I’ll do my job…

Center of attention: Kalshi founder Tarek Mansour believes federal regulators will bring insider trading or fraud cases against prediction market participants within the next 12 months amid meteoric sector growth.

• Speaking to Axios, Mansour said enforcement would be a natural and welcome part of the market maturing, with exchanges and regulators both responsible for detecting, deterring and punishing misconduct.
• “Our job as an exchange and the job of regulators” is to “flag these bad actors and detect and deter,” he said, adding “you punish them when you find someone who did something bad.”

The warning reflects a broader concern hanging over markets tied to politics, war, sports and entertainment, where rapid growth has brought a parallel rise in questions about market abuse.

• Kalshi said it has already tightened safeguards, including blocking athletes from trading on their own games and political candidates from trading on their own campaigns.

Headed for the future: Earlier this week, the prediction market operator drew blood in its year long fight with New Jersey after the US Court of Appeals for the Third Circuit said the company is likely to succeed in arguing that federal law preempts state gambling restrictions.

• The ruling keeps in place a lower-court injunction blocking New Jersey regulators from enforcing state law against the company while the case proceeds.
• The panel said Kalshi’s sports-event contracts, traded on a Commodity Futures Trading Commission (CFTC)-licensed designated contract market, fit within the federal derivatives framework and fall under the Commission’s exclusive jurisdiction.
• Mansour hailed the decision as a win for the company and the wider sector, although one judge dissented and said the contracts look much more like conventional sports betting.
• CFTC chair Mike Selig has signaled support for the sector and for efforts to resist state attempts to shut prediction markets down. His agency recently sued Illinois, Arizona and Connecticut in an effort to assert regulatory dominance.

After the Garden: Kalshi is already trying to use the Third Circuit decision beyond New Jersey, adding it to a fresh Arizona filing as the first federal appellate ruling to address directly whether the Commodity Exchange Act preempts state gambling law in this context.

• The company said the opinion should carry weight in other cases, including ahead of a Ninth Circuit hearing on April 16 that is expected to test similar questions.
• The Third Circuit also found Kalshi would face irreparable harm without an injunction, citing the threat of civil and criminal penalties as well as reputational and economic damage.
• That gives Kalshi a cleaner appellate precedent than it has had so far, even as states, including Nevada, Ohio and Arizona, continue pushing to characterize its products as gambling subject to local control.

This could be the start of something big: Monday’s ruling will give other judges a precedent, but the dissent in the decision could be seen as a ‘bellwether’ of mixed opinions, said gaming attorney Daniel Wallach.

• If New Jersey seeks and is granted a hearing with a larger panel of appeals court judges, it could end up similar to the case that ultimately granted states control over their own sports gambling laws, Wallach noted.
• “This one has even greater significance potentially because it goes beyond sports betting,” he said.
• “It’s an important public question of national significance affecting not only sports gambling, but the limits and extent of federal powers to regulate gambling in the face of contrary state regulation.”

With friends like these: Meanwhile, Kalshi’s lobbying hiring drive is continuing, with Heather McHugh and Meghan Taira of Resolution Public Affairs registered in January to push for the “development of regulatory structures around prediction markets,” adding two former Sen. Chuck Schumer legislative directors to the company’s outside bench.

• The Democratic hires follow Kalshi’s move last week to bring in former Barack Obama advisor Stephanie Cutter, as bipartisan interest in tighter rules for prediction markets gathers pace.

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