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The Next Online Casino Loophole Is Being Built on Prediction Markets, Gaming Lawyer Says

Congress, state regulators, and the prediction market trade itself agree that casino-related prediction market contracts ought to be off limits. But as that door closes, a gaming lawyer says {that a} window could also be opening for a brand new era of gray-area on line casino merchandise that neither the CFTC nor state playing regulation is clearly positioned to succeed in. The template already exists: historic horse racing (HHR) machines use previous race outcomes to energy slot-like video games in additional than a dozen states with out a on line casino license. Prediction market contracts might serve the identical operate, and it’s not simply hypothetical.

“This is one thing I’m certain persons are speaking about and fascinated about proper now,” mentioned Stephen Piepgrass, a gaming regulatory lawyer and accomplice at Troutman Pepper Locke. “The HHR mannequin is one which I feel might be very readily translated into the prediction market house, and I’d anticipate there are companies which can be fascinated about how to try this proper now.”

What Piepgrass is describing isn’t a prediction market on a roulette spin, a contract kind even the prediction market trade’s personal coalition has moved to ban. “These enterprise fashions wouldn’t permit folks to commerce on the prediction markets with a casino-style overlay; It’s truly one thing completely different from that,” Piepgrass advised DeFi Rate. “It’s utilizing, most likely previous predictions, similar to historic horse racing, because the background enter for the mannequin.”

The mannequin being contemplated is a gray-area on line casino product layered on prime of legit federal derivatives, utilizing permissible CFTC-listed occasion contracts as the end result engine for casino-style video games with out going by a regulated trade in any respect. The precedent is already reside. GiddyUp took the HHR mannequin on-line earlier this yr, working underneath an Oregon Racing Commission parimutuel license. Swap the horse race for a federal funds charge determination or a CPI studying, and the mannequin interprets straight. As for whether or not present or proposed laws closes that hole, Piepgrass doesn’t assume so. 

“I don’t see the present laws being the kind of framework that may deal with this.”

A well-known playbook and a slender window

The gray-zone sample is one the gaming trade has seen play out repeatedly. “Every time you modify the information barely, the authorized overlay that applies to these information is now imperfect,” Piepgrass mentioned. 

What’s modified every time isn’t the basic logic, however slightly the know-how and authorized wrapper. And every iteration has given operators a window to scale earlier than regulators caught up. Much just like the fashions that got here earlier than, the monetary incentive for operators to function within the grey is actual.

“I feel it will take off in a short time as quickly as the primary one comes out,” Piepgrass mentioned. “I feel earlier than we all know it, everybody’s going to be doing it.” While the window could also be shorter now given the present intense regulatory scrutiny round prediction markets, even a decent window might present adequate incentive for operators. 

“I feel the window is narrower than what it’s been up to now for working on this zone, however I do assume there’s some huge cash that might be made in a small window.”

The fashionable gray-zone on line casino trade traces its roots to internet sweepstakes cafes that started proliferating throughout the south round 2005. These institutions offered web time, with casino-style sweepstakes entries hooked up. The product seemed like a slot machine. The authorized argument was that prospects had been shopping for web entry and receiving sweepstakes entries as a bonus, satisfying the “no buy needed” requirement that removes the “consideration” aspect of playing. The mannequin unfold to at the least 20 states earlier than dealing with prison complaints and bans. It ultimately migrated on-line, spawning the trendy sweepstakes on line casino trade championed by main operators like Chumba, McLuck and Stake.us, which itself ran for years earlier than Montana grew to become the first state to successfully ban them in May 2025, adopted by eight others so far.

Pennsylvania has been preventing a paralell battle with skill games, digital terminals in bars and gasoline stations that use a game-of-skill overlay to argue they fall exterior the definition of slot machines. Governor Shapiro has estimated roughly 70,000 unregulated terminals at present function throughout the commonwealth. Years of litigation have but to provide a definitive decision.

