The U.S. Commodity Futures Trading Commission (CFTC) announced a regulatory proposal on the 10th (local time) to govern prediction markets. The proposal clarifies definitions that were problematic in previous regulations and establishes specific criteria for prohibiting contracts related to war, terrorism, and other activities. The CFTC stated it identified the continued increase in the number and types of event contracts, prompting the need to evaluate whether they involve activities such as terrorism, assassination, war, or gambling, and to create regulations that prevent harm to public interest. This regulatory initiative follows the CFTC's 2024 lawsuit loss against prediction market platform Kalshi, where a federal court ruled that the agency's definitions of key terms were insufficiently clear.
The CFTC described prediction markets as markets where event contract derivatives are traded. Event contracts are agreements that pay out when specific events occur and have been gradually incorporated under CFTC regulatory jurisdiction since the 2000s. CFTC Chairman Michael Selig stated the agency will protect the integrity of regulated markets without stifling innovation.
CFTC Introduces New Definitions for Involvement and Gaming
The regulatory proposal introduces new definitions for "involvement" and "gaming," terms that were central to the CFTC's 2024 lawsuit loss against Kalshi. The CFTC defined involvement as cases where contract settlement is determined by the occurrence of the activity, the degree of occurrence, or contingent events.
The CFTC defined gaming as activities that meet three criteria: activities in which one or more participants engage typically for entertainment or to entertain others; activities governed by rules; and activities that include measurable events or outcomes where results vary based on participants' luck, skill, or athletic ability.
The introduction of these definitions addresses weaknesses exposed in the Kalshi lawsuit. In 2024, the CFTC lost its case against prediction market platform Kalshi when a federal court ruled that the agency's existing regulatory definitions were not sufficiently clear. The court found that the definition of gaming was absent and the interpretation of involvement was overly broad. The CFTC had argued that registered entities should not list or clear contracts based on special commodities that are involved in, linked to, or reference terrorism, assassination, war, gaming, or activities illegal under federal law.
CFTC Establishes Prohibition Criteria for Contracts Contrary to Public Interest
The CFTC specified criteria for applying special rules while establishing that event contracts related to war and similar activities can be prohibited if they are contrary to public interest. The prohibition is not unconditional but requires an agency review process to confirm harm to public interest before implementation. Special rules refer to authority granted to the CFTC under the 2010 Dodd-Frank Act to prohibit the trading and clearing of specific types of event contracts.
The CFTC stated it can determine that contracts, agreements, or transactions are contrary to public interest. While existing law already contained rules prohibiting activities contrary to public interest, the proposal specifies the CFTC's judgment criteria. The CFTC defined public interest assessment factors as: the usefulness of price discovery and information aggregation; potential threats to market integrity; and regulatory compliance challenges. This means the agency will comprehensively review whether contracts have price discovery functions, whether market manipulation is possible, and whether there is capacity to manage the contracts.
For sports event contracts as an example, large events with substantial commercial impact on advertising and distribution, such as the Super Bowl, may be permitted for prediction market establishment. Conversely, cases involving pure gambling purposes or potential match-fixing may be prohibited. The proposal establishes that such judgment procedures will occur through a 90-day review process, after which prohibition decisions will be made.
FAQ
What did the CFTC announce on the 10th?
The CFTC announced a regulatory proposal on the 10th (local time) regarding event contracts in prediction markets. The proposal introduces new definitions for involvement and gaming, and establishes criteria for prohibiting contracts related to terrorism, assassination, war, and gambling when they are contrary to public interest.
Why did the CFTC introduce new definitions for involvement and gaming?
The CFTC introduced these definitions to address weaknesses exposed in its 2024 lawsuit loss against prediction market platform Kalshi. The federal court ruled that the CFTC's existing definitions were insufficiently clear, with gaming lacking a definition and involvement being interpreted too broadly.
How does the CFTC determine if a contract is contrary to public interest?
The CFTC assesses public interest using three factors: the usefulness of price discovery and information aggregation, potential threats to market integrity, and regulatory compliance challenges. The agency reviews whether contracts have price discovery functions, market manipulation possibilities, and whether there is capacity to manage the contracts. Prohibition decisions are made after a 90-day review process.
