US derivatives regulator maps out rules for soaring prediction market industry

By Douglas Gillison

June 10 (Reuters) – The top U.S. derivatives regulator on Wednesday released new draft regulations governing the burgeoning prediction markets industry, seeking to cement federal oversight of companies that have shot to the forefront of politics and sports betting while presenting new possible avenues for fraud.

Prediction markets such as Kalshi and Polymarket allow traders to buy and sell binary “yes” or “no” contracts on the outcome of virtually any event from foreign interventions to football games and elections. That has sparked scrutiny from lawmakers who have called for tougher regulation and for some bets to be banned on the basis they serve no economic purpose and may be harmful to the public interest.

Under federal law, the U.S. Commodity Futures Trading Commission has the power to review and block transactions it deems contrary to “the public interest” if they involve a set of activities identified in the law, including crime, terrorism, assassination, war or “gaming.”  On Wednesday, the agency laid out which types of bets in these categories might fall afoul of the public interest test.

It said preliminarily that both sporting events and games of chance or pure luck qualified as gaming. But while wagering on the outcome of sports likely was not contrary to the public interest, wagering on games of pure chance — or gambling — likely was, it said. Sports bets comprise the majority of activity on Kalshi, and a large chunk of activity on Polymarket, according to data from Pew Research Center.

Election wagers, also a large and growing source of revenue for the industry, fall outside the set of activities that allow for a public interest test, the agency said, removing a potential hurdle for market operators as the U.S. midterms approach. Wagers on elections, and on awards like the Oscars, “are contests, not gaming,” the proposal said.

CFTC Chair Michael Selig said in a statement that the proposed new regulations offered a means of protecting market integrity “without standing in the way of responsible innovation.”

Prediction markets based on sports scores, price spreads, win-loss results, tournament advancement and similar data “may serve price discovery functions and provide meaningful information,” according to the proposal. However, wagering on player injury, fighting, children’s sports and officiating in sports or betting in ways that may encourage cheating were not likely in the public interest.

A spokesperson for the agency said that while election-related event contracts wouldn’t be covered under the special review process, the CFTC would still have regulatory authority over them under other regulations.

“Such contracts would be subject to every other CFTC regulation and CEA provision that apply to swaps,” the spokesperson said, referring to the Commodity Exchange Act.

OPPOSITION FROM STATES, NATIVE AMERICAN TRIBES

The CFTC proposal faces strong opposition from an array of U.S. states and Native American tribes who say event contracts predicated on sports amount to illegal gambling and have sued to block them.

Bill Miller, head of the American Gaming Association, said the CFTC’s proposal was “a remarkable attempt to redefine what constitutes sports betting” and that prediction markets were illegally “siphoning” tax revenue from state and tribal governments.

“This siphoning will intensify as ‘prediction markets’ continue refusing to comply with state and tribal law,” Miller said in a statement.

In addition to Kalshi and Polymarket, sports betting and crypto firms, several of them with ties to President Donald Trump’s family and businesses, have hurried to join the new industry.

Instances of alleged insider trading have multiplied in recent months, although the prediction market companies say they detected and reported them: a U.S. Special Forces soldier who wagered on the capture of Venezuelan leader Nicolas Maduro, apparent bets by disgraced former lawmaker George Santos on his attendance at Trump’s State of the Union address. 

The CFTC, Kalshi and Polymarket have all said they are prepared and actively engaged in efforts to prevent insider trading.

The proposal will be subject to a 45-day notice-and-comment period. 

(Reporting by Douglas Gillison in Washington and Abu Sultan in Bengaluru; Editing by Alexandra Hudson, Paul Simao, Mark Porter and Deepa Babington)