Swaps under federal law, or bets under state law
The main issue here is the matter of jurisdiction. According to Novig, its sports contracts are conducted under swaps which are subject to the Commodity Exchange Act (CEA) and thus fall under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC). Meanwhile, Ludlow Exchange was authorized as a designated contract market regulated by the CFTC on June 16.
However, Wisconsin maintains that sports betting is viewed as gambling under its law despite the legislation of the federal government.
The preemption question is based on CEA provisions. Specifically, CEA §2(a)(1)(A) gives the exclusive jurisdiction over futures and swaps traded at designated contract markets to the CFTC. CEA §1a(47) gives a wide definition of the term “swap,” while CEA §16(e) deals with federal preemption against the requirements set by states.
There have been different approaches taken by courts. The Third Circuit found in the April case of KalshiEX LLC v. Flaherty that the CEA preempted New Jersey gambling law when it came to Kalshi’s sports contracts because they were determined to be swaps traded on a CFTC-regulated market.
A Nevada federal court ruled differently in the case of North American Derivatives Exchange v. State of Nevada, determining that, at the preliminary stage of the case, sports contracts offered by Crypto.com were not swaps subject to the jurisdiction of the CFTC.
The distinction matters: a federal designation does not exempt a prediction market from state statutes. The operator needs to prove that their contracts comply with CEA and that the state regulations are overridden.
Novig is dealing with an unfavorable development in Wisconsin. The CFTC made a request for a preliminary injunction against Wisconsin state officials, which was rejected by a federal judge. According to the judge, the CFTC has not provided evidence to meet the court’s obligation for the so-called preemption theory of legality. The case is still pending.
Why the sector runs on crypto rails
The dispute is significant to cryptocurrency investors as predictive markets are becoming more intertwined with stablecoins, crypto infrastructure and on-chain trading. Crypto-linked volume on the top prediction markets, Kalshi and Polymarket, totaled $1.46 billion, or 15.4% of the market tracked.
According to Galaxy Research, the cumulative volume of prediction markets exceeded $150 billion, while Macquarie Equity Research claims there will be $1.5 trillion of transactions in 2030.
Novig is trying to differentiate its business model from those of other companies that attracted the attention of regulators. The platform focuses on sports contracts instead of political prediction markets and requires its users to be at least 21 years old.
A nationwide legal campaign, and a Mets deal
Wisconsin is the fifth state that Novig has sued in court since August 4, after the cases in New York, New Mexico, Massachusetts and Washington. The nature of these lawsuits suggests that Novig has a strategy in mind to gain federal protection as they grow.
The company also had a license for sports betting in Colorado before switching to a federally regulated exchange model.
Alongside a legal campaign, Novig entered a marketing agreement with New York Mets to become the first Major League Baseball (MLB) team to offer a prediction-market platform. Novig will be able to brand Citi Field and various broadcasts of Mets games and have access to official MLB data with this deal.
The merger puts Novig right at the intersection of derivatives regulation and state gambling laws. Moreover, in the crypto market, the ruling could influence whether prediction markets are allowed to function as national financial products or remain under states’ restrictions.
