CFTC Directs Prediction Markets to Eliminate State-Based Trade Barriers in 30 Days

CFTC Directive on Prediction Markets

The Commodity Futures Trading Commission (CFTC) has issued a directive mandating that regulated prediction markets eliminate any restrictions preventing traders from participating based on their state of residence. This decision allows exchanges a 30-day period to either comply with the removal of these restrictions or provide a valid rationale for their continuation. This announcement follows a recent ruling by a federal judge that temporarily prohibits Kalshi from offering certain sports contracts on tribal land in California, where legal action has been initiated by the tribes involved.

Clarification of Impartial Access Guidelines

On November 5, the CFTC clarified its impartial access guidelines, asserting that designated contract markets (DCMs) are required to allow eligible traders access that is “competitive, open, fair, and impartial.” In this context, the CFTC expressed that geographic restrictions violate the principles of impartial access stipulated within the Commodity Exchange Act. CFTC Chairman Michael Selig emphasized the importance of uniform operational standards for derivatives markets across the nation in order to meet legislative objectives, noting that geographic barriers are incompatible with these standards.

Impact on Intermediaries and Market Liquidity

The ruling extends to intermediaries, including brokers who facilitate trading for clients, instructing them to ensure no obstructions to impartial access exist. If these intermediaries cannot meet this requirement, they must justify their situation to the CFTC’s Division of Market Oversight. The agency has stated that it will consider specific circumstances regarding the implementation of any future policy.

In its six-page interpretation, the CFTC pointed out the potential risks involved with state-based geoblocks. For instance, a trader might initiate a trade in a state that allows such actions, only to find themselves restricted upon traveling to a state where participation is denied. This could lead to significant issues in managing trades or satisfying margin obligations. Additionally, the CFTC underscored that restricting participation can fragment market liquidity and worsen trade spreads. For example, a bet on whether a home team will reach the playoffs could see diminished interest if traders from the team’s own region are excluded. This is particularly pertinent in election-related markets, where informed trading often occurs at community levels.

Legal Challenges Facing Kalshi

As the CFTC's guidance emerges, exchanges are also dealing with recent court-imposed geographic restrictions. On November 4, U.S. District Judge Jacqueline Scott Corley granted a preliminary injunction that prevents Kalshi from offering sports betting contracts involving tribal lands. The tribes involved are required to submit maps of the restricted areas to Kalshi by November 13, with compliance reporting due within 21 days thereafter.

In Michigan, Kalshi is already subject to a state court ruling requiring the platform to restrict access for users located within the state, with each violation incurring substantial fines. Various federal courts have also dismissed Kalshi's claim that state limitations would violate impartial access requirements, including a Ninth Circuit ruling that categorized the argument as a “false, all-or-nothing proposition.”

State Legal Actions Against Kalshi

Additionally, state authorities are increasing legal actions against Kalshi, with Arkansas Attorney General Tim Griffin filing suit under the state’s Deceptive Trade Practices Act. The CFTC has also initiated litigation against Utah, seeking to halt enforcement of state gambling laws that target federally regulated prediction markets.

While the recent CFTC announcement does permit exchanges to provide explanations regarding the feasibility of compliance within the 30-day time frame, it is unclear how the agency will respond to such claims, particularly those linked to court-mandated restrictions. In Utah, Kalshi and its founders face serious legal troubles, with charges including 13 felonies filed against them by state prosecutors.

By Luci Kelemen, Reporter based in Budapest