CFTC Files Lawsuit Against Rhode Island in Battle Over Prediction Markets

Rhode Island is the seventh state to face a CFTC lawsuit

Rhode Island will be the seventh state to square off against the CFTC in court. In each case, they're battling over the decision of who has the ultimate legal right to regulate prediction market sites. Since companies like Kalshi and Polymarket are under federal jurisdiction, the CFTC argues that only it can regulate the sites.

“CFTC-registered exchanges have faced an onslaught of lawsuits seeking to limit Americans’ access to event contracts and undermine the CFTC’s sole regulatory jurisdiction over prediction markets,” CFTC Chairman Michael Selig said in a press release announcing the lawsuit. “This power grab ignores the law and decades of precedent.”

However, states are making the argument that the sports-event contracts offered by these prediction market sites are nothing more than unregulated sports betting. States are taking regulatory control over all sports betting in the USA.

In total, 18 states are currently involved in legal action over prediction markets. Interestingly, the Trump Administration-controlled CFTC so far is only opting to sue states with Democratic Attorneys General.

Rhode Island filed suit against Kalshi and Polymarket

It's been a little over a week since Rhode Island Attorney General Peter F. Neronha announced a lawsuit against Kalshi and Polymarket in Rhode Island Superior Court. Neronha is asking for a declaration that Kalshi’s and Polymarket’s sports-related event contracts amount to sports betting. If so, that is subject to Rhode Island state gambling laws.

“There is no substantive difference between sports betting and ‘events contracts’ in this context; Kalshi and Polymarket know that, and we know that,” Neronha said in a statement. “The problem here is that Rhode Island State law heavily regulates gambling, for good reason, and we allege that Kalshi and Polymarket are evading our laws. And Rhode Islanders are losing out.

"While these private companies continue to profit exponentially off hard-working people, the State’s third largest revenue stream is detrimentally affected, which means less money to fund critical parts of programs that serve Rhode Islanders every day."

Kalshi filed the lawsuit that started it all

Rhode Island's lawsuit was filed mere hours after Kalshi filed a lawsuit in U.S. District Court in Rhode Island, seeking to halt the state from trying to shut it down.

Lawyers for Kalshi are making the argument that the event contracts it is offering on sports, and all other events are federally-regulated financial derivatives. That being the case, they should only be facing regulatory control by the Commodities Futures Trading Commission. State governments do not have any regulatory control over prediction markets.

"Event contracts are a valuable means to hedge against event-driven volatility," Kalshi's complaint reads. "Advertisers, sponsors, television networks, local communities, sportsbooks, and others all stand to gain or lose substantial sums depending on the outcomes of sports events.

"Sports event contracts thus offer these entities opportunities to hedge their exposure."