CTFC Attempts to Join Prediction Markets Lawsuit Against Rhode Island

In its recent prediction markets lawsuit, Rhode Island asserted that its laws should govern Kalshi and other prediction markets. But the United States’ Commodity Futures Trading Commission (CTFC) believes prediction markets are a federal issue, and it wants to get involved on behalf of Kalshi.

The CTFC has announced a lawsuit against Rhode Island, after Rhode Island attorney general Peter Neronha announced that his state was suing Kalshi and Polymarket. The CTFC’s decision would move the case from Rhode Island state courts to federal courts, if their lawsuit is permitted to move ahead.

Additionally, Kalshi countersued Rhode Island in federal court, requesting a preliminary injunction. That case has arrived in the court of District Judge Mary McElroy, who has set a date of June 9 for Rhode Island’s opposition briefs. Kalshi will then have seven days to respond before McElroy issues a decision.

As part of the process, Rhode Island has agreed not to attempt to remand the case to district court until McElroy issues her ruling. If McElroy rules in the Ocean State’s favor, it will likely attempt to remand the issue to state courts, cutting the federal government out of the process.

What Is Each Side’s Position in This Prediction Markets Lawsuit?

In short, Rhode Island believes that prediction markets are akin to sports betting. Sports betting is legal in Rhode Island, and the state sets a tax rate of 51% on betting. That leads to large amounts of revenue for the state and often means worse odds for bettors.

That’s made prediction markets more attractive to consumers. As with sweepstakes casinos, which have also come under fire, prediction markets aren’t legally seen as sports gambling. That means they’re not subject to state regulations or taxes, which leads to bettors keeping more of their winnings.

Rhode Island’s prediction markets lawsuit focuses on the sites violating existing sports betting laws. Other states have made the same arguments, with Minnesota going as far as enacting a ban through its legislature.

But the federal government is a notable supporter of Kalshi and Polymarket, and it has attempted to claim that it should be the sole determinant of their legality. That argument relies on the framework of the Dodd-Frank Act, which grants the federal government sole authority over derivatives and swaps.

Rhode Island is the seventh state that the CTFC has filed a prediction markets lawsuit against. In each state, the CTFC has relied on this framework. No court has yet ruled whether or not it fits this dispute.

What Distinctions Are Involved?

The biggest distinction in the prediction markets lawsuit is whether Kalshi, Polymarket and others function as swaps or as sports betting. In the landmark 2018 Murphy v. NCAA case, the Supreme Court struck down a federal ban on sports betting, leaving the power to the states.

If prediction markets are classified as sports betting, they’d have to function in accordance with state laws. That means paying taxes to state governments and banning certain wagers, which cuts into their potential profits.

Swaps, on the other hand, function similarly to trading stocks. That’s how prediction markets have skirted the rules; they allow users to trade future shares in a certain outcome. If the outcome occurs, the shares get cashed in. If it doesn’t, the shares become worthless.

Critics have said that’s no different from gambling, given that a bet becomes worthless once it loses.

What’s The Difference Between State and Federal Court?

The main difference is who would make the final decision on the prediction markets lawsuit. If the case is deemed a federal affair, the United States Supreme Court would be the ultimate authority in the decision. It could also lead to a decision with national ramifications, as opposed to just one state.

But if the prediction markets lawsuit is decided in Rhode Island’s district courts, the state Supreme Court holds that authority. No appeal to the U.S. Supreme Court would be possible, which might increase Rhode Island’s chances of a favorable ruling.

What Are the Next Steps?

Following Judge McElroy’s decision, the prediction markets lawsuit can take one of multiple paths. It can either proceed in federal court, return to state court or end in a settlement. Based on her schedule, a decision could come as soon as June 16.