Prediction markets raise new tests for CFTC
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CFTC chairman Mike Selig came out swinging in the fight against state regulations of prediction markets, declaring they aren't gambling, and that his agency has "exclusive jurisdiction" to regulate the space.
The big question: Is the CFTC prepared or equipped to take on the full scope of prediction markets in the age of retail trading?
Between the lines: CFTC is expected to create more rules around prediction markets, particularly defining insider trading.
- But prediction markets have become a much larger retail phenomenon than traditional derivatives and there are serious questions about what further regulation is needed.
- Goodwin partner Andrew Kim notes: "The Commodities and Exchange Act wasn't intended for individual trading."
What they're saying: Selig took to multiple platforms over recent days to argue that prediction markets "aren't new" and have a legitimate economic purpose by hedging risk.
- That set up a very public state vs. federal fight, with Utah Gov. Spencer Cox writing: "I will use every resource within my disposal ... to beat you in court."
Zoom in: Prepare for a long fight that will likely to end up in the Supreme Court. While some prediction market contracts look more like traditional derivatives, others, like ones that bet on the odds of the Super Bowl, look awfully similar to state-regulated sports betting — and appear to be used by retail customers interchangeably.
- The FT reported Saturday that Kalshi's annualized revenues from sports trading account for around 90% of fees.
- Selig hinted at the arguments the CFTC could make for why sports-related trades on prediction markets should fall under his authority in Bloomberg's Odd Lots podcast, citing that prediction markets go through clearing houses, and that trades can be bought and sold.
The bottom line: Selig's move would severely limit the tools states have to regulate prediction markets. And he's kicking the regulation on the parts the CFTC isn't familiar with to Congress — "that's a question for society as a whole and for Congress," Selig says on Odd Lots, regarding who should be able to trade.
