Managing Editor
Yesterday, the Commodity Futures Trading Commission (CFTC) announced its staff had issued no-action letters to two predictions trading companies seeking to enter the US market: Railbird Exchange, LLC and QC Clearing LLC. The letters clear the path for these companies to offer products similar to Kalshi without the fear of having to defend themselves against enforcement action by the CFTC.
While those companies may not be recognizable to the average American consumer, they’re both connected to much more familiar brands.
QC Clearing LLC was acquired last month by Polymarket, in a deal the crypto-based predictions exchange explicitly said was meant to pave the path for its US return. Meanwhile, rumors have been swirling that DraftKings might be poised to buy Railbird as its way to enter the burgeoning sports contracts space.
Both companies received licenses from the CFTC this summer to operate as designated contract markets—Railbird in June, QC in July. However, exchanges like Kalshi have pushed the world of event futures contracts in new directions, opening up a legal gray area.
State-level battles over legality of contracts on sporting events continue to play out. For the most part, these seem to be going the way of the exchanges, although a recent setback for Kalshi in Maryland bucked the trend.
The no-action letters mean that the newcomers won’t have to worry about challenges on the federal front, as their predecessors did. They represent a promise by CFTC staff not to recommend enforcement action against QC and Railbird, provided they adhere to certain conditions. These include certain reporting requirements, no third-party middlemen, and a prohibition on leveraged trading.
Who are QC Clearing and Railbird Exchange?
Although Railbird only gained entry to the US market this year, the company dates back to 2021. As a startup, it received funding from the incubator Y Combinator.
Its site highlights the product’s features, but user signups are still “coming soon.”
It first came to mainstream attention shortly after receiving approval from the CFTC in June because of rumors that it was in acquisition talks with DraftKings.
For now, it remains unclear whether Railbird will operate independently or whether a deal with DraftKings is still on the table. DraftKings has waffled about whether or not it intends to enter the predictions space. For mainstream regulated sportsbooks, “beat ’em or join ’em” remains a dilemma when it comes to the predictions markets. On the one hand, eliminating new competition would be strategically preferable. However, it’s looking less likely that US courts will come down against the exchanges, which might mean that launching their own exchanges is the logical Plan B for DraftKings and its ilk.
DraftKings first announced an in-house exchange, DraftKings Predict, but backed away from that plan in April. The Railbird acquisition talks reportedly started not long thereafter. Its indecision continues, with the Wall Street Journal quoting CEO Jason Robins as saying it boils down to whether the opportunity will be worth “whatever noise might come along with it.”
On Polymarket’s side, there is a lot more clarity. It served US users until the CFTC forced it out in 2022. The Commission’s stance on event contracts was significantly different under the Biden administration than it is today. Ever since, Polymarket has been looking for a way back in, and the previously unheard-of QC Clearing appears to be that path.
Why No-Action Letters Are Crucial for Predictions Markets
Traditionally, event contracts are a financial tool. Their original intent was to allow businesses to hedge against specific risks not covered by standard commodity and currency futures.
The first novel use for them, before the idea of sports contracts was on the radar, was speculation on elections and other political events. PredictIt was an early player in that space, and it operated entirely under the blessing of a CFTC no-action letter.
At that time, the US federal government was opposed to commercial speculation on politics. However, PredictIt came about as a research project by the University of Wellington, in Australia. The CFTC granted the university and its partners permission to accept American users without challenge, so long as the exchange remained small in scope and focused on providing academic value.
There was a sudden policy shift in 2022, perhaps spurred in part by Polymarket’s activities. A few months after it forced Polymarket out, the CFTC withdrew its no-action letter and gave PredictIt a deadline to shut down. The resulting legal battle raged for years, before becoming moot after the election of Donald Trump.
Under President Trump (whose election the markets had correctly predicted), the CFTC’s stance on predictions markets has swung back in the opposite direction. It has conceded the fight against PredictIt and amended that no-action letter to permit the exchange to continue under the leadership of American academics. Meanwhile, it dropped its legal cases against Kalshi and Robinhood and granted them no-action letters of their own.
This week’s announcement makes clear that the letters issued to Railbird and QC Clearing are similar in structure and intent to those issued to Kalshi and Robinhood, though it doesn’t mention those companies by name:
The no-action letter applies only in narrow circumstances and is comparable to no-action letters issued for other similarly situated designated contract markets and derivatives clearing organizations.
