News that the Commodity Futures Trading Commission (CFTC) is suing states for attacking prediction markets provides entrée to my other great policy love—no, not crypto—federalism! Our system of government includes a national government and a bevy of independent sovereigns in the states. When a federal agency sues those sovereigns for bringing actions to enforce their laws, that is a little strange. If the suits aren’t promptly thrown out, that would be a lot strange. Our Constitution’s dispersion of power preserves liberty through political accountability.

Prediction markets are a new class of entertainment-journalism-investing that allows people to invest (or bet) on things that will happen in the future. Their coverage runs the gamut from war to technology to business to sports—whatever people have enough interest in to wager on (or invest in). As I articulated with Jane Bambauer in a recent pair of Truth on the Market articles, they can be classed as a market response to misinformation, a field that has its challenges. Prediction markets certainly have their haters, of course.

Arizona, Connecticut, and Illinois are in the hater category. They have each taken actions against prediction markets, from issuing cease and desist orders to charging them with illegal gambling and election wagering. In response, the CFTC is weighing in with lawsuits against each of those states (AZ, CT, IL).

The lawsuits allege . . . violation of the supremacy clause?

There is certainly a supremacy clause in the Constitution. It holds that federal law is supreme. And there is a well-developed body of law articulating when and how federal law preempts state law. But that doesn’t mean a federal agency has a cause of action when states act under laws the federal agency thinks are preempted.

The Supreme Court has held that there is not an implied cause of action under the supremacy clause in a case where an actually aggrieved party claims that a state agency is refusing to abide by federal law. In the prediction markets suits, the grievance is not an actual injury. The CFTC is just saying, “Hey, this is our turf!”

The way the supremacy clause should have effect here is for the parties against which these states have acted to bring it up, arguing that the states lack power. It seems likely that they would be right. I have misgivings about nationalizing everything that happens nationally. There is great virtue in having decentralized government. But if two points are enough to draw a line, mine is that values (such as privacy) are better regulated locally (if at all), while technologies (such as AI) and businesses/markets as such may be better regulated nationally.

If states can’t regulate these national businesses and their offerings because they are regulated by the CFTC, why don’t the states move to regulating their people in the name of values? Gambling of this type has enough social costs that we deem it illegal for our people to participate, the argument would go.

Here’s why not: Regulating their people directly would put states in the role of stopping residents and voters from doing what they want to do. That is likely to engender political blowback. States would prefer to control their populations indirectly through business regulation, because that route has weaker political accountability.

Oh, I’m going to get crypto in, too. In a forthcoming law review article on modernizing law enforcement for the digital money environment, I make a similar point about accountability. Present-day financial surveillance is “wholesale”—tracking people through their financial services providers—so it lacks legitimacy. Coincidentally, its costs far outstrip its benefits. Reorienting modern policing to be “retail,” which can be done even on digital currency and crypto networks, would have substantial legitimacy benefits. It would probably produce net benefits.

The system I describe in my article would enable law enforcement to ask participants in transactions anywhere on the globe for help solving crime. As I explain, “Because it is a ‘retail’ system—going metaphorically door-to-door for information—there are political feedback loops. Uses of the system consonant with public values will be self-evident.”

So it would be with requiring states to regulate what is in their bailiwick, the safety and security of their own people. If they can’t regulate prediction markets, they may be able to regulate the use of prediction markets by the users within their borders. I bet they won’t. By strengthening political accountability, federalism protects liberty—requiring virtues like personal responsibility, by the way.

The CFTC suits seem like a message-sending exercise, which is not what the courts are for. As structural constitutional law, they are bunkum. The CFTC should stand down and let these anti-prediction-market states lose directly on the merits.