The Commodity Futures Trading Commission (CFTC) issued an Advance Notice of Proposed Rulemaking for the prediction markets industry on Thursday morning.
In simple terms, this gives market participants 45 days to respond to a huge range of questions that would shape how event contracts are regulated in the future. However, reading between the lines, you also get a sense of the CFTC’s own ambitions for the industry.
Protecting sports bets
The Commission has already withdrawn previously proposed rules that would have blocked event contracts being listed that cover sports and political listings. Sports bets typically make up more than 80% of trading volumes at popular platforms Kalshi and Polymarket.
The two platforms have clashed with state-level regulators as a result of this, with many states either banning gaming or wanting to keep tax revenue for themselves. The CFTC has already sought to establish itself as the primary authority over these markets, challenging state-level efforts to classify event contracts as illegal gambling.
A central theme of the questionnaire released today by the CFTC is its intent to keep sports betting within the federal regulatory tent rather than allowing it to be blocked by state authorities. The regulator said it’s looking to create “durable” standards that allow these products to exist under strict federal supervision.
More specifically, the Commission asks questions which strongly suggest it is aiming to establish a clear and sold legal framework, which will allow it to distinguish sports competitions from other contests to ensure they are regulated as financial products rather than falling under gambling laws.
Curbing insider trading
Another key point in the document is a strong focus on insider trading rules. This has been a huge problem for event contract platforms since they went live. For example, several Israeli citizens were arrested last month for making bets on political events that they had insider knowledge of.
To combat this, the CFTC is considering new compliance obligations that would require prediction markets to implement more aggressive surveillance and audit trails to detect suspicious activity before it can distort market prices.
The document specifically calls out the danger of “informed” participants who may have direct influence over the events they are trading on. It points to existing statutes that make it unlawful for government employees, members of Congress, or judicial officers to use nonpublic information for personal gain in swap or futures transactions.
The Commission is seeking input on how to regulate contracts where the underlying event is under the control of a single individual or small group, aiming to prevent scenarios where insiders can “guarantee” a payout at the expense of the public.
Adding margin trading
Finally, the CFTC is exploring whether to allow prediction markets to offer trading on margin, which would be a major shift from the current model where contracts must be fully collateralized.
Officials are weighing the potential benefits of increased liquidity against the risks of offering leverage to retail customers, asking what specific data should be used to calibrate appropriate margin levels.
The industry and the general public now have a 45-day window from the date of publication to provide formal feedback on these proposed shifts.
