TD Cowen: Despite CFTC intervention, states hold edge in prediction markets legal fight

U.S. states still appear to have the upper hand in the legal battle over sports-based prediction markets despite recent intervention by the Commodity Futures Trading Commission, according to TD Cowen.

"We continue to give a slight edge to the states in this legal fight primarily because the states have historically been the regulators of sports gambling," Jaret Seiberg, managing director at TD Cowen’s Washington Research Group, wrote in a note Wednesday. "As we have seen with the case involving the President's effort to fire Fed Gov. Lisa Cook, this Supreme Court appears to give weight to historical precedents. In the case of the Fed, it was the establishment of the First and Second Banks of the United States."

The dispute reflects a growing conflict between federal and state authority over prediction markets tied to sporting events. The latest clash is Nevada’s case against Crypto.com. Last year, the Nevada Gaming Control Board sought to block Crypto.com’s sports event contracts, describing them as unlicensed gambling. Crypto.com challenged the move, arguing the products are federally regulated derivatives overseen by the CFTC and that Nevada was exceeding its authority.

A district court judge sided with Nevada, and the case is now before the Ninth Circuit Court of Appeals, as the CFTC filed an amicus, or "friend of the court," brief Tuesday supporting federal oversight of prediction markets.

"States cannot invade the CFTC’s exclusive jurisdiction over CFTC-regulated designated contract markets ('DCMs') by re-characterizing swaps trading on DCMs as illegal gambling," the agency said in the amicus brief. 'The decision below is inconsistent with the text, structure, and history of the CEA [Commodity Exchange Act] and, if affirmed, would reintroduce precisely the regulatory fragmentation Congress deliberately displaced."

The CFTC’s move signals its view that it, rather than individual states, should have the final say over prediction markets. TD Cowen's Seiberg said the agency's intervention was expected after Selig signaled support for event contracts on sports during a recent crypto symposium. When he was nominated as CFTC chair last November, however, Selig had described the regulatory status of sports event contracts as a complex legal issue likely to be resolved by courts.

Seiberg said the Crypto.com vs. Nevada case is likely headed to the Supreme Court.

"The 9th Circuit appeal could spill into 2027 especially if there is a request for an en banc review," he said. "This means the justices probably do not hold arguments in the case until the fall of 2027 and don't decide the case until early 2028."

"The politics of this are messy," Seiberg added. "There are many Republicans who oppose sports gambling and do not want prediction markets to be a way to get around prohibitions in their states. This also raises questions about states rights, which Republicans typically champion. It is why we do not assume that the Republican-controlled Congress will act to protect prediction markets."