Prediction markets inch closer to the Supreme Court: State of Crypto

Prediction markets inch closer to the Supreme Court: State of Crypto New Jersey petitioned for a writ of certiorari in Kalshi's case against it last week, finally throwing the ball to the high court. The stage is now set for the U.S. Supreme Court to take up a case on whether prediction markets — at least prediction markets tied to sports contracts — are gambling products that should be regulated by states, or swaps regulated by the federal Commodity Futures Trading Commission. That doesn't mean that the high court will do this, necessarily, but the ingredients are in place. PS: I'll be at the Boston Blockchain Week conference this week. Around? Let's catch up. You’re reading State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. Click here to sign up for future editions. SCOTUS watch The narrative New Jersey filed for a writ of certiorari with the U.S. Supreme Court last week, asking the nation's high court to take up the issue of whether prediction markets' sports-related contracts are actually gambling products or federally regulated swaps products. Why it matters It's unclear if the Supreme Court will take up this case, but every lawyer I've spoken to for the past year thinks that SCOTUS will take up a prediction market case, likely within the next year. To somewhat overly simplify the stakes: if a majority of the justices agree that sports-related prediction markets are just gambling products, all of the companies offering these products will need to secure state licenses and approvals, and pay taxes in each state they operate in. On the other hand, if a majority of the justices agree that these are swaps that are properly overseen by the Commodity Futures Trading Commission, there will be significant implications for states and pure play sports betting firms. Breaking it down New Jersey asked the U.S. Supreme Court to evaluate whether the Dodd-Frank Wall Street Reform and Consumer Protection Act preempts state regulations around gambling, if the products in question are offered on federally regulated designated contract markets. What the Supreme Court really needed was a circuit court split, several lawyers following prediction market cases told CoinDesk, and that exists now after last month's Ninth Circuit Court of Appeals ruling. New Jersey was already entitled to appeal the Third Circuit ruling from this past April to the Supreme Court, but the split gives the issue more momentum, said Carl Kennedy, a partner at the law firm Katten who co-chairs its financial markets and regulation group. And while the Supreme Court may choose to wait for other circuits to weigh in, the justices don't need to, at this point. "Although the Supreme Court doesn't explain why it grants or denies certiorari, it is likely to grant cert with a circuit split or other court conflicts, and a nationally significant question," said Katherine Kirkpatrick Bos, head of legal at Chainlink Labs. "Here we have litigation which is materially affecting an entire industry's business model." Still, any further circuit court rulings — such as the forthcoming Sixth Circuit or Fourth Circuit — would give the Supreme Court more information as it prepares to take up the issue, said Todd Phillips, a director at the Klaros Group. "If the Third Circuit is the outlier and the Ninth Circuit and the Sixth Circuit and the Fourth Circuit all agree that prediction markets are violating state law, that gives the Supreme Court a signal that when courts are provided with more information, they find [in favor of the states]," Phillips said. "If the Sixth and Fourth Circuits agree with New Jersey, that's a sign, and if they split, that's also a sign. This is all just information for the Supreme Court in figuring this out." One scenario in which the Supreme Court might wait is if it wants to wait for the CFTC to finish its revised rulemakings around prediction markets, said Daniel Wallach, who runs his own legal practice focused on gaming and sports betting law. He pointed to the CFTC's proposal for event contracts, which is not yet finalized. Whatever the final rule ends up being will likely be challenged under the Administrative Procedures Act, he said, which could signal to the Supreme Court that the issue is "unripe for review." Nor is New Jersey limited to the arguments presented during its original district court fight with Kalshi, Kennedy said. The state can bring new arguments, including by raising issues presented in one or another of the many other prediction market cases. "Any smart litigator or appellate lawyer would monitor these other cases and make [those arguments]," he said. This becomes even more true if the different appellate cases end up getting consolidated, Phillips said. The different states trying to regulate prediction markets, as well as the different companies offering prediction market products, will all likely want to present their own arguments in front of the Supreme Court, Wallach said. Wallach said historical precedent suggests good news for New Jersey and other states, as the Supreme Court reverses the lower courts some 70% of the time. Process-wise, the Supreme Court now has about 90 days to decide whether to grant cert, Kennedy said, and Kalshi would have 30 days from the filing being docketed to respond to New Jersey's petition, Wallach said. The initial round of briefing, if it happens, would focus on whether the Supreme Court should even take up the case. Only then, assuming the Supreme Court does take it up, would the parties then argue on the actual merits of the underlying argument. Clarity watch The U.S. House of Representatives will not be in session for the last two weeks of September, all but assuring that even if the Senate passes the Digital Asset Market Clarity Act this month, it won't become law before the midterms. On Friday, the National Sheriffs' Association said in a letter directed to Senate leadership that it would shift its stance on the bill, from opposing it to "neutral," clearing a hurdle. There are still some other hurdles. There has been no public discussion about the ethics provision negotiations, and the stablecoin yield issue continues to draw debate (see this robust back-and-forth from interested parties in CoinDesk's opinions page). CEOs I spoke to last week were split 50/50 on whether the bill has a chance at passing. But expect the debate around this to tick up again as the Senate inches closer to returning to session and holding its first procedural vote on the bill. This week This week - Calm before the storm. If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Bluesky @nikhileshde.bsky.social. You can also join the group conversation on Telegram. 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