The top U.S. derivatives regulator on Wednesday released new draft regulations governing the burgeoning prediction markets industry, seeking to cement federal oversight over companies that have shot to the forefront of politics and sports betting while presenting new possible avenues for fraud.
The proposal, if adopted, would set standards for the types of sporting wagers that are acceptable while leaving prediction markets on elections and politics outside a category of activities that garner stricter review, according to a draft made public by the U.S. Commodity Futures Trading Commission.
In proposing new regulations, the CFTC aimed to address far-reaching questions about prediction markets’ appropriate functions and their risks. CFTC Chair Michael Selig said in a statement that the proposed new regulations offered a means of protecting market integrity “without standing in the way of responsible innovation.”
The CFTC has the power to review contracts and transactions that may involve a set of activities including crime, terrorism, assassination, war or “gaming” and block their listing from public exchanges if it determines they are “contrary to the public interest,” according to federal law.
Under the proposal released on Wednesday, the agency said preliminarily that both sporting events and games of chance and pure luck qualified as gaming but that wagering on the outcome of sports likely was broadly not contrary to the public interest while staking money on the outcome of gambling or games of pure luck likely was.
Prediction markets based on sports scores, price spreads, win-loss results, tournament advancement and similar data “may serve price discovery functions and provide meaningful information,” according to the proposal. However, wagering on player injury, fighting, children’s sports and officiating or in ways that may encourage cheating were not likely in the public interest.
Elections wagers, a large and growing source of revenue for the industry, “are contests, not gaming,” the proposal said, putting them outside the “enumerated activities” for which the CFTC can subject event contracts to a 90-day review.
The CFTC’s proposed new regulations arrive as the agency faces strong opposition from an array of U.S. states and Native American tribes who say event contracts predicated on sports amount to illegal gambling and have sued to block them.
In addition to Kalshi and Polymarket, sports betting and crypto firms, several of them with ties to President Donald Trump’s family and businesses, have hurried to join the new industry, which allows users to put yes-no wagers on the outcome of virtually any event and has attracted billions of dollars from punters around the world.
Instances of alleged insider trading have multiplied in recent months, although the prediction market companies have maintained that they themselves detected and reported them: a U.S. Special Forces soldier who wagered on the capture of Venezuelan leader Nicolas Maduro, apparent bets by disgraced former lawmaker George Santos on his attendance at Trump’s State of the Union address and an Italian Google software engineer accused of trading on insider knowledge, to name a few.
The CFTC, Kalshi and Polymarket have all said they are prepared and actively engaged in efforts to prevent insider trading.
The proposal will be subject to a 45-day notice-and-comment period prior to any decision on finalization.
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