Former CFTC Chair Gensler Says CEA Does Not Preempt State Gaming Laws
Commentary by Steven Lofchie
Former CFTC Chair Gary Gensler urged a federal appeals court to reject the argument that Dodd-Frank made the CFTC a national sports-betting regulator and preempted state gaming laws, contending that sports bets are not swaps. Mr. Gensler filed the amicus brief in the Sixth Circuit, supporting Ohio officials in KalshiEx LLC v. Schuler and urging the court to affirm the district court.
Kalshi, the appellant, contends that because Congress brought some event contracts within the statutory definition of swap, it gave the CFTC exclusive jurisdiction over sports betting and displaced states' traditional police power over gaming. Mr. Gensler, who said he helped draft the relevant provision "direct involvement," said Congress did nothing of the sort.
He argued that the swap definition, and the scope of CFTC authority, turns on hedging economic and price risk, which many event contracts do not. He said no one involved in Dodd-Frank called for preempting state gaming laws, and that Congress, which had preempted some state gaming laws in the Commodity Futures Modernization Act, added no reference to sports or gaming when it amended the statute. Mr. Gensler's brief also makes some very practical, historical arguments; e.g., the Senate majority leader was Harry Reid from Nevada - it seems unlikely that Senator Reid would have favored legislation that injured Nevada's ability to make money from gambling.
Mr. Gensler said the "Special Rule," implemented as Rule 40.11 ( Review of event contracts based upon certain excluded commodities), did not define sports bets as swaps but instead let the CFTC prohibit exchanges from listing contracts involving gaming, war, terrorism, assassination, or unlawful activity. Mr. Gensler also invoked the principle that Congress does not bury major policy changes in obscure statutory language.
Commentary
This may be quite literally the first time that I have ever agreed with Mr. Gensler on an issue of any controversy. At the end of the day, the issue of the proper scope of event contracts that should fall within the jurisdiction of the CFTC is an issue for Congress to determine, not an issue for the CFTC to resolve by fiat on a very limited evidentiary basis (See our prior comment in the story on Prediction Market Oversight). By asserting that all prediction contracts fall within the CFTC's jurisdiction, the CFTC is repeating Mr. Gensler's mistake when he was the chair of the SEC, claiming that all digital assets fell within the jurisdiction of the SEC.
Sometimes, regulatory modesty is in order.
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In an amicus brief before the Sixth Circuit, the CFTC argued that sports-related event contracts listed on designated contract markets are "swaps" within the agency's exclusive jurisdiction and that state gambling laws cannot reach them.