Swaps or bets? SJC digs into sports prediction market case

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In brief

• SJC examines whether Kalshi contracts are swaps or bets
• Attorney General Andrea Campbell challenges federal preemption claim
• Kalshi involved in over 30 similar cases nationwide

Supreme Judicial Court justices queried attorneys on May 4 whether Kalshi’s sports-event contracts are swaps or bets, a key point in the case determining whether the popular prediction market can continue making those offerings available in Massachusetts.

“The definition of swap is pretty broad so tell me why it hasn’t preempted state law,” Justice Dalila Argaez Wendlandt said seconds after an attorney representing the commonwealth began testifying. “First, let’s start with are these things swaps?”

The case before the SJC concerns whether a Superior Court judge erred in banning Kalshi, one of the largest prediction markets in the country, from taking action on sports-related events in Massachusetts.

In a brief presented to the court, attorneys for Kalshi argued the company’s sports-event contracts are considered swaps that are subject to the federal Commodity Futures Trading Commission’s (CFTC) “exclusive jurisdiction” on designated contract markets, or DCM, and preempt state regulations. Attorney General Andrea Campbell disagrees and says the company is essentially offering sports wagering without a state license.

The Commodity Exchange Commission defines a swap to include any agreement, contract or transaction that deals with any purchase, sale, payment, delivery or transaction “that is dependent on the occurrence, non-occurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”

Justices appeared confused with a point Grant Mainland, an attorney appearing on behalf of Kalshi, made that Kalshi’s offerings deal with financial, economic or commercial consequences because people and companies have business tied up in sports.

“I had trouble following the potential financial, economic or commercial consequence here, because it’s a bet on a bet,” Justice Scott Kafker said.

On the other hand, Gerard Cedrone, the deputy state solicitor who represented the state on May 4, said Kalshi’s offerings are not swaps and should be regulated by the state. That is because Kalshi’s sports contracts do not meet the criteria of dealing with an occurrence or non-occurence of an event and potential financial consequences, he argued.

Wendlandt questioned this. She asked if there would be no payout on a hypothetical bet she makes on whether the Bruins win or lose.

Cedrone said no. He said the term event is more likely referencing the game itself – not whether someone scores or if a team wins or loses. And even if those instances are considered an event, they do not have the type of financial consequences needed to be considered a swap.

Justices also pressed Mainland on how what Kalshi offers is different from a bet or a wager.

Mainland said they are “fundamentally different.” When a bettor goes to a casino or uses a sportsbook, he said, they are engaging in a bilateral transaction. The casino or sportsbook sets odds and pricing, and usually the bettor is going to be on the losing side. That’s “completely different” from derivative transactions, he said.

“I mean, for someone who wants to bet on a game, this is a way of betting on a game,” Kafker said, challenging Mainland’s point.

Cedrone disputed Kalshi’s stance that it is different from a traditional betting operation. He said the Superior Court found that Kalshi has an affiliated entity that places bets on its platform. Sometimes another bettor will be on the other side of a bet, but often it is Kalshi’s affiliated entity.

“They don’t set odds; they operate this marketplace where users can create these contracts with each other. The prices can change dynamically, so users can sell positions before the event resolves itself,” said Justice Serge Georges. “So, doesn’t that really resemble more of a financial exchange rather than a house based system?”

Cedrone acknowledged that in certain instances it may resemble a financial transaction. But it also resembles many forms of traditional sports betting, like bets placed on horse racing. Those bets involve parimutuel wagering where the racetrack is not acting as the house, individual bets are pooled, the racetrack gets a cut and bets are paid out to everyone. Notably, the racetrack does not set the odds, which fluctuate based on how the money comes in.

“So, I just keep coming back to the point that it’s true that there may be distinctions between specific bets on Kalshi and specific types of sports betting and casinos,” Cedrone said. “But when you look at the whole picture, it is not able to draw a consistent, meaningful and principled distinction between the bets that it offers, and the bets that casinos offer.”

Justice Elizabeth N. Dewar pressed Cedrone on whether or how all 50 states could regulate Kalshi if it is overseen at the federal level.

“Doesn’t it make sense that something that’s on a DCM, which is this federally CFTC-regulated market, that it would be really unwieldy for 50 different states laws to be applicable to those transactions?” Dewar said.

Cedrone said that, in many areas, the Commodity Exchange Act leaves room for state regulations and that has been the norm for sports betting in the U.S.

Kafker also said that if Congress was making a major policy decision – like shifting oversight of sports gambling to the CFTC as Mainland says it did – it would do so more clearly.

Mainland noted that Congress was aware that event contracts may involve gaming when it passed a sweeping law in 2010 that overhauled U.S. financial regulation and authorized the CFTC to oversee the swaps market.

“That’s the only thing that distinguishes these derivatives is that the underlying event happens to be a sports event,” he said.

Kafker pushed back, saying gambling is something that states have traditionally regulated.

“I just feel like you’re swimming upstream,” he told Mainland.

Kalshi is involved in disputes with state regulators across the country over whether it should operate under state or federal laws. The prediction market operator is part of more than 30 cases. Massachusetts was the first state to sue Kalshi when Campbell filed the lawsuit in September.

The outcome of the case could likely set a precedent for how the surging and evolving prediction markets are regulated in the U.S.