It’s Now or Never for the States in Their Fight Against Prediction Markets
The CFTC’s NPRM handed them a lifeline–and why the clock is running out
Last week I walked through the CFTC’s Notice of Proposed Rulemaking (“NPRM”) and argued that states hold the wildcard: They can legalize high school sports betting. I ended with a question:
The only question is if and when they decide to play it.
Today, let me answer that.
The States’ Misplaced Confidence
The states look at the scoreboard and see this:
I don’t believe that lead is real. But the states, and their advocates, seem emboldened by it. And when Gary Gensler files an amicus brief arguing that Congress never intended to leave this matter to the federal government, they take it as validation. When Gensler talks about Harry Reid, and provides how he interprets what happened in 2010, states are even more encouraged:
They shouldn’t be.
Gensler may seem like the right messenger, but his message doesn’t survive a principled reading of the statute. In fact, I’ve argued before that behind his credentials sits a surprisingly inconsistent intellectual framework:
Setting my thoughts aside, it’s pretty clear that the states believe they are winning. I can absolutely see them staying the course and playing the status quo. If SCOTUS ultimately rules in their favor, nothing changes. No political fight over high school sports betting. No need to play their wildcard. Business as usual.
But if they lose–and I believe strongly that they will–they may discover the window has already closed.
Here’s why:
The Courts Are Not Truth Machines
Near the end of 2025, I genuinely believed SCOTUS would evaluate this matter holistically using our 3P framework in conjunction: Preemption, Permissibility and Parallelism. Using that lens, Chad and I made our SCOTUS predictions:
I’m still confident that SCOTUS will take the case. I still believe they will rule for federal preemption.
I no longer have confidence that they will address all three questions comprehensively.
The answer is simple. For better or worse, courts aren’t designed to be truth machines. They pick the better argument, not the best one (which sometimes isn’t even made). Murphy is the perfect example: SCOTUS resolved a narrow constitutional question and left the real issue–whether states can legalize sports gambling–untouched:
I saw the risk around a narrow and incomplete treatment and warned them in our amicus filing:
“Because gambling contracts (such as sports betting and DFS) constitute financial instruments subject to regulation by the … CFTC, the federal regulatory interest clearly exists and Congress has preempted the field.”
They chose not to engage and states proceeded to “legalize” anyway.
For anyone claiming it had never occurred to anyone (Gary Gensler included!) that federal jurisdiction extended to sports contracts–please stop. This argument has been out there for two decades–being made by scholars and, ironically, by the CFTC itself. Paraphrasing Gensler: Just because you didn’t hear (or like) the message doesn’t mean it wasn’t given.
I may have been the only one who put this argument in front of SCOTUS, but I certainly wasn’t the only one thinking about this:
The Missing Question Nobody Wants to Raise
Is off-exchange swap trading trading an issue someone needs relief on? Yes. However, prediction markets have every incentive to avoid raising this question and the states have even less incentive because they’d be admitting that their licensing regimes have been illegal off-exchange swap markets all along.
So the issue sits there, unaddressed, waiting.
However… If SCOTUS resolves this case narrowly, as they’ve shown a history of doing, and if the states reach for high school sports betting, the issue is not going to sit there unaddressed for much longer.
Listen Carefully to Brian Quintenz
Former CFTC commissioner who later became a Kalshi board member said it best:
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)
Clean. Confident. Correct. No ambiguity. Off-exchange trading simply cannot happen regardless of whether that contract trades on a DCM or not.
This bears repeating: Off-exchange trading simply cannot happen regardless of whether that contract trades on a DCM or not.
Now take a look at what he is saying:
“I think both models can co-exist…
Sportsbooks and casinos can operate at a state level if they are legally allowed to.”
This is the money quote and the operative word is:
If.
He is not saying sportsbooks can co-exist unconditionally. He is saying that’s only possible if they are legally allowed to.
And he already told you fives years ago that they are not legally allowed to.
