The Commodity Futures Trading Commission (CFTC) is set to introduce new regulations for prediction markets, aiming to clarify how platforms can offer contracts related to sports, politics, and other real-world occurrences. The proposed rules will also impose restrictions on markets deemed harmful to the public interest.
In a comprehensive 267-page notice titled “Prediction Markets; Public Interest Determinations,” which was first reported by the Wall Street Journal, the CFTC outlines amendments intended to specify which types of event contracts may be considered contrary to public interest.
While most sports event contracts will likely remain permissible, certain micro-bets that are susceptible to manipulation could be prohibited. Examples include wagers on a single baseball pitch or specific shots taken by players. Additionally, contracts related to player injuries, officiating outcomes, physical altercations, and pre-collegiate sports events may also be classified as against public interest.
Contracts associated with war, terrorism, or assassination are expected to be viewed similarly.
The proposed regulations also delineate the agency's authority to intervene and terminate a contract if necessary.
With the release of this proposal, a 45-day public comment period has commenced.
Establishing a Clear Framework
These regulations do not impose outright bans on contract types but instead provide a framework to help the CFTC assess whether a specific event contract is contrary to public interest. If a market is found to violate this standard, a CFTC-registered exchange would be prohibited from listing or clearing it.
CFTC Chairman Mike Selig emphasized in a press announcement that this proposal offers a solid and transparent framework for identifying contracts that require scrutiny, while allowing legitimate markets to thrive.
The stakes are high for an industry that has seen rapid growth and visibility, with total trading volume across registered contract markets surpassing $25 billion in April. This surge reflects the expansion of platforms like Kalshi and Polymarket, where users engage in trading on elections, economic indicators, cultural trends, and sporting events.
Reducing Uncertainty
A significant aspect of the proposal is its approach to applying the public interest test to specific categories of contracts. The CFTC argues that prediction markets derive their value from the aggregation of information. If participants are unable to predict outcomes effectively, the resulting prices lack informative value.
In contrast, most sports contracts are viewed more favorably. The CFTC believes that contracts based on the overall results of sporting events—such as final scores, tournament progress, and season-long statistics—serve important price discovery functions and provide valuable information.
Moreover, these contracts are considered less susceptible to manipulation, as they rely on the collective actions of numerous participants.
The proposal also addresses political events, indicating that elections are not classified as gaming since the outcomes depend on voter decisions rather than individual skills or luck.
Furthermore, the CFTC indicated that event contracts linked to game-show outcomes or those based on chance are likely to be regarded as contrary to public interest.
A Significant Shift from Previous Policies
This proposal marks a notable shift in the CFTC's stance under the leadership of Mike Selig and during the Trump administration. Previously, the agency acted as an adversary to the firms it now seeks to regulate and support.