Is Everything a Swap?
Yes, according to Dodd-Frank.
It’s 2009. The US is in an economic mess after the financial crisis. People have lost their homes and their livelihood, and they are angry. The blame is directed at complex financial instruments like mortgage backed securities and credit default swaps that enriched the big banks, only to later blow them up and leave mainstreet as collateral damage. Obama has just been elected to the White House. The Democrats, including Elizabeth Warren and Gary Gensler, are channelling people’s anger into the Dodd-Frank Act to regulate derivatives, specifically swaps.
Swaps are the largest derivatives market in the world. Hundreds of trillions of dollars in swaps are traded privately between banks with little transparency. Dodd-Frank’s goal wasn’t just to regulate credit default swaps or interest rate swaps - it was to regulate *all* types of swaps. Including swaps that may be constructed in clever ways to avoid regulation in the future.
The only way to regulate every potential swap was to define ‘swap’ in the broadest possible manner. Dodd-Frank defined swaps to include any agreement based on events with “potential” financial consequence, which is… almost everything.
Gary Gensler, the Chairman of the Commodity Futures Trading Commission, said in July 2009:
“(The regulation) should include interest rate swaps, currency swaps, commodity swaps, credit default swaps, and equity swaps. Further, it should apply to dealers and derivatives no matter what type of swaps or other derivatives may be invented in the future.”
With a definition that broad, any financial agreement could be swept under the federal regulatory umbrella. Nothing would escape oversight.
There’s one problem. When you pass a law, you’ve got to imagine your opponent using that law too. And sometimes, that can come back and bite you in the ass.
Fast forward to 2026 under a Republican administration. Prediction markets like Kalshi have registered with the CFTC, a federal derivatives regulator. Billions of dollars are being bet on sports markets on Kalshi, but Kalshi argues that this isn’t sports gambling. Sports event contracts are ‘swaps’, a financial product defined broadly in the Dodd-Frank Act. States like Nevada, Ohio, and New Jersey push back, arguing that they are, in fact, sports gambling where state-specific licenses, taxes, and bans apply. Fourteen states are involved in court cases with prediction markets and the CFTC over whether sports event contracts are swaps (regulated by the CFTC) or gambling (regulated by the states).
Yesterday, the Third Circuit ruled in Kalshi’s favor. The main issues are:
Does a sports game have economic consequence?
The Third Circuit stated that sports games do have “potential” economic consequences like sponsors, media rights, and merchandise revenue.
Does the game need to directly drive that consequence, or can it be indirect?
The Third Circuit said that indirect consequences count.
It will be an uphill battle for the states.
It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.
The Democrats thought for sure that Dodd-Frank would lead to less degeneracy in our financial system. Their righteous rage led to an expansive definition of ‘swap’, which they thought meant that more financial products could be included in the CFTC’s purview, leading to less of a wild west.
However, since that same law is used by a Republican administration in a different way, it will lead to sports betting being treated as a financial product rather than a gambling product. Which potentially leads to gambling being legal and accessible in all fifty states in America, something the Democrats of 2009 would have never wanted or expected. The world works in strange ways.