How this UK exchange is trying to do both in the U.S.

Smarkets, a UK-based betting exchange, is making its way into the U.S. by pursuing two separate avenues.

The company, which was founded in 2008, filed for a license with the Commodity Futures Trading Commission in March. The platform — which has over $60 billion in lifetime trading volume — also has pending applications to operate as a sportsbook in Illinois, Iowa and Michigan, according to Smarkets founder Jason Trost. 

“The reason we’re doing the dual track is because the legal situation is unclear if the CFTC has federal preemption or not,” Trost said. Just like prediction market platforms Kalshi and Polymarket, sports also drives Smarkets’ volume, he added. 

A growing number of states have argued prediction markets are operating as illegal gambling platforms. The CFTC has hit back, however, suing multiple states to block efforts looking to regulate the platforms. Last month, 44 state attorneys general also wrote that the federal agency cannot be the exclusive regulator of sports-related event contracts found on exchanges. 

Prediction market platform Kalshi called it “political theater” when New York filed a lawsuit against the platform in July.

“States can’t just shut down a federally licensed exchange. This would also just hurt New Yorkers, who would be driven offshore,” Kalshi said.

As the tug-of-war on regulatory jurisdiction continues, Smarkets is trying to cooperate with states. The Susquehanna-backed platform applied as a sportsbook in Illinois and Michigan, two states where regulators have categorized prediction markets as unlicensed sports betting operators. Smarkets already operates as a sportsbook in Indiana. 

The first choice, though, would be for Smarkets to run as a prediction markets exchange regulated under the CFTC, Trost said. He agrees with what some states argue against, that sports-event contracts should be identified as swaps and be federally regulated. 

“We view it more as a hedge rather than we want to be active on a state level. You know, our preference is to be active on the federal level,” Trost said. 

Smarkets isn’t the first one taking this dual-track approach. Sports betting platforms like DraftKings and FanDuel have launched prediction markets late last year. During last week’s earnings call, FanDuel’s parent company, Flutter, noted its prediction market platform can gain customers faster in states where sportsbooks are still under scrutiny.

Smarkets has had to confront each state’s provisions for its platform to operate as sportsbooks, including abiding to high compliance and tax costs. 

Still, Trost said he’s willing to take the rough terrain and make Smarkets a leading “good actor” in the business. He noted the platform runs in four European countries, including Ireland, Malta and Sweden, which has helped the UK-based betting exchange know how to respond to contrasting regulatory landscapes. 

Without specifying which operators, Trost added platforms within the space also have a responsibility in following regulation, rather than working around it.

“Some of my competitors are in danger of ruining the reputation of this industry because I think they’re acting irresponsibly [and] not following regulation closely enough,” he said. 

Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.