Then there’s historic horse racing. HHR machines, the direct template for what Piepgrass says operators at the moment are exploring, originated at Oaklawn Park in Arkansas in 2000 and expanded from there. A participant locations a wager and animated reels spin, similar to a slot machine. The catch is that the end result is decided not by a random quantity generator however by the results of an anonymized, beforehand run horse race drawn from a historic database. To an informal observer, it’s functionally indistinguishable from a slot machine. Legally, operators argued, it was a pari-mutuel wager on a horse race, and due to this fact coated by horse racing regulation slightly than on line casino gaming regulation.

The Kentucky Supreme Court struck down HHR in 2020, ruling the machines didn’t genuinely protect the pari-mutuel construction. The legislature responded not by redesigning the product however by rewriting the definition of “pari-mutuel wagering” to explicitly embody “previously-run” or historic races. Approximately $10.5 billion was wagered on HHR machines in Kentucky throughout fiscal yr 2025, roughly 5 instances pre-legalization ranges. The mannequin now operates in Virginia, Wyoming, New Hampshire, and several other different states with parimutuel wagering legal guidelines. 

GiddyUp Games, a model working underneath KHK Games, Inc., introduced the mannequin on-line in 2026, working the identical structural logic throughout 17 states underneath an Advanced Deposit Wagering (ADW) license from Oregon. The firm’s CEO, Jon Kaplowitz, told PlayUSA, “By utilizing reside horse racing as the idea for its video games, GiddyUp offers a secure, compliant choice for gamers looking for authorized real-money gaming options.”

The Kentucky Law Journal captured the gray area construct in addition to any. “Whether a brand new wagering know-how is permissible typically turns much less on the way it features and extra on how the regulation chooses to outline it,” wrote KLJ editor Jay McCormick. 

Internet cafes weren’t playing; they had been promoting web time. Sweepstakes casinos aren’t playing; they’re promotional contests. Skill video games aren’t slots as a result of they require ability. HHR machines aren’t slots; they’re horse racing wagers. Each time, the product features like on line casino playing, however a authorized label creates the excellence.

The prediction-market-powered on line casino mannequin might be the subsequent iteration. It’s not a on line casino sport, proponents will argue, however a CFTC-regulated monetary instrument with a gaming interface on prime.

Gaming tips underneath the CFTC

The CEA’s gaming special rule, Section 5c(c)(5)(C), provides the CFTC authority to ban occasion contracts involving “gaming” as opposite to the general public curiosity. CFTC Rule 40.11(a) in 2011 listed a categorical prohibition on itemizing of contracts that “contain, relate to, or reference” gaming on registered exchanges. Interpretations have broadly converged on the “gaming” prohibition encompassing casino-style video games like slots, roulette and blackjack. But “gaming” itself has by no means been formally outlined in statute or rule, a spot the CFTC acknowledged when it opened its March 2026 Advanced Notice of Proposed Rulemaking (ANPRM) and requested the general public to outline it. The CFTC’s personal 2024 try and outline “gaming” in rulemaking was withdrawn earlier than taking impact, leading to one in all plenty of regulatory gaps currently playing out in courts.

What hasn’t been addressed in courtroom or in regulation is what occurs when a permissible CFTC contract powers a on line casino sport slightly than being listed as a on line casino sport contract itself. Peter Sanchez Guarda, a derivatives lawyer and former CFTC lawyer, thinks the CFTC has the instruments to maintain such merchandise off registered exchanges. One purpose is that casino-game functions fail the fundamental financial operate check that has anchored CFTC jurisdiction since earlier than the company existed.

“I don’t assume the CFTC would allow an trade to supply these ‘contracts’ as a result of they don’t have any financial operate,” Sanchez Guarda mentioned. He notes that with some sports-related contracts, there’s at the least a hedging and worth discovery argument. For instance, a staff’s playoff standing would possibly have an effect on lodge occupancy, promoting income, TV scores and so forth. But on line casino sport outcomes are categorically completely different. 

“Spins of a roulette wheel don’t have any worth discovery. Past spins don’t have an effect on future spins, and the percentages aren’t modified by educated bettors. They additionally don’t have any hedging operate,” mentioned Sanchez Guarda. “The similar is true for sweepstakes. So they lack the connection to commerce that has been a requirement for legality since earlier than the CFTC existed.” 

