At the federal level, SEC Commissioner Hester Peirce suggested crypto vaults and onchain lending may trigger securities law considerations. Commissioner Peirce cautioned that crypto vaults—which use smart contracts to allocate user assets to yield-generating activities like staking and lending—and onchain lending strategies may implicate the federal securities laws, as investment contracts or investment companies, or through the issuance of notes that constitute securities. Peirce emphasized that moving activities onchain does not take them outside the SEC’s regulatory purview and warned market participants not to consider such activities as outside the scope of the federal securities laws. Commissioner Peirce encouraged market participants designing or operating crypto vaults and onchain lending platforms to instead engage with the SEC to find compliant paths forward and rule modifications to accommodate these innovations while still protecting investors.
Meanwhile, the CLARITY Act negotiations continue in the Senate. Treasury Secretary Scott Bessent stated that lawmakers were at the “1-yard line” and urged the Senate to pass the bill, though some issues linger. On July 22, Senator Cynthia Lummis released an updated draft that incorporates input from both the Senate Banking and Senate Agriculture Committees. The bill now includes a Trump-approved ethics provision barring certain officials, including the president and other members of the executive branch and their spouses, from offering or issuing digital assets. Some key Democrats oppose the bill, arguing that DOJ ethics enforcement would be insufficient. The updated bill text also permits some stablecoin rewards, which has been a point of contention with bank trades associations.
At the state level, a Washington superior court judge granted Washington state’s motion for a preliminary injunction against Kalshi (the first federally regulated financial exchange in the United States that lets people trade "event contracts" on the outcomes of future real-world events), finding that its sports-related event contract likely violated the state’s gambling laws. The court rejected Kalshi’s central legal argument that its registration with the Commodity Futures Trading Commission (CFTC) places its contracts under exclusive federal jurisdiction and instead ruled that the Commodity Exchange Act does not prevent Washington from applying its gambling laws to the platform. Kalshi continues to resist the ruling, maintaining its belief that states cannot regulate federally registered prediction markets.
New York Attorney General Letitia James agrees with Washington and cautioned against delegating oversight of digital assets to the CFTC and overriding state regulation. She noted that complaints to her office about cryptocurrency scams have grown significantly in the last three years, with reported scam losses totaling nearly half a billion dollars in the past five years alone. Among other recommendations, James urged Congress to require cryptocurrency platforms to comply with Anti-Money laundering and Know Your Customer laws, cybersecurity protocols, and stricter ethics requirements. She also called for prohibiting cryptocurrency that cannot be fully traced from being converted to U.S. dollars and for holding platforms financially liable for failing to protect consumers from fraud. Her recommendations also track the increase in crypto platform fraud arbitrations and pig-butchering scams.
At the same time, Kalshi requested CFTC approval for precious metal-linked perpetual futures. If granted, the CFTC would expand the prediction market’s perpetual contracts beyond crypto to create derivatives for gold, silver, and platinum. Instead of the 24/7 constant schedule for crypto perpetuals, the precious metal-linked contracts would trade five days a week for 24 hours a day, which matches the markets for precious metals. Kalshi filed the request in a process that would give the CFTC 45 days to determine whether to approve.
Nevada meanwhile got Kalshi to implement geofencing technology to prevent Nevada customers from trading certain prohibited event contracts, including contracts on sports, elections, and entertainment-related events. The agreement, with the Nevada Gaming Control Board, comes after state regulators gained access to certain events contracts despite Kalshi’s use of IP and residency-based trading blocks. Kalshi has agreed to implement geofencing by no later than August 12 or pay Nevada $120,000 a day until fully implemented.
On July 22, a Pennsylvania representative introduced a bipartisan bill that would create a regulatory framework for prediction market platforms. Notably, the bill does not suggest the prohibition of sports event contracts, though it would require consumer protection and integrity standards similar to those imposed on gambling.
On July 27, a federal judge paused Minnesota’s ban on prediction market platform activity in the state after the Justice Department, the CFTC, and major prediction markets filed lawsuits to halt the law. In her order, the federal judge found that federal law will likely preempt state law in some respects, though not all, and that the law would cause “irreparable harm” to large prediction markets in the state.
After the ruling, Governor Tim Walz signed an executive order on July 28 to prohibit state government officials and employees from using non-public information obtained through state employment to participate in a prediction market. For public entities like independent officials, the Minnesota legislature or judicial branches, and certain state groups not considered employees of state agencies, the executive order “strongly encouraged” them to adopt measures to prevent the use of non-public data on prediction markets.
Article 1 in this three-part series can be found here.
Janice L. Sperow is a member of the AAA's AI Ambassador program, which brings together experienced AAA arbitrators and mediators to examine emerging issues at the intersection of AI and dispute resolution.