Prediction market companies such as Polymarket and Kalshi have a new set of guidelines for their U.S. operations, with the Commodity Futures Trading Commission on Thursday introducing initial guidance and a proposed permanent rule for what the agency called “a proven source of trusted information for news media, sports leagues, financial institutions and everyday Americans.”
The agency had once been a legal opponent of prediction markets, warning that some bets violated derivatives laws and that the CFTC could not function as a global political force fighting fraud and manipulation in political markets around the world. But under the leadership of its Chairman Mike Selig, the CFTC abandoned its old legal fight and sided with the companies. It has now issued a non-binding notice to prediction market companies regulated by the CFTC as “designated contract markets” and initiated a binding rulemaking process.
“This marks the beginning of the process of developing new rules based on a rational and consistent interpretation of the Commodity Exchange Act, while reassuring the American people that the CFTC will exercise exclusive jurisdiction over prediction markets,” Selig said of the rulemaking process that begins with what is called an “advance notice of proposed rulemaking.”
Selig, who can function as the sole authority within the regulator because he is the only member of what is supposed to be a five-person commission, quickly moved to promote the new policy effort. He is also waging a rhetorical campaign against state regulators claiming authority over sports betting, saying his agency is the primary regulator of that space. Many states have sued prediction market providers, alleging that they too are subject to their jurisdiction, at least for sports betting, and Selig recently filed a court brief asserting that the CFTC has sole jurisdiction.
The CFTC’s new notice explains how DCMs – a list that includes Kalshi, Coinbase and Polymarket – should obtain authorization for commercial products from the regulator and says companies should only handle “commercial contracts that are not easily susceptible to manipulation.”
It also noted that companies listing sports contracts should engage in “communications with relevant sports bodies or authorities when developing terms and conditions, compliance programs and market monitoring for sports-related event contracts”.
The agency’s regulatory initiative, however, is much more complex and will likely take months to implement. At this point, the CFTC is seeking public comment on how it should proceed. The next step will be a more fleshed-out proposal and then a final rule, each a lengthy process under administrative law.
The agency set a 45-day deadline for comments, which is relatively quick, suggesting a quick turnaround.
Prediction markets are platforms where users can buy and sell contracts that bet on a typically binary outcome, such as the winner of a sporting competition or the winner of an election. Selig argued that the process belongs to the derivatives watchdog, just like futures contracts.
The initial regulatory document highlights that companies engaged in this sector have a legal responsibility to monitor their activities regarding market manipulation, as evidenced recently by Kalshi’s announcement of the sanctioning of a few of its clients.
The regulatory text notes that “the number of applications for DCM registration has more than doubled over the past year, largely from entities interested primarily or exclusively in operating prediction markets.” At this point, the 32-page document asks a series of questions to help define the direction the more concrete proposal should take.
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