North Carolina Law Officially Makes Prediction Markets Legal in the State

Not all states are at odds with the federal government over regulating prediction markets. Last week, North Carolina became the first state to formally recognize the authority of the Commodity Futures Trading Commission to oversee event market platforms like Kalshi and Polymarket. While some other states have refrained from trying to regulate prediction markets, North Carolina put it in writing. A measure included with the state budget law signed by Gov. Josh Stein expressly makes it legal for any prediction market platform registered and licensed by the CFTC to operate in the state due to the “exclusive federal regulatory authority” over event markets established by the federal Commodity Exchange Act. The measure imposes a 6% tax on operators’ net trading fee revenue attributable to North Carolina residents, but the statute is explicit that the levy carries no licensing, registration or other regulatory obligations of any kind, according to Decrypt. The 6% tax is far lower than what North Carolina levies on sports-betting operators, which the same measure actually raised from 18% to 23%. It’s also far lower than the 14.5% tax Kentucky imposed on prediction-market platforms, which led to the CFTC bringing a lawsuit against the state in June. Kentucky had previously sued Kalshi and Polymarket for illegally operating sports books in the state. All told, more than a dozen states have challenged prediction market platforms for violating state gambling laws by hosting markets related to the outcome of sporting events, per Decrypt. The CFTC has sued nine of those states over trespassing on its exclusive authority over what it calls swaps, a kind of derivative. The platforms themselves have other sued several states for interfering with their federally licensed operations. Wagering on sporting events makes up as much as 80% of the trading value on the platforms, by some estimates, prompting states to view them essentially as sports books, which some states regulate and license while others ban them outright. The platforms and the CFTC, in contrast, maintain that event contracts tied to sports are no different from traditional swaps on CFTC-licensed derivative exchanges used in agriculture and other industries to hedge risk. In taxing prediction-market platforms at a rate far lower than that of sports-betting operators, the North Carolina law seeks to establish a clear legal distinction between the two. So far, courts have been all over the map in their rulings on the question. The platforms secured injunctions against New Jersey and Tennessee but lost their bids for relief in Maryland, Nevada and Arizona. And on the same day North Carolina’s governor signed into law the bill recognizing CFTC’s exclusive authority over the markets a federal in New York denied Kalshi’s bid for an injunction, ruling that the Commodity Exchange Act did not supersede New York’s gambling laws as applied to Kalshi’s sports event contracts, per Reuters. According to U.S. District Judge Analisa Torres, New York’s interest in preventing gambling addiction and preserving the integrity of sports “heavily outweighed” Kalshi’s interest in ensuring federal supremacy over event contracts. With so many conflicting rulings in so many jurisdictions many expect the question eventually to land at the Supreme Court. In the meantime, the CFTC last month issued a Notice of Proposed Rulemaking seeking comments on a framework for establishing whether contracts related to sporting events involve activity prohibited by the Commodity Exchange Act, which include contracts related to terrorism, assassination, war, gaming, or conduct that is unlawful under federal or state law, and whether such contracts are contrary to the public interest.