Some Much Needed Clarity

Congress’s attempts to pass crypto bill remain elusive. Ninth Circuit deals Kalshi another legal defeat, overturning a lower-court ruling that had gone Kalshi’s way against California tribes.The Bulletin BoardTHE LEDE: The CLARITY Act is dead. What happens next? BEYOND the HEADLINE: Prediction markets overreact to CLARITY Act news.QUICK HITTER: Gambling loss deduction cap repeal passes House committee, but House goes on recess until November. NEWS: Ninth Circuit rules against Kalshi in tribal case.AROUND the WATERCOOLER: When literally means figuratively. 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There were also some prediction market concerns, voiced by Sen. Catherine Cortez Masto:“This version of the CLARITY Act is a step backwards from the language passed out of the Banking, Housing, and Urban Affairs Committee and clearly undermines law enforcement’s ability to both investigate crypto crimes and to ensure bad actors cannot use crypto for illicit finance. The bill would allow prediction markets to continue to perpetuate illegal gaming operations that ignore state and Tribal law. The legislation also doesn’t go far enough to address key ethics issues. I’ve been clear from the beginning about my position, and I’m disappointed that Republican leadership refuses to accept such commonsense solutions.”Sen. Cynthia Lummis, who has been spearheading the CLARITY Act effort, talked big in the press release:“After a year of intense daily bipartisan negotiations, this bill is ready,” said Lummis. “President Trump voluntarily agreed to unprecedented ethics restrictions, holding every federally elected official, judge, and their spouses to some of the toughest ethics restrictions in U.S. history. This text is truly bipartisan and includes more than 120 of Democrats’ demands. A no vote on Tuesday means opposing real ethics reforms on politicians’ personal investments, handing American leadership in digital assets to our foreign competitors, and leaving Americans with zero protections in the digital asset markets. Democrats got what they wanted; now they need to take yes for an answer.”Unsurprisingly (to everyone except crypto true believers), at the end of the day, talks broke down. And also unsurprisingly, things got testy:I’ve said this about gambling legislation, when you start trying to find support by fixing concerns around the edges, without dealing with the underlying core issues, it’s a massive tell that it’s not going to pass:“The kitchen sink approach is a common occurrence in states struggling to gain enough support for a gambling expansion bill. The theory is you can add another expansion that opponents of your effort agree with to bring them on board… So you gain a few votes and lose a few votes. And then, in a desperation hail-mary attempt, you try adding another expansion (and maybe another), and the same scenario plays out. You keep adding and adding until no one supports it.”That seems to have happened here, too:The hope among the crypto crowd is the SEC and CFTC can institute CLARITY-lite via rules:Unfortunately, that would likely lead to a prediction market-sized legal fight, with Loper Bright at its center.Beyond the Headline: How Prediction Markets (Over)Reacted to CLARITYSomething else to consider is how prediction markets reacted to the news of a “compromise” bill (again, there was no compromise, it was like stepping on 100 ants in someone’s kitchen and declaring you’ve fixed their infestation problem). The markets tend to be quite reactionary, spiking to 34% on the news and then falling to 5%:As Dustin Gouker noted in his Event Horizon newsletter:“I think it’s fascinating to see how a market prices things in real time! I am one of the people who goes to Kalshi and Polymarket to see what their markets say the odds of things happening are for things related to the news.“This is something that prediction markets honestly solve: price discovery in some important markets. The market thought passage of Clarity was possible, but still an underdog. You can agree or disagree with that assessment, but it’s what a decently liquid market thought! You could also in theory find ways to hedge on this market, depending on your interest; it’s not entirely clear if that was going on, but it was possible!”I agree with Dustin on the useful part. Just don’t confuse headline-induced spikes with a strong signal. It’s worth noting that the pricing of these longstanding markets (will CLARITY pass) can contain quite a bit of noise, with overreaction to news and the possibility of people hedging against prior bets or crypto exposure. The crash back down to 5% is the signal, the rest was just noise.Quick Hitter: A Little Momentum to Repeal the Gambling Loss Deduction CapThere was finally some movement on reinstating the 100% gambling loss deduction cap, as Rep. Steve Horsford’s FULL HOUSE Act was included in a larger tax reform package passed by the House Ways and Means Committee on Wednesday, in a 38-5 vote.But this is a good news/bad news story. First, the good news: The bad news is, the House just recessed until November:Rep. Dina Titus, who has been spearheading the effort to restore the gambling loss deduction cap to 100% (her Fair Bet Act was not the vehicle chosen), tweeted the following:“Finally, after 14 months of uncertainty, my fix to restore the 100% tax deduction for gambling losses has been passed out of committee. I was the first Member of Congress to recognize this injustice when I introduced my provision to correct it on July 7, 2025. Since then, I have amplified this issue nationally and brought it to the attention of my colleagues, including members of the Ways and Means Committee. Now it is time for us to push this commonsense solution to the House floor, to the Senate, and finally to the President’s desk. I won’t stop fighting until we get this over the finish line.”Bill Miller, President and CEO, American Gaming Association also issued a statement:“The American Gaming Association is grateful for this critical step forward in restoring the 100% gambling tax deduction. We encourage Congress to pass the FULL HOUSE Act to ensure that consumers choose the legal market where protections exist and are not taxed on phantom income.Thank you to the Ways and Means Committee as well as Representatives Horsford and Miller for their leadership in advocating for this bi-partisan measure. We look forward to working with our partners in Congress to get this passed.”Sponsor’s Message, Presented by Golfbet: Golfbet is a proud supporter of Responsible Gaming Education Month. Whether you’re playing golf or placing a bet, luck is part of the game. But playing smart doesn’t happen by chance. Stick to your plan, have fun, and play smart from the start. For more information on how to put together your sports betting game plan, visit playsmartfromthestart.org.News: Ninth Circuit Deals Kalshi Another BlowThe decision overturns (in part) Judge Jacqueline Scott Corley’s denial of the tribes’ preliminary injunction. The Ninth Circuit found the tribes are likely to succeed, and sending the injunction back to Corley, who had ruled they failed to show a likelihood of success on IGRA or Lanham Act claims and that Kalshi’s activities do not fall under IGRA, as contracts aren’t “conducted on tribal lands” under current interpretations.As Wallach noted (I pulled out the highlights below, but there is a lot more in his analysis here), the Ninth Circuit didn’t hold back in its ruling, noting that Kalshi argues it’s not offering betting, but its advertisements say the opposite:“In this court, Kalshi studiously wraps its product in the language of derivatives. Its advertising is less coy. The advertisement that the Tribes challenge in this appeal states that ‘Sports Betting [Is] Legal in all 50 States on Kalshi… And we recently clarified ‘[t]he substance of the sports event contracts offered on Kalshi’s DCM is sports gambling, regardless of whether Kalshi calls them swaps.’”Further, the court found that Kalshi’s contracts are Class III gaming and therefore fall u