The latest twist in the prediction-markets debate comes not from a court, but from the Commodity Futures Trading Commission (CFTC). On November 5, the CFTC issued interpretive guidance stating that designated contract markets (DCM) generally may not restrict otherwise eligible U.S. market participants based on where they are located or reside. DCMs have 30 days to remove geographic restrictions inconsistent with the Commission’s impartial-access requirements or explain why compliance is not feasible.
There is an important market-structure rationale behind the guidance. The Commodity Exchange Act requires DCMs to provide competitive, open, and efficient markets that protect the price-discovery process, while Commission Regulation 38.151 requires access criteria to be impartial, transparent, and nondiscriminatory. The CFTC reasons that excluding entire states can fragment liquidity, impede risk management, and diminish price discovery by removing potentially well-informed market participants. As the agency notes, those concerns may be particularly acute for event contracts because local participants may possess information relevant to elections, sporting events, or other geographically concentrated markets.
But those principles now encounter an increasingly complicated federalism problem. States maintain that certain event contracts constitute gambling activity subject to traditional state authority, while the CFTC and prediction-market operators have argued that federally regulated derivatives markets must be able to operate on a national basis. Courts have divided over important aspects of that dispute, and some exchanges have responded to adverse orders by restricting access in particular jurisdictions.
The result is an unusual tension. A prediction-market exchange subject to a court order requiring geographic restrictions may simultaneously operate under a federal regulator that views geography-based restrictions as potentially inconsistent with the exchange’s obligations as a DCM. Indeed, the Ninth Circuit has already rejected Kalshi’s contention that Nevada’s geographic restrictions and federal impartial-access requirements necessarily create an irreconcilable conflict, describing that argument as a “false, all-or-nothing proposition.”
Whether the CFTC’s new guidance turns that theoretical tension into an actual compliance conflict remains to be seen. Importantly, the guidance does not simply direct an exchange to disregard a contrary judicial order. A DCM that cannot eliminate geographic restrictions may explain to the agency why compliance is not feasible, and the CFTC says it will consider the facts and circumstances in determining whether to take action. That mechanism could prove particularly important where an exchange is operating under a binding injunction.
The development nevertheless sharpens the fundamental question underlying the prediction-markets litigation. The federalism debate is not simply about who gets to regulate event contracts. It is increasingly also aboutwhat kind of market Congress intended federally regulated derivatives exchanges to operate. If liquidity, impartial access, and national participation are integral to price discovery, state-by-state restrictions may have consequences extending beyond where a particular contract can be traded. At the same time, states continue to assert traditional authority over activity they regard as gambling.
For prediction-market operators caught between those competing regimes, the practical consequences of that disagreement may soon become as important as the jurisdictional debate itself.
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