Kalshi moves forward with sports contracts amid CFTC scrutiny

David Gravel January 28, 2025
Kalshi moves forward with sports contracts amid CFTC scrutiny

Kalshi, an expanding prediction market company, recently attracted attention. Despite a current Commodity Futures Trading Commission (CFTC) review, Kalshi announced a planned launch of sports event contracts. The CFTC is a federal regulator that reviews the legalities of specific markets.

As reported last week by Vixio Regulatory Intelligence, Kalshi filed documentation to self-certify an event contract that addresses whether a team will win a title. This event contract includes major events such as the NFL’s Super Bowl and Conference Championships and championships from the National Hockey League, National Basketball Association, and the National Collegiate Athletic Association.

This move raises questions about regulations and rules for event contracts, particularly as Kalshi faces legal challenges surrounding its operations.

Kalshi’s expanding business model

Founded in 2020 and launched in 2021, Kalshi soon attracted attention in the world of prediction markets. Initially offering markets on political and economic events, the company now intends to dominate the sports market. Their platform permits users to buy and sell positions on whether specific events will occur. An example would be which team will win a championship.

The company’s new sports contract covers high-profile leagues such as the NFL, NBA, NHL and NCAA. So, an example of Kalshi’s model would ask, “Who will win the Super Bowl?” or “Who will be the NCAA basketball champions?” The idea is for the company to create alternatives to traditional bets by allowing users to trade on event outcomes.

The CFTC is the U.S. federal body overseeing commodities and derivatives markets. They’ve had Kalshi on their radar for a while. CFTC’s chief concern is whether Kalshi’s contracts fall under the “gaming” category, as defined by the Commodity Exchange Act (CEA). If this is found to be gambling, these contracts will have to be more strictly regulated or face a potential ban.

In a previous case, the company had already found itself in legal disputes with the CFTC. This conflict was over political event contracts. Kalshi admits its contracts are controversial but do not qualify as “gaming.” Although a court recently sided with Kalshi, the CFTC has appealed the decision, and the matter remains unresolved.

While this is ongoing, the CFTC recently began reviewing similar contracts offered by Crypto.com. The outcome of this review may influence how the CFTC approaches Kalshi’s sports-related contracts. If the CFTC finds Kalshi’s sports-related contracts in breach of gaming regulations, the company would face substantial restrictions. This comes as MGM Resorts International recently agreed to pay $45 million as part of a settlement related to two major data breaches in 2019 and 2023.

Kalshi’s risk and market confidence

Kalshi’s answer is to sidestep potential issues by self-certifying its sports contracts. The CFTC maintains the power to review these contracts and intervene if required. So, at this time, Kalshi faces much uncertainty, as it will have to halt trading if the CFTC intervenes.

The Crypto.com review also adds to the apprehension as whatever happens here could also happen to Kalshi, which would then present new challenges. These reviews could impact the overall prediction market landscape.

Another concern is public perception. If the ruling favoured the CFTC, it could lead to negative sentiment. An unfavourable ruling may suggest that these contracts, like elections or sports, are akin to gambling. Any public backlash will harm their reputation. This pessimism would then hurt its ability to expand into new markets.

On the other hand, if Kalshi successfully defends its model, it could project it to a new level that sees it as a leader in its space. A consequence is to boost investor confidence while attracting new users to its platform. Whatever the outcome, the decision will shape the future of Kalshi and similar companies.

A broader impact on the sports betting industry

Kalshi’s move into sports contracts may pave the way for similar companies to enter the space. This sector will see a boom if the CFTC adopts a lenient stance. Sports, politics, entertainment and economics could all become areas where prediction markets thrive.

An unfavourable ruling would have the opposite effect. Stricter regulations or bans on event contracts will stifle innovation. This adverse result would be a setback for Kalshi, who has pushed for regulatory clarity and a more open approach to event-based trading.

Established companies like DraftKings and FanDuel will face competition from Kalshi’s expansion. Traditional sports betting operators focus on sportsbooks using a different regulatory framework. Bettors may be attracted to Kalshi’s model, as it offers alternative betting options.

Kalshi could also change how people approach sports betting, especially in states where traditional betting regulations are less established. Kalshi’s model offers bettors a new way to engage with events.

Potential future developments

Kalshi’s future depends on the outcome of its legal battles and the CFTC’s review process. If the company is allowed to continue unabated, it could see expansion into new markets, which may include single-game odds, player props and wider sports offerings.

However, if the CFTC rules against Kalshi, it must rethink its strategy. The company could focus on other event types or move to jurisdictions with better regulatory environments. The coming months look set to be crucial for Kalshi’s future.

Kalshi’s plans are bold, albeit carrying massive risks. The CFTC’s ongoing review and Kalshi’s past legal challenges mean it faces uncertain regulatory and market conditions.

How the legal landscape unfolds will determine not only Kalshi’s fate, but also the future of event contracts in the prediction market space. The next few months will be pivotal as the company navigates these challenges while aiming to reshape the sports betting industry.

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