The U.S. Securities and Exchange Commission (SEC) has decided to postpone its decisions regarding several proposed exchange-traded funds (ETFs) focused on prediction markets. This delay comes as the SEC seeks to understand how event-based contracts fit within the current regulatory framework for ETFs.
On May 20, SEC Chairman Paul Atkins announced that the agency intends to gather public feedback on the treatment of these innovative ETF products, particularly those linked to event contracts. He stated, “Novel products raise novel questions, and I appreciate the willingness of fund sponsors to delay the effectiveness of several new ETFs, including those based on event contracts, while we assess their implications.” Atkins emphasized the importance of transparency and thoughtful consideration in this process.
This announcement confirms that the SEC has postponed action on the initial set of prediction market ETFs that were submitted earlier this year. The filings in question include proposals from Bitwise Asset Management, Roundhill Investments, and GraniteShares, which aim to provide exposure to event-driven outcomes through conventional investment vehicles.
The delay affects 24 ETFs that were nearing the conclusion of a 75-day review period, following their submission in February. Some of these proposed funds are linked to significant events, such as the 2028 U.S. presidential election, layoffs in the tech sector, and the likelihood of a recession.
As prediction markets gain traction among both retail and institutional investors, data indicates that monthly trading volumes frequently surpass $15 billion across various prediction markets encompassing sports, elections, economic indicators, and cultural events. Notably, platforms like Polymarket and Kalshi reported a combined trading volume exceeding $25 billion in April.
The proposed ETFs would enable investors to access event contracts through standard brokerage accounts, eliminating the need to engage with crypto-centric prediction market platforms. Observers have likened these products to spot cryptocurrency ETFs, which provide regulated access to digital assets like Bitcoin and Ether through traditional financial avenues.
However, the filings also highlight the inherent risks of event-based investing, cautioning that investors could potentially lose “substantially all” of their investment if the outcomes of contracts do not align with their positions.
Industry experts note that the SEC seems to be adopting a cautious stance before allowing event-contract ETFs into the public market. Bloomberg Senior ETF Analyst Eric Balchunas remarked, “The commission is clearly wrestling with these and wants more time and input. These are a whole new thing (kind of like crypto) and they want to feel comfortable before they open the barn door.”
Balchunas further compared the current review process to the SEC’s lengthy evaluation of spot Bitcoin ETFs, which ultimately received approval in January 2024. He suggested that regulators might be looking for additional safeguards before allowing funds linked to binary event outcomes.
This review occurs amid ongoing legal and regulatory challenges faced by prediction market operators across the United States. Earlier this week, the Commodity Futures Trading Commission (CFTC) filed a lawsuit against Minnesota after Governor Tim Walz enacted legislation that would ban prediction markets starting August 1.
The CFTC contends that the new law conflicts with federal oversight of derivatives markets and could criminalize activities related to federally regulated event contracts, including those linked to weather events. Minnesota Attorney General Keith Ellison stated that the state is reviewing the lawsuit and will respond in court.
Simultaneously, prediction market operators Kalshi and Polymarket are under scrutiny from various state regulators to determine whether specific event contracts qualify as illegal gambling products.