Max Bocken
Associate Editor
Loyola University Chicago School of Law, JD 2027
In just over a year, prediction markets have taken the United States exchange by storm. From betting on who will win the 2024 presidential election, to whether certain celebrities will attend the Superbowl, on prediction markets one can wagerwhether or not just about anything will occur. However, due to growing concerns of national security, public safety, and insider trading, a new bill has been introduced in the House of Representatives. The Event Contract Enforcement Act(ECEA) would extend the power previously granted to the Commodity Futures Trading Commission (CFTC) and require the CFTC to ban certain event contracts. If passed, the ECEA could deal a massive blow to prediction markets such as the two most popular prediction markets in the world – Kalshi and Polymarket.
The fine line between a sports bet and an event contract
An event contract, like a sports bet, allows an individual to speculate on the outcome of a specific event. However, the key difference between an event contract and a bet is that a bet is placed in opposition to a “house,” or the entity which establishes the platform to bet on. With an event contract, individuals are trading directly against one other and the “house” merely makes money from trade volume, not from any stake in an event. This slight difference subjects event contracts, and the prediction markets which furnish them, to the jurisdiction of the CFTC, not state gambling regulators.
Since an individual can trade an event contract at the age of 18, anyone over 18 years old can use Kalshi, Polymarket, or any other prediction market in all 50 U.S. states. Conversely, traditional sportsbooks such as FanDuel and DraftKings are only allowed to operate in 40 states (those which have legalized sports betting) and are often subject to more rigorous oversight from state regulators. This unjust outcome seems even more out of touch when considering that sports are the predominant category of event contracts for each prediction market. For Kalshi, sports make up ninety percent of their trading volume, and for Polymarket it’s roughly half of their trading volume.
The effects of the Event Contract Enforcement Act (ECEA)
To relinquish the unjust outcome based on classification, ensure the national safety of the United States by disincentivizing criminals from committing crimes to trigger rewards, and to deter individuals from insider trading, two House representatives introduced the ECEA last week. If passed, the ECEA would essentially treat event contracts as sports bets. It would amend the current Commodity Exchange Act (CEA) making it unlawful to list or make available for trading, a contract that is based on the occurrence of illegal activity, terrorism, assassinations, war, gaming, any form of government election, or any conduct by any level of government. Nonetheless, the ECEA would give states the power to allow gaming event contracts in the event a state law is passed to such effect. This would require prediction markets to lobby state legislatures, apply to operate in a state, and abide by state laws, just as traditional sports books do. For all other activity not otherwise outlawed by the ECEA, or related to gaming, the prediction markets and their event contracts would still be under the jurisdiction of the CFTC and regulated as such.
What’s next for event contracts
Kalshi and Polymarket are the dominant prediction market platforms, attracting both users and investors alike. However, last December three traditional sports books – Fanatics, DraftKings, and FanDuel – launched prediction market platforms on their existing apps with the intention of becoming market leaders. Couple this development with the likely enactment of the ECEA and recent public scrutiny for targeting teenagers and college kids, the future does not look bright for Kalshi and Polymarket.
However, this legislation can be beneficial for the American public. Like most forms of addiction, the earlier an individual is exposed to gambling, the greater the likelihood of future gambling problems and addiction. The ECEA would allow states to set their own age limitations for sports related event contracts, and if they followed their current laws, this would increase the minimum age required to participate. Additionally, subjecting sports related event contracts to a higher scrutiny at the state level and impeding insider trading, which has become prevalent in recent months, would support a fair market. A recent example of insider trading took place last month when one fraternity member at the University of Miami gave his fraternity and many other students information regarding if his stepfather, Jeff Bezos, was to attend the Superbowl. This led to students with the information profiting roughly 30% returns on the average bet of $10,000 per person. Lastly, the ECEA prohibits the profiting of illegal activity or activity tied to government. This disincentivizes criminal activity and ensures that the democratic process is not hindered by an event contract. While this bill would financially harm non-traditional sports books, the benefits received by the American public from stricter regulation on predictions markets far outweigh the consequences.