- ▸ Law professor Ilya Beylin said the “number one oversight” is that the rulemaking “doesn’t consider the harms of gambling through derivatives exchanges.”
- ▸ Beylin calls the shift to requiring Commission review of all contracts “a change that’s bad for America.”
- ▸ Whether the Commission built a rule that can survive scrutiny, and potential legal challenges, is a question the next 18 months will answer.
When announcing the agency’s proposed rule last week, CFTC chairman Michael Selig said it became clear from public comments that “the Commission needed to prioritize updating Rule 40.11 to ensure it remains properly calibrated for modern prediction markets and aligns with Congressional intent.” Some early critiques of the proposal see a document built as much to win in court as to produce good policy, a distinction that may matter if and when potential legal challenges arrive.
“The proposal reflects the philosophy and the strategic goals of the current commission,” Ilya Beylin, Associate Professor of Business Law at Seton Hall University School of Law, told DeFi Rate after reviewing the full text.
The proposed rule, published last week, defines “gaming” under the CEA for the first time, amends CFTC Regulation 40.11 to require the Commission to apply a multi-factor public interest test before prohibiting any contract, and identifies four categories of sports contracts the Commission would likely find contrary to the public interest. Whether it reflects sound regulatory policy is a separate question, one the courts may ultimately answer.
Rulemaking as litigation strategy?
Beylin sees the framework as shaped more by the CFTC’s litigation posture than by first-principles regulatory analysis, and points to the rule’s treatment of Rule 40.11 as exhibit A.
CFTC Regulation 40.11, known as the “Special Rule,” was promulgated by the CFTC in 2011 to implement statutory provisions enacted by the 2010 Dodd-Frank Act. The official Rule 40.11 notice in the Federal Register on July 27, 2011 reads: “The final regulations also amend existing requirements for the submission of new products and prohibit the listing and clearing of products based upon certain excluded commodities, if such products involve statutorily-specified activities or similar activities determined, by rule or regulation, to be contrary to the public interest.”
Based on that language, and prior CFTC actions that included halting gaming contracts from ErisX and Nadex, Beylin argues the current commission has not been enforcing its own rule. The proposed rule reframes that non-enforcement as a principled statutory interpretation rather than a policy choice, arguing the CEA’s Special Rule requires case-by-case review rather than a categorical prohibition.
The CFTC says the proposed rulemaking seeks “to modernize Rule 40.11.” Beylin sees it differently. “It’s a pretty good reading, but it’s far from the only defensible reading, and I believe another reading would have been more responsible.”
“They propose to take a very different approach from the one currently taken under 40.11 and they’re doing it partly to justify the non-enforcement of 40.11,” he said. “They haven’t been enforcing 40.11 since they approved the NFL contracts. And the leadership of the CFTC today would say that the statute gives exchanges a right to list contracts on terrorism or assassination or topics illegal under state law, such as arson, and I disagree with that.”
Under current Rule 40.11, certain contracts simply cannot be listed. Under the proposed rule, any contract can be listed and remains live unless and until the CFTC completes its review and issues a prohibition order, a shift from ex ante (before the event) prohibition to ex post review. Beylin called the original approach a “wiser” one: “There was no need, after the contract is listed, and after trading has started, to review and then ask for a takedown…Because the industry was told ‘don’t list these contracts.’ That’s part of the wisdom in the existing rule and that’s one of the reasons that I don’t think the existing 40.11 should be changed the way it’s being changed.”
The practical implication is that under the proposed rule, contracts on war, terrorism, or assassination could technically be listed and begin trading before the CFTC acts. “I frankly don’t see what the value is in giving exchanges the right to list contracts on, say, terrorism or arson or assassinations or war,” said Beylin. “I don’t see how that interpretation of the statute provides any real public interest, so I don’t understand why they’re changing 40.11 in this respect. I do understand it’s a strategic move to explain what they’ve been doing, but from a what’s good for America perspective, I think that they’re making a change that’s bad for America.”
On the review timeline, Beylin argues the proposed framework is built to favor exchanges. “It’s constructed to have a thumb on the scale in favor of the exchanges,” he told DeFi Rate. “For a terrorism contract, 10 days is enough for the CFTC staffer who receives the contract listing to go to the chair and the commissioners and say, ‘do we really want this?’ and the 10-day period will probably be enough to issue an objection. But for a sporting contract where the CFTC, based on the proposal, would have a harder road to showing that the sports contract is against the public interest, the 10-day period is probably not enough, and it’s made that way.”
On the lack of enforcement of the original rule, Beylin is pointed: “Frankly, to some extent, this administration has been lawless. There was a good argument that this administration violated the Administrative Procedure Act when they refused to enforce 40.11.”
