Kalishi calls time out on enforcement with Tennessee injunction win

Predictions markets have seen a huge rise in users with sites like Polymarket and Kalishi raising large funding rounds and experiencing exponential growth. The speed with which these offerings have grown has started to run into regulatory hurdles however, and last Friday, regulators in Tennessee sent a cease-and-desist letter to Polymarkets, Crypto.com and Kalishi, alleging that their predictions markets were in fact unlicensed gambling. The same day Kalishi commenced legal proceedings against the state of Tennessee seeking a temporary restraining order (TRO) preventing enforcement which would shut down their offering in Tennessee, until their substantive claims had been heard. Polymarkets and Crypto.com have not followed Kalishi in suing the state.

Kalishi hired the former Attorney General of Tennessee and is arguing that it is already regulated under the Commodities Futures Trading Commission and, as such, is not subject to state-level compliance.

The lawsuit reveals that Kalishi has requested "dialogue" with the Tennessee regulators mentioning three other cases which are pending relating to the platform, but those approaches were rejected. Many other states have chosen to wait and see how the other cases against Kalishi are resolved prior to commencing enforcement, according to Kalishi. Polymarket has faced prosecutions in Canada and purchased a CFTC licensed entity in the US to offer their predictions as swaps, in a manner similar to Kalishi.

The heart of the dispute relates to where a line will be drawn between what is considered a "swap" under US law, and what is considered wagering or gambling. The definition of a "swap" is very broad, including:

any agreement, contract, or transaction ... that provides for any purchase, sale, payment, or delivery that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence

This gives a broad cross-over with wagering, which the Tennessee Sports Wagering Council defines as:

a sum of money risked by a bettor on the unknown outcome of one or more sporting events, including but not limited to: the form of fixed-odds betting, a future bet, live betting, a money line bet, pari-mutuel betting, parlay bet, pools, proposition bet, spread bet... 

The US States each regulate wagering, whereas swaps are federally regulated by the CFTC. Federal law trumps state law, so if Kalishi's sports and other predictions markets are found to be swaps, then despite them appearing very similar to wagers, they would escape state level bans or control, and enjoy greater freedom (and simplicity) under Federal US regulation. Other countries (including Australia) regulate in a similar fashion and derivatives and options are often defined with reference to securities or financial products to draw a demarcation between those products and wagering. Not so the USA, which has historically had strict gambling regulation and focused the venues for gambling into casinos and sports betting venues.

The internet and rise of smart contract powered predictions markets like Polymarket have drawn to the forefront the demand for these products and the difficulty of the state preventing access, due to the manner in which the internet and cryptocurrencies operate.

Polymarket bets, for example, may be created by any users, and operate on a zero-sum basis with anyone able to bet on a peer-to-peer basis. Given this freedom, there has been some suspicious bets with one X user suggesting that the end of a press conference, which had a 98% bet of going over 65 minutes, was ended very abruptly, forcing Kalishi to formally respond and point out there was only $3,400 wagered on that particular bet.

One thing is for sure, the outcome of the swaps vs bets argument will have significant ramifications over the predictions markets business models, as well as traditional gambling and wagering.

By Michael Bacina