CFTC requests public comment on prediction market rulemaking

• Key insight: The CFTC is exercising its authority over prediction markets through proposed rulemaking amid insider trading concerns and state-level gambling charges.
• What's at stake: As investment companies like Goldman Sachs and Robinhood express interest in prediction markets, ongoing legal battles could indirectly expose them to increased regulatory risk.
• Expert quote: "The CFTC will exercise its exclusive jurisdiction over prediction markets." - CFTC Chairman Michael Selig

The Commodity Futures Trading Commission has issued a proposed rule for regulating prediction markets, as the platforms hosting these trades undergo scrutiny from lawmakers over insider trading and Kalshi faces criminal charges for illegal betting from the state of Arizona.

On Friday, the agency issued an advanced notice of proposed rulemaking, "given that the number of applications for [designated contract market] registration has more than doubled over the past year, largely from entities that are interested primarily, or exclusively, in operating prediction markets."

"This begins the process of new rulemaking grounded in a rational and coherent interpretation of the Commodity Exchange Act, while reassuring the American people that the CFTC will exercise its exclusive jurisdiction over prediction markets," CFTC Chairman Michael Selig said in a statement.

Prediction markets, exchange-traded platforms where traders buy and sell event contracts based on the outcome of future events, are a subsector of the trade finance industry that has grown significantly in popularity over the past couple of years, particularly in the U.S. around the November 2024 presidential election.

Investment firms and fintechs such as Goldman Sachs, Investment Brokers and Robinhood have expressed interest, or already begun investments, in prediction market products. (Both Investment Brokers and Robinhood also applied for bank charters last year.) Global fintech and stablecoin issuer Circle announced last month that it partnered with Polymarket to make its USDC stablecoin the settlement asset for the prediction market.

To register with the CFTC as a designated contract market, or DCM, prediction market platforms would need to govern the types of trades that can be hosted on their platforms to comply with the restrictions of the Commodities Exchange Act (CEA). 

Which types are permitted and banned, however, is in flux as the agency reconsiders its rulemaking for event contracts and as various state regulators file their own cases against prediction market platforms.

On Tuesday afternoon, Arizona Attorney General Kris Mayes filed criminal charges in a first-of-its-kind case against the prediction market platform Kalshi for 16 counts of "betting and wagering" and four counts of "election wagering." 

Arizona state law prohibits unlicensed betting organizations and bans election betting, and according to the case filing Kalshi is not registered with the Arizona Corporation Commission. Kalshi preemptively filed a federal case against the state last week, according to a statement from the Arizona AG office.

"Rather than work within the legal frameworks that states like Arizona have established, Kalshi is running to federal court to try to avoid accountability," Mayes said in the statement.

Kalshi is currently also facing civil lawsuits from entities such as the Nevada Gaming Control Board, but criminal charges are a new front in the ongoing legal battles between prediction markets and state officials.

The newly issued notice is the CFTC's second attempt at creating a rule for prediction markets. In 2024, the agency proposed a set of rules to further specify the types of event contracts that fall under the scope of the CEA and are "contrary to the public interest, such that they may not be listed for trading or accepted for clearing on or through a CFTC-registered entity." 

Examples cited in the 2024 proposed rule included the standard CEA bans on exchange trading related to terrorism, war and assassination, as well as an additional ban on "gaming" bets such as political elections, awards contests and athletic competitions.

The "gaming" section of the initial 2024 proposal has gained significant relevance over the past two years, since political elections and sports games are two of the most popular types of event contracts on prediction market platforms such as Kalshi and Polymarket.

In October 2024, a D.C. appellate court ruled in favor of Kalshi on this point, in a lawsuit the prediction market filed against the CFTC's ban on "gaming" contracts. Kalshi planned to offer contracts that would allow people in the U.S. to trade futures contracts on the outcome of the November 2024 congressional elections, and the initially proposed 2024 rule would have banned these trades.

"Ensuring the integrity of elections and avoiding improper interference and misinformation are undoubtedly paramount public interests, and a substantiated risk of distorting the electoral process would amount to irreparable harm," Judge Patricia Millett wrote in the ruling. "The problem is that the [CFTC] has given this court no concrete basis to conclude that event contracts would likely be a vehicle for such harms."

The CFTC had "failed to make the essential showing of irreparable harm," Millett continued, but dismissed the case without prejudice and said "a showing is not out of reach."

Last month, the CFTC withdrew the proposed 2024 rules ''in light of various forms of state regulatory actions and litigation concerning the Commission's exclusive jurisdiction over event contract derivatives listed on DCMs and the proper application of the swap and excluded commodity definitions under the CEA.''

The CFTC has asked for public comment on its second attempt at a proposed rule, stating that this will assist the agency in formulating its prediction markets rulemaking, and opened comments on Monday. The commenting period is open until April 30.

"We write to urge the Commodity Futures Trading Commission to prohibit event contracts tied to U.S. military operations and investigate whether any insider trading has occurred in connection with recent military strikes against Iran," Senators Jack Reed and John Hickenlooper wrote in a co-signed letter submitted to the CFTC in response to its comment request. Their concerns echo similar calls from lawmakers to investigate potential cases of insider trading on prediction markets related to the Iran war.

Stevie Cline, a general counsel lawyer specializing in AI governance, said in a comment submitted to the CFTC on Monday that "AI systems operating in prediction markets will face strong optimization incentives to discover and exploit manipulative strategies" and recommended that the agency create a "safe harbor" provision in its prediction markets rule for verifiable AI governance protocols.

"Rather than chilling AI innovation, it channels that innovation toward systems designed with accountability from the outset," Cline said.