The Lawsuit That Drops the Day After SCOTUS Decides Preemption
I’ve long believed the moment SCOTUS rules for federal preemption, the next day a lawsuit drops on states and state-regulated sportsbooks–arguing, correctly, that they cannot co-exist with federally regulated prediction markets:
I have also believed that the states still have a way to control their destiny:
But, not only do I think that states are not going to do what might be better for them (going after permissibility rather than preemption), but I increasingly believe the states might actually manage to do even worse than going after preemption and taking their chances.
They simply will choose not to abandon the preemption fight. Too much pride. Too much sunk cost and too little incentive. They will ride that train to the bitter end.
And when they lose, they will panic. They’ll scramble for the few breadcrumbs the federal government left behind on the table. The states will “legalize” high school sports betting, hoping to capture one remaining piece of the market. They might even choose to allow some other egregious betting to occur too: Injuries. Yellow cards. Flagrant fouls. Whatever’s left. Squeezing the last drops out of an emptying bottle in an ever-increasing race to the bottom.
And by not swallowing their pride, they’ll, once again, deliver the full course meal on a silver platter to the federal government.
Because now the prediction markets nor the CFTC even need to strike first. They can simply wait it out and let the states become desperate. Then they can just react to that, and win.
A Much Cleaner Federal Lawsuit
The federal government will likely say:
We were happily coexisting. The states expanded into an area federal law does not permit. We’re simply enforcing the statute.
That’s a much cleaner narrative.
Prediction markets and the CFTC are still the ones that initiate the lawsuit, except now they look injured. They point to the NPRM commentary. They point to the statute. They point to Quintenz’s own words.
They don’t even need to attack the traditional sports bets. They simply need to go after the newly expanded event types the states just “legalized.” Why broaden the universe? Establish the principle first: There can be no off-exchange swap trading.
Single-game outcomes, spreads, point totals–those can wait for the next lawsuit which simply becomes a limiting principle case based on established precedent.
And just like that, state-regulated sports betting is gone and it’s all regulated by the federal government.
Why Are States Betting the House on the Worst Possible Reading of the Statute?
I will never understand why states and their advocates insist on putting all their eggs into a single basket, unsupported by the most natural reading of the statute. Some of those people subscribe and read this blog. They know the risks. Yet they continue to plow forward, wearing their pride on their sleeves. Fortunately for them, the CFTC’s newly released NPRM has thrown them a lifejacket.
The states still hold one wildcard capable of flipping the script.
It may also be the only one.
Game Theory Is Useful
Long before I started following prediction markets or commenting on legal issues, I learned game theory. If you think it’s just some obscure technical corner of economics, you would be mistaken. Remember how in A Beautiful Mind, John Nash applied it in a real-life situation when a group of guys were trying to pick up girls?
Ok, that scene is almost certainly fiction, but that doesn’t mean game theory principles cannot be helpful in legal settings. Start with this question:
Would Prediction Markets Really Seek to Eliminate State Competition?
That’s a query that doesn’t receive enough mindspace; it certainly deserves it.
Why wouldn’t they, if they believe federal law is on their side?
Legal strategy and political strategy are different. If the legal posture flips, prediction markets will have every incentive, with no meaningful barrier, to go after the states. Litigation is won in courtrooms, not on social media. And when the incentives line up that cleanly, they’d be irrational not to take the shot.
Which brings us back to the states. They can hope to win at the Supreme Court, but they owe it to themselves to consider what would happen if they don’t. If they can adopt that mindset, then whether the wildcard should be played becomes an assignment of probabilities. If what I’m describing is correct, coexistence will not be a permanent condition. If the likelihood of that event is high enough, then it makes sense to play the wildcard.
Remember, in my last post we left you with a question:
The only question is if and when they decide to play it.
The moment states decide to play their wildcard, the next decision becomes: When. That opens up some additional branches in the decision tree we discussed above. It doesn’t take much to see when the best time will be for the states to pull the trigger:
If they intend to play their wildcard, they may need to do it before SCOTUS grants certiorari—not after.
If the states opt to rest on their laurels and the federal framework is cemented, the nuclear option may no longer exist.
It’s now or never.