Peter Sanchez Guarda, a financial derivatives lawyer who spent 22 years at the CFTC, flagged the same pressure point. “Whether the preamble does enough is the whole ballgame here,” he told DeFi Rate. “Opponents will certainly argue it’s insufficient justification and it will likely be another battleground that ends up being fought in state and federal courts over this issue along with the existing cases.”
What’s public interest got to do with it?
The rule’s public interest framework is where Beylin’s criticism is most pointed. The Commission’s analysis of sports contracts focuses narrowly on market integrity including manipulation risk, insider trading susceptibility, and exchange resources for policing misconduct. For contracts on war, terrorism, assassination, and player injuries, the CFTC applies a broader lens, considering national security, moral hazard, and privacy interests.
Beylin sees that selectivity as the rule’s central flaw. “For mainstream sports contracts, they chose a narrow market integrity focus, and once that choice is made, their approach makes sense, but that choice didn’t have to be made,” he said. “If I was to point to one problem with the proposal — it doesn’t consider the harms of gambling through derivatives exchanges. That’s the Number One oversight.”
He also challenged the price discovery rationale the Commission uses to justify permitting broad-outcome sports contracts. “There is price data in the form of odds that traditional sports books generate, so it’s not that we gain this only through trading through derivatives exchanges. If this was governed by state law, we’d still gain it, maybe not to the same extent, but we’d still gain some price discovery through the odds.”
Melinda Roth, law professor at Washington and Lee School of Law whose work has examined the CFTC’s public interest authority, also flagged a gap the rule does not address. Despite the Commission’s attention to manipulation risk throughout the sports contract analysis, the proposed rule contains no treatment of mention markets, contracts whose outcomes can be influenced by coordinated social media activity or public statements. “I was surprised not to see anything on mention markets since they are so easily manipulated,” she said.
The CFTC drew the line: Will it stick?
The Commission’s four prohibited categories — player injury contracts, officiating outcome contracts, discrete-action contracts, and pre-collegiate sports — each rest on a common rationale that a single participant, official, or narrow set of insiders can too easily determine settlement, creating manipulation risk the Commission found contrary to the public interest.
Beylin finds the framework internally consistent given its premises, but notes the premises weren’t compelled by the statute. “A lot of their analysis is based on market integrity and the ease with which particular contracts can be manipulated or insider traded on, and some of that is based on the commission’s own speculation,” he said. “Can lines be drawn differently? Could they have reached a different conclusion? Yes, absolutely.”
The stakes of where that line falls are visible in the volume data. DeFi Rate’s weekly volume tracking shows sports running at 84–85% of Kalshi’s weekly notional volume, with the World Cup group stage underway and the potential to push into the low-90s over the next two months.
Sanchez Guarda flagged that the rule’s cost-benefit structure may be intentionally designed for legal durability. “Rather than a single cost benefit for the entire rule, they went to great lengths to try to explain the costs and benefits for each subsection,” he said. “This may be an attempt to keep the parts as severable as possible so that if one part of it is invalidated on that basis, the others aren’t affected by it.”
Potential challenges and what comes next
The proposed rule is not a final rule. It is currently in a 45-day public comment period that concludes July 27, after which the rule text would still need to be finalized and published.
Roth’s initial read is that the level of definitional detail and statutory history in the preamble appears deliberate, and could be an attempt to “future proof” the framework against administration and party changes.
Beylin sees potential for the rule, once finalized, to carry real weight with the courts: “This change could hold up in court because the CFTC has substantial authority in interpreting a statute.”
On APA challenge risk, Sanchez Guarda identified the reversal question as central. Post-Loper Bright, the 2024 Supreme Court decision overturning Chevron deference, courts make statutory interpretation calls themselves, without deferring to the agency. That means the CFTC loses interpretive authority, but opponents also lose the ability to cite the old Rule 40.11 orders as binding precedent courts must follow. “The CFTC’s new stance that sports outcomes are commodities and can be traded on DCMs will be decided by courts without the agency’s opinion as a valuable input,” Sanchez Guarda said.
Beylin is cautious about predicting a challenge while the rule is still in proposed form. “I could see the sportsbooks, or more likely the state gambling commissions, and maybe the tribes challenge some aspects of this rulemaking process. It’s possible, but we just don’t know enough yet, because we don’t have the final release.”
The comment period and ongoing state vs. prediction markets appeals are running simultaneously. A ruling from the Ninth Circuit on the Nevada preemption case is expected in the coming weeks. The proposed rule is the most detailed framework for prediction markets the CFTC has ever produced. Whether it was built to last, or built to litigate, is the question the comment period and the courts may soon answer.