He factors to Irwin v. Williar, an 1884 Supreme Court case he describes as one “most individuals don’t learn about.” In it, the Court held that contracts the place events intend solely to pay the distinction in worth, with no intention of precise supply, are wagering contracts, not legit industrial devices. The case predates the CFTC solely, and established that utilizing a monetary market worth because the reference doesn’t rework a playing product right into a monetary one.

The similar logic, Sanchez Guarda argues, applies to any try and layer a on line casino sport on prime of a CFTC-regulated contract. “In the previous days the ‘numbers racket’ the place the mafia would acquire bets and payout based mostly on a quantity like the full variety of bets of a racetrack, was playing,” he mentioned. “If it was based mostly on the closing worth of the S&P 500 index, it will nonetheless be playing, not a securities violation. I feel the end result would observe for the CFTC.” 

Where the evaluation will get extra sophisticated is the appliance layer with the on line casino sport constructed on prime of, slightly than listed on, a CFTC trade. “If the end result of a CFTC contract was used to generate a random quantity that supplied a payout, that may appear to be playing that’s coated by the state’s authority,” Sanchez Guarda mentioned.

Outside of CFTC attain? 

If an operator constructed the product solely exterior the DCM framework, Sanchez Guarda’s learn is that “The CFTC wouldn’t have enforcement authority.” 

The purpose comes right down to market affect. The CFTC can attain past the trade when downstream exercise distorts the trade market itself. That’s why it pursued banks for manipulating LIBOR, the rate of interest benchmark that underpinned trillions of {dollars} in exchange-traded derivatives, and why misreporting pure gasoline costs can fall underneath CFTC jurisdiction when it strikes futures contract costs. In each instances, the downstream conduct corrupted what was occurring on the trade. 

As Sanchez Guarda explains: “The CFTC governs trade buying and selling of commodities, not what occurs to the underlying commodity (or on this case, the underlying contract final result) downstream, until it’s getting used to control the costs on markets that the CFTC regulates.”

A on line casino sport that makes use of a CFTC contract’s final result as a randomization engine doesn’t do any of that. The CPI contract resolves usually on the trade and the on line casino sport is a separate, downstream use of that final result. Nothing feeds again into trade costs. “If what they’re utilizing the CFTC contract for is one thing else which doesn’t affect the CFTC’s markets, then I don’t see what the jurisdictional hook is.”

So the CFTC can possible block these merchandise on the trade degree, however could don’t have any attain over a product constructed one step faraway from its markets. But that doesn’t imply enforcement is unattainable.

“Even if it doesn’t match neatly throughout the CFTC regulatory scope, there’s nonetheless a approach that they, by partnering with the DOJ, can take motion right here and assert themselves,” Piepgrass mentioned.

States arguably have the clearest authority over the product itself, however patchwork state enforcement has taken years to catch up in earlier gray-zone markets, and the continuing preemption battle over prediction markets has already produced circuit court splits that complicate any state’s capacity to behave. 

Parties align on casino-based market prohibition, however hole stays

There’s a notable consensus forming round one model of casino-related prediction market considerations. The query is whether or not a extra imminent risk is unnoticed of that therapy. 

On February 10, Rep. Dina Titus (D-NV) launched the Fair Markets and Sports Integrity Act (H.R. 7477), the primary congressional motion particularly concentrating on casino-game contracts (and sports-related contracts) on prediction market platforms. On March 23, Senators Adam Schiff (D-CA) and John Curtis (R-UT) launched the Prediction Markets Are Gambling Act within the Senate, enumerating the identical on line casino video games (slots, poker, blackjack, roulette, bingo) as prohibited contract classes. Both payments would amend the CEA to bar CFTC-registered entities from itemizing these contracts.

The prediction market trade’s personal coalition agreed. In its April 30 CFTC comment, submitted the identical day the remark interval on the company’s ANPRM closed, the Coalition for Prediction Markets, representing Kalshi, Coinbase, Crypto.com, Robinhood, and Underdog, requested the CFTC to formally outline “gaming” as casino-style video games and said it “doesn’t assist itemizing contracts on conventional on line casino video games (corresponding to slot machines, roulette, or ‘desk video games’) on prediction market platforms.”

