Regulatory impact on crypto derivatives — Tennessee

The Tennessee Precedent: State Regulator Challenges Prediction Markets, Targeting Polymarket and Kalshi

The Tennessee Sports Wagering Council (SWC) has issued a demand to Polymarket, Kalshi, and the cryptocurrency exchange Crypto.com to cease operations with residents of the state. The regulator has classified their "event contracts" as unlicensed gambling activities. This decision, dated February 8, 2024, sets a critical precedent in the escalating conflict between federal and state regulation, jeopardizing the future of the multi-billion dollar prediction market industry in the U.S.

The Essence of the Regulator's Claims

In official cease-and-desist letters — reported by CoinDesk and The Block citing SWC Executive Director Mary Beth Thomas — the regulator asserts that the companies’ activities violate the Tennessee Sports Gaming Act.

The SWC’s position is that contracts betting on the outcomes of political elections, economic indicators, or pop culture events (e.g., "Will Candidate X win?" or "Will Movie Y gross over $100 million?") constitute "sports wagering" de facto. Under state law (T.C.A. § 4-51-102(20)), the definition of a wager includes "wagering on the outcome of an event occurring within any professional or amateur competition, or other event involving real people."

Since none of the three companies hold a license to operate sports betting in Tennessee, their operations have been deemed illegal under T.C.A. § 4-51-104. The platforms have been given a deadline of March 8, 2024, to completely wind down operations with state residents.

Different Models — One Problem

To understand the legal risks, it is crucial to distinguish between the companies' structures:

• Kalshi: The only player with a federal license. It operates as a "Designated Contract Market" (DCM) under the direct oversight of the U.S. Commodity Futures Trading Commission (CFTC). Kalshi positions its products as financial derivatives, not bets.
• Polymarket: The largest decentralized finance (DeFi) platform on the Polygon blockchain. It is not registered with the CFTC and officially blocks U.S. users, yet remains vulnerable to state claims due to residents accessing the platform via VPN services.
• Crypto.com: A centralized crypto exchange. It offers event derivatives (via its acquisition of the regulated exchange Nadex/Strike), but the state disputes whether a federal license is sufficient to offer retail "wagers."

Legal Collision: State vs. Feds

The situation creates a complex legal conflict, with Kalshi at the epicenter.

The company's lawyers will likely invoke the doctrine of federal preemption. The core argument is that Kalshi’s activity as a financial exchange is regulated by a federal body (the CFTC) under the Commodity Exchange Act. Consequently, the State of Tennessee does not have the jurisdiction to reclassify federal financial instruments as "gambling."

The SWC, in turn, may argue that the nature of these specific contracts (betting on events) historically falls under gambling, the regulation of which is a state prerogative (under the 10th Amendment).

Expert Commentary:
"We are witnessing a classic jurisdictional battle for control over an innovative market," notes David Friedman, a lawyer specializing in fintech regulation. "If the SWC prevails, it will create a regulatory 'patchwork' across the U.S., which would kill liquidity for national platforms. A victory for Kalshi, conversely, would cement the CFTC's status as the sole supervisor for prediction markets."

Failure to comply with the order could result in civil penalties of up to $25,000 per violation (T.C.A. § 4-51-118(c)) and injunctive relief banning activity in the state.

Recommendations for Tennessee Users

If your funds are held on these platforms, it is recommended to take preemptive action:

1. Asset Audit: Immediately take screenshots of your balances, open positions, and transaction history. This constitutes your evidence in the event of account freezes.
2. Withdraw Funds: Do not wait for the deadline. Initiate withdrawals to a bank account or a personal non-custodial wallet (e.g., MetaMask or Trust Wallet). Be prepared for potential transaction delays due to high demand.
3. Communication: If issues arise, contact official support and save all ticket correspondence:
   • Polymarket: https://help.polymarket.com
   • Kalshi: https://kalshi.com/support
   • Crypto.com: https://help.crypto.com
4. Regulatory Complaint: In the event of frozen funds, you have the right to file a complaint via the Sports Wagering Council (SWC) website.

Sources & References:

• Regulator: Tennessee Sports Wagering Council (SWC)
• Legislation: Tennessee Sports Gaming Act (T.C.A. Title 4, Chapter 51)
• Kalshi Status: CFTC Order of Registration as a Designated Contract Market
• Context: CoinDesk, The Block