 2008 financial crisis, five types of future contracts are banned: Betting on illegal activity, assassinations, terrorism, war and games.

Incorrect. Congress did not ban these categories. It instructed the CFTC to scrutinize them carefully, but left the final determination to the agency. That distinction matters because it helps identify the correct defendant (the CFTC) and the correct legal framework (the APA) (our amicus PDF). What we see today in courts are the wrong defendants (prediction markets) and incomplete arguments (preemption).

NPR then notes:

…the CFTC sought to rein in the industry by blacklisting sports and election betting… but the rule was not finalized before the Trump administration regained control in Washington.

Correct, that was the 2024 proposed rulemaking on event contracts, which CFTC Chair Selig just instructed his staff to withdraw. NPR, how and why, would you not mention this directional narrative in your article?

NPR also claims:

A D.C. federal court ruled in 2024 that election betting does not constitute “gaming”...

That’s not what the federal court ruled. The court held that the CFTC lacked authority “to conduct the public interest review it conducted” with respect to election contracts. We covered this case from top to bottom. You can start here.

NPR continues:

…in the same way as poker or slot machines, whereas courts in Maryland and Massachusetts have decided that Kalshi wagers are effectively games…

That’s not what those courts ruled either. Those cases are about preemption, not about whether Kalshi wagers are games. Our Maryland coverage starts here and we recently released our podcast on Massachusetts.

NPR adds:

When the law was updated in the 2010 Dodd-Frank Act, nobody foresaw the emergence of prediction market apps, former CFTC officials told NPR, with one describing the D.C. ruling as the industry’s “rocket-booster.”

Another false narrative. 2000 to 2010 was an eventful decade. The CFTC was well aware of sports prediction markets becoming a possibility. Early in 2004, it wagged its finger at Hedgestreet (now Nadex under the crypto.com umbrella). Later, the CFTC issued a concept release on event contracts (2008) and solicited public comments (we participated). This is in the public record, NPR, you simply needed to investigate a little further; this did not come out of nowhere. This “oh, nobody predicted this, it came out of left field” narrative is poor reporting and very tiresome.

Finally, NPR concludes:

Kalshi says it is confident federal courts will ultimately rule in its favor, but gaming attorney Wallach predicts the company has long odds.

We agree with the prediction that Kalshi is facing an uphill battle, but not with the reasoning. Wallach rejects federal preemption; we believe preemption is correct. The real stumbling block for Kalshi and others will be the gaming prong.

We offer our own predictions: The Future of Sports Gambling in America: By the Numbers.