The Commodity Futures Trading Commission (CFTC) released a 267-page proposed rulemaking for prediction markets, outlIning a framework that does not ban categories like elections or sports yet signals that contracts on injuries, officiating, and terrorism will likely be rejected as against the public interest. the rule aims to balance innovation with market integrity.
The Commodity Futures Trading Commission ( CFTC ) has been increasingly in the spotlight as it assumes a critical role in regulating the burgeoning prediction market industry.
This week,the agency issued a comprehensive 267-page notice of proposed rulemaking aimed at establishing a clear regulatory framework for event contracts. The proposal notably avoids an outright ban on any specific category of trade, including elections and sports, but signals that certain contracts will likely be deemed contrary to the public interest.
CFTC Chairman Michael Selig emphasized the agencys commitment to balancing market integrity with innovation, stating that the rulemaking provides a durable and transparent structure to evaluate contracts as directed by Congress, while allowing legitimate markets to flourish. Prediction markets function by allowing users to trade shares tied to the outcome of future events; for example,a share representing a 'yes' on a presidential candidate winning pays $1 if that candidate wins and $0 if they lose, with the market price reflecting the collective probability assessment.
While the CFTC traditionally oversees derivatives markets for commodities like oil and wheat, event contracts have fallen under its remit since it granted regulatory approval to Kalshi in 2020, making it the first fully regulated U.S. exchange for such contracts. The other major player, Polymarket,operates primarily through an international entity.
The proposal has drawn mixed reactions; John Berlau of the Competitive Enterprise Institute praised it for allowing most sports and election contracts, though the agency also outlined categories it plans to scrutinize, including contracts that are easily manipulable or against the public interest. The scrutiny follows high-profile incidents,such as prediction markets' attention during the capture of former Venezuelan President Nicolas Maduro. The CFTC explicitly hinted that wagers on assassinations, wars, and terrorism would generally not be approved.
It distinguished between contracts that settle on a warlike event itself, such as whether Iran initiates armed conflict in the Strait of Hormuz, versus those that settle on a commercial measurement, like oil transit volume,even if that volume is influenced by military conditions. State regulators have also raised concerns that sports contracts may circumvent gambling laws. Under the proposed rule, sports contracts are not banned, but the CFTC flagged specific types as likely violating the public interest.
Contracts tied to player injuries are problematic because they could create perverse financial incentives to harm athletes. similarly,contracts based on officiating decisions are concerning due to the small number of referees and the pressure they face,making them vulnerable to manipulation. The agency as well highlighted 'discrete-action contracts involving specific participants,' which settle on a single play or action by an individual athlete, raisIng similar manipulation risks.
These distinctions aim to preserve market integrity while permitting legitimate predictive trading on broader outcomes. the rulemaking process will involve public comment before final regulations are adopted, shaping the future of prediction markets in the United States
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