Will New CFTC Rules Fix Prediction