The CFTC is Losing the Prediction Markets Narrative
Why the agency’s shifting interpretation of off-exchange trading can’t survive judicial scrutiny
CFTC Chair Mike Selig was at the Milken Institute’s Future of Finance 2026 event a couple of days ago:
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:
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:
A prediction market sues state-regulated sportsbooks, arguing they are engaged in illegal off-exchange swap trading.
The CFTC files an amicus brief supporting that position–because it expands the agency’s power;
The courts agree, because the statute is clear; and
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.
The law simply does not allow that;
The agency’s own enforcement history does not support that; and
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.
We can expect the CFTC to claim that Chair Selig was speaking on his behalf, and not the Commission’s. Yet, the inescapable reality remains: The CFTC has not taken a single action on state-regulated sports betting since 2018, even when they took actions against other off-exchange trading. It’s not what Chair Selig says, it’s what the CFTC didn’t do.
This is the type of thing I used to do in grad school at UCLA. My advisor, John Riley, literally co-authored a book titled The Analytics of Uncertainty and Information, with a pair of dice on the cover no less (I have the honor of having a signed copy). Sometimes, when I wasn’t studying, my wife and I would visit tribal casinos, Morongo being a favorite, for some low-stakes casino gaming and good food. At the time, it didn’t occur to me that the states and tribes would one day face an existential decision-making crisis under substantial uncertainty, and that I would be blogging about it.