Crypto.com Prediction Market: Round Two

The regulatory landscape for prediction market platforms in the US might be shifting. Last Thursday, a federal judge in Nevada ruled against Crypto.com in its dispute with state authorities.

Similar to Kalshi, a leading player in the prediction market, Crypto.com initiated legal action against the Nevada Gaming Control Board in June. Their goal was to secure a preliminary injunction, preventing the board from regulating their platform or restricting access for Nevada residents.

Crypto.com, like Kalshi, asserted that regulation by the Commodities Futures Trading Commission (CFTC) shields them from state-level oversight. However, Judge Andrew Gordon, who oversaw both cases, denied Crypto.com’s request, unlike his earlier ruling for Kalshi.

According to the Las Vegas Review-Journal, a member of the Nevada Gaming Control Board declared “the gig is up” at a recent meeting, celebrating the outcome.

However, a lawyer specializing in cryptocurrency and innovative financial products says this celebration is premature. Aaron Brogan, founder of Brogan Law, told Decrypt that “this will lose six ways to Sunday on appeal,” strongly indicating his belief that the ruling will be overturned.

The official transcript of the hearing and Judge Gordon’s rationale will be released in January. In the meantime, screenshots shared on X by legal analyst Dan Wallach are circulating.

Wallach highlights that Judge Gordon differentiated Crypto.com’s contracts based on “outcomes” versus “occurrence,” stating that because the contracts focus on the “outcomes” of sports events rather than their “occurrence” or “non-occurrence,” they don’t meet the definition of “swaps” under the Commodity Exchange Act (CEA).

The CEA is a key federal law granting the CFTC regulatory authority over futures, options, and swaps. Prediction market platforms in the US have sought to classify their contracts as swaps since they are neither futures nor options, putting them under CFTC jurisdiction.

Brogan told Decrypt, “The idea that there is a legal distinction between ‘outcome’ and ‘occurrence’ is, in my opinion, completely fanciful. It seems that this argument has not been presented by either party. The definition of ‘swap’ includes contracts ‘dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency.'”

This denial of the injunction stands out because Kalshi previously secured a significant legal victory in Nevada through an injunction, also before Judge Gordon. This shift suggests a potential change in the judge’s perspective or a reliance on technical or legal distinctions between “outcome” and “occurrence.”

Brogan reiterated that “I believe this is simply incorrect, and from my perspective, the judge’s only support comes from his own logical construction,” again emphasizing that the full transcript remains unavailable.

Prediction markets have experienced significant growth, attracting more US users to their platforms this year. Data from a Dune Analytics dashboard shows that combined volume on Kalshi, Polymarket, Limitless, and Myriad last week approached $1.5 billion, reaching near the levels leading up to the 2024 US presidential election. The week of the election saw total volume peak at nearly $2 billion. (Disclosure: Myriad is associated with Dastan, Decrypt‘s parent company.)

Kalshi emerged as the first fully regulated prediction market in the US after the CFTC ended its appeal against allowing sports event contracts for US users. Meanwhile, Polymarket has received approval and is preparing to launch its US operations soon. A Certuity report projects the market size for prediction markets to grow to $95.5 billion by 2035, exhibiting a 46.8% compound annual growth rate.

Despite the market’s potential, a growing number of state regulators are challenging prediction markets in courts, including Maryland, New Jersey, and Nevada. The CFTC’s requirement for prediction market platforms to obtain a designated contract market license has made this sector an attractive option for crypto exchanges looking to expand into derivatives markets.

Crypto.com stands out in the emerging market of US prediction market firms. It has become the first crypto exchange that has acquired a full group of licenses from the CFTC.

The company obtained its most recent license for designated contract market (DCM) just the previous week via North American Derivatives Exchange. The company possessed a DCM license since 2004 and Crypto.com acquired it during 2022.

Ever since then, the exchange partnered with Underdog Sports (fantasy sports and gaming company) to roll out sports prediction markets accessible via the Underdog app, available across majority of the US and the whole of Canadian provinces (excluding Ontario).

Decrypt reached out to Crypto.com for comment. They did not immediately respond.