Comment Text:
Public Comment: Advance Notice of Proposed Rulemaking – Prediction Markets (RIN 3038-AF65)
The comment submitted by Sara Slane of Kalshi attempts to portray sports event contracts as sophisticated tools for hedging legitimate commercial risks faced by sportsbooks, merchandisers, broadcasters, and sponsors. This narrative reframes what is, in practice, a high-volume retail gambling operation as a vital extension of the CEA’s risk-management mandate. The argument fails on both empirical and statutory grounds.
Independent data confirms that sports contracts overwhelmingly dominate trading activity on Kalshi, frequently accounting for 85–91% of total volume, with peaks reaching 90%+ during major football and basketball seasons. This is not occasional or incidental activity — it is the core business model. The vast majority of participants are retail traders placing bets on game outcomes, player props, spreads, and parlays, not commercial entities systematically laying off “catastrophic” balance-sheet exposures.
*Hedging Utility Is Overstated and Does Not Define the Market*
While isolated commercial actors may face outcome-contingent risks (e.g., unsold championship merchandise or variable ad revenue), these have been managed for decades through inventory planning, diversification, insurance where available, and ordinary business judgment. The claim that exchange-traded sports event contracts are the “only practical” hedging vehicle is unsupported by evidence of meaningful institutional adoption at scale. Instead, the explosive growth in volume is driven by retail speculation, not hedging demand.
Even accepting that some hedging occurs, the presence of legitimate hedgers does not immunize a market when the predominant character and volume are speculative gambling. CEA precedent, including the economic purpose analysis referenced in the comment, evaluates whether contracts are used for hedging or price basing on more than an occasional basis. A market where 85–90%+ of activity consists of retail wagers on sports outcomes does not meet that threshold in substance. It functions as a parallel sportsbook that evades state licensing, responsible gaming requirements, taxes, and consumer protections by operating under the CFTC banner.
*Excessive Self-Policing Power Creates Unacceptable Risks*
Kalshi stresses its compliance with DCM core principles and federal supervision. Yet the platform retains broad unilateral authority to issue late clarifications to contract terms, pause or resume trading at will, selectively issue refunds, modify market titles, and resolve contracts to subjective “fair value” rather than the last traded price — often with opaque methodology. These discretionary practices place far too much responsibility for ensuring fair outcomes, preventing manipulation, and protecting participants directly in the hands of a profit-driven operator.
Such self-regulation is particularly concerning when the underlying products are binary, high-frequency sports wagers that encourage rapid, repeated trading. Retail users face amplified risks of financial loss, addiction-like behavior, and associated mental health impacts. The CEA’s public interest inquiry under section 5c(c)(5)(C) must weigh these real harms against theoretical benefits.
*Statutory Framework Supports Restriction or Prohibition*
CEA section 5c(c)(5)(C) expressly authorizes the Commission to determine that event contracts involving “gaming” (or similar activities) are contrary to the public interest and to prohibit them from trading on registered entities. The statute is not limited to pure games of chance; it encompasses activities whose dominant function is wagering on contingent outcomes for entertainment or speculative gain.
When sports contracts comprise the overwhelming share of volume and operate with lighter safeguards than state-regulated sportsbooks, they cross into gaming territory. Price discovery and information aggregation are valuable in theory, but they cannot justify creating a lightly supervised nationwide retail betting venue that circumvents state gambling frameworks and exposes unsophisticated participants to significant harm.
The Commission should exercise its authority to prohibit sports-dominated event contracts or impose strict limitations that prevent these platforms from functioning as de facto sportsbooks. This includes tighter standards for contract design and resolution, meaningful retail protections, position limits or accountability for speculative accounts, and enhanced oversight to ensure genuine hedging utility predominates over recreational betting.
Permitting the current model risks turning the CEA into a loophole that undermines state consumer protections and responsible innovation. The public interest favors clear boundaries that preserve legitimate derivatives functions while closing the door on rebranded high-volume sports gambling.