Rep. Titus publicly famous the alignment: “I’m happy to see the Coalition for Prediction Markets, which incorporates Kalshi, helps my rule that bans prediction markets from offering on line casino type video games.”

The consensus addresses one perceived casino-related risk, however the mannequin being explored targets a unique loophole that the present laws isn’t designed to shut.

The state enforcement image

One of essentially the most aggressive states when it comes to cracking down on grey space or unregulated playing is Pennsylvania, which has directed motion on a number of fronts together with sweepstakes casinos, ability video games, and now sports activities occasion contracts. Doug Harbach, the PGCB’s director of communications, framed the board’s place as follows: “The Pennsylvania Gaming Control Board believes that the Commodity Exchange Act was by no means meant to authorize gaming, be it sports activities wagering or on line casino video games.”

The CEA, Harbach advised DeFi Rate, was constructed for legit industrial hedging, noting its oversight in each chambers sits with the Agriculture Committees, “which is in step with how Congress supposed the CEA and the CFTC to operate…to determine a market the place somebody (e.g. a farmer) might hedge his danger of dangerous climate (e.g. a drought) by shopping for a futures contract that there can be lower than common rainfall, thereby compensating him for harm to his crops. In different phrases, prediction markets had been established to hedge danger in opposition to financial penalties of occasions exterior of the management of the purchaser of the contract, to not give an 18-year-old the chance to have a small windfall if his favourite staff received a sport or from the end result of the spin of a roulette wheel.

The PGCB has been in conversations with the Pennsylvania AG’s workplace about authorized choices, Harbach mentioned, however acknowledged the constraints. 

“It is value noting that the third Circuit Court of Appeals (the U.S. Circuit wherein Pennsylvania is located) just lately determined that state gaming legal guidelines are possible pre-empted by the CEA. That determination, which can very properly be appealed to the U.S. Supreme Court, have to be thought of when discussing any potential litigation. The clearest and quickest path to addressing this problem is thru the CFTC rulemaking course of or by Congressional motion to extra clearly outlining the boundaries of the CEA. That is why the Board continues to debate this matter on the Federal degree.”

Notably, when requested particularly concerning the casino-engine mannequin (prediction market contracts powering casino-style video games slightly than being listed straight as on line casino sport contracts), Harbach acknowledged he wasn’t versed in that particular construction. Pennsylvania has dealt straight with sweepstakes casinos and ability video games, however this subsequent iteration isn’t but on the board’s radar. That’s not stunning contemplating regulators are targeted on the loopholes already being debated and addressed, not on a hypothetical one quietly being constructed within the background.

The jurisdictional confusion isn’t new; it’s baked into how prediction markets developed. Novig CEO Jacob Fortinsky recalled on a current Prediction Market Movers podcast that when making an attempt to get their peer-to-peer sports activities betting trade licensed again in 2023, a state regulator advised him early on: “We basically don’t view what you’re doing to be playing. If you’re making an attempt to construct a monetary trade for sports activities betting, you must go to the federal authorities.” State regulators directed operators towards the federal framework. The mannequin now being explored could sit within the house between: too removed from the trade for the CFTC to succeed in, and too wrapped in federal derivatives for states to simply act.

Closing the incorrect door?

Even if the Curtis-Schiff or Titus payments move or if the CFTC formally defines “gaming” as casino-style video games in its rulemaking, it might not foreclose the mannequin Piepgrass says operators are already exploring. Current efforts goal casino-game contracts on registered exchanges, however the novel mannequin doesn’t require a registered trade.

The potential prediction market-powered on line casino sport mannequin would enter that hole with a stronger authorized argument than any of its gray-zone predecessors. The underlying instrument isn’t a promotional contest or a ability sport, however slightly a federally regulated monetary spinoff. That doesn’t make it authorized, however it might place it in jurisdictional no-man’s land that neither the congressional proposals nor the CFTC’s rulemaking is designed to deal with.

The dialog about constructing precisely that’s already occurring. The window could also be narrower than in previous gray-zone on-line on line casino fashions, however operators are already starting to look by it. 

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