Crypto.com and Kalshi’s Sports Contracts Face Probing from US Derivatives Regulator

The Commodity Futures Trading Commission (CFTC) is investigating Super Bowl event contracts offered by Crypto.com and Kalshi, a blockchain-based marketplace that allows users to create and trade event-driven prediction markets, according to a report by Bloomberg.

Will CFTC Regulation Affect Prediction Markets?

According to Aaron Brogan, a crypto lawyer, the outcome of this probe depends on how the CFTC defines “gaming” under the Commodities Exchange Act. In his opinion, the CFTC likely has limited power to regulate these types of contracts if the definition excludes sports “gaming” and favors gambling. This raises significant implications for prediction markets and other types of event-based contracts in the cryptocurrency industry.

Last year, the CFTC ruled on a case involving Kalshi, concluding that election betting contracts were not subject to regulation under the Act. Judge Cobb defined “gaming” as “playing games” or “playing games for stakes.” In this case, the language from Congress, where a legislator mentioned sports betting as falling within the realm of gaming, did not factor into the final ruling.

New Considerations from Judge Cobb’s Definition

In contrast, according to Brogan, Merriam-Webster defines gaming as “the practice or activity of playing games for stakes” and not explicitly tied to playing sports. While the definition suggests that the definition could be limited to gambling rather than sports betting, it might persuade some judges to view the prediction markets differently. The judge’s definition from the Kalshi ruling, considered non-binding “dicta,” presents an area for potential arguments on behalf of prediction market creators and traders.

A Shift in the CFTC’s Approach under New Chair

The recently appointed Republican chairperson, Caroline Pham, has been believed by some to introduce a more lenient approach to regulation compared to her predecessor, a democrat. This perceived change could indicate that the commission is willing to accept some relaxation of regulations surrounding retail-oriented event contracts, giving an opening to crypto-based companies.

However, whether this lenient approach translates into concrete relaxation or merely increased tolerance for limited regulations remains an open question.

Crypto Lawyer Weighs in on Prognosis for Crypto.com and Kalshi

Aaron Brogan believes that even if the commission does maintain its hawkish stance on specific contracts, Kalshi’s successful application to launch its election contracts is a beacon of hope. Furthermore, it appears that regulatory developments might bring significant changes that can benefit players within the blockchain space.

Closing Thoughts on Regulation and its Implications for the Crypto Ecosystem

Closing Thought:

The regulation of Crypto.com and Kalshi’s event contracts is more nuanced than the initial reports indicate, with underlying considerations regarding “gaming,” Congressional language, and the role of Judge Cobb’s definition playing critical roles.

Conclusion:

While uncertainty remains in the regulatory climate for event-driven contracts, players in the cryptocurrency market can count on ongoing adaptations, new court rulings, and a potential shift in the regulatory stance. Cryptocurrencies offer numerous benefits in fostering financial democratization and facilitating easier access to investments, allowing innovators in this space to experiment and optimize, and regulation provides a structure within which their offerings can prosper.