Lawmakers scrutinize prediction market oversight

• Key takeaway: Lawmakers questioned whether prediction markets should be regulated by the Commodity Futures Trading Commission or whether oversight should fall to state regulators. 
• Expert quote: "The CFTC has literally no experience in regulating sports betting. CFTC has failed to use the authority it does have to protect sports bettors from insider trading, market manipulation, predatory advertising and financial instability." — Sen. John Hickenlooper, D-Colo.
• What's at stake: Lawmakers from both parties offered critical views of the emerging prediction markets, a dynamic that could be a precursor for future legislation clamping down on the industry.

WASHINGTON — Lawmakers are beginning to ask questions about how prediction markets are and should be regulated, and whether oversight should fall primarily to federal or state authorities. 

A Senate Commerce Committee hearing Wednesday underscored the debate over whether the Commodity Futures Trading Commission has the capacity to regulate the rapidly growing prediction markets industry or whether state regulators should play a larger role in overseeing the space. 

Sen. John Hickenlooper, D-Colo., said in his opening statement that prediction markets currently are not subject to state or tribal gambling laws, leaving the CFTC as the industry's primary regulator — a role he argued the agency is not equipped to handle. 

"The CFTC has literally no experience in regulating sports betting," said Hickenlooper. "CFTC has failed to use the authority it does have to protect sports bettors from insider trading, market manipulation, predatory advertising and financial stability, this workaround is merely a way for prediction markets to skirt state consumer protection laws."

Prediction markets — including the most visible companies, Kalshi and Polymarket — have attracted billions in venture capital funding and achieved significant valuations. Prediction markets advertise themselves as exchange-traded platforms where participants buy and sell contracts — known as futures or event contracts — based on the outcomes of future events such as elections, economic data or sporting events.

In an exchange between Hickenlooper and Patrick McHenry — the former Republican chair of the House Financial Services Committee and now a senior adviser to the Coalition for Prediction Markets, who appeared as a witness at the hearing — the two debated whether the CFTC is capable of effectively overseeing the industry.

Hickenlooper called the CFTC "easily manipulable," arguing that its limited oversight allows prediction markets to launch new contracts "just one business day after filing them, without any CFTC review at all."

McHenry countered that the CFTC serves as "a cop on the beat" and has the capacity to oversee prediction markets "just as they've done with the broader commodities marketplace that's been around and well versed for decades."

Hickenlooper shot back, "You're the first person to tell me that the CFTC is up to standards."

Debate over state oversight also surfaced during the hearing, with witnesses including Bill Miller, CEO of the American Gaming Association, and Mary Beth Thomas, executive director of the Tennessee Sports Wagering Council, arguing that states are better equipped to regulate the industry. 

"It was never Congress' intent to create a federal department of gambling through the CFTC," Miller said. "The fact that we have federalism in this country, that states have the rights of self-determination, and tribal nations similarly. This is how we've created a system that works in America. Eighty-four hundred regulators work every day to make sure that there's integrity in the matches, that the consumers are protected, and that the state and or tribe benefits from this."

Miller also pointed to lawsuits questioning whether prediction market firms should be treated as federally regulated financial exchanges or as gambling operations subject to state-licensed sportsbooks.

"As it relates to litigation, nine of the 12 circuits and 41 state attorneys general have written to the CFTC saying, 'Stop it, knock it off, it's not your purview,' and these are attorneys general that span the spectrum from the farthest left to the farthest right, all agreeing that the states have the right to do this," Miller said.Lawmakers have closely watched the space and in recent months have introduced several bills aimed at restricting prediction markets.

Rep. Adrian Smith, R-Neb., and Rep. Nikki Budzinski, D-Ill., introduced legislation in March that would prohibit government officials from participating in prediction market trading. Another bill, introduced by Sen. Adam Schiff, D-Calif., and Sen. John Curtis, R-Utah, is titled the "Prediction Markets Are Gambling Act" and would bar CFTC-registered platforms from listing prediction contracts that resemble sports bets or casino-style games.

Ahead of the hearing, Jaret Seiberg, managing director at TD Cowen, wrote in a note that opposition to prediction markets is bipartisan, which could open the door to future legislation, though not in the near term.

"We do not see a window in this Congress for comprehensive prediction market legislation. It is too close to the election," Seiberg wrote. "The risk is that a bipartisan amendment gets added to another bill such as the [defense reauthorization bill]. That amendment could simply clarify that the states have the power to permit or block prediction markets from offering event contracts on sports in their state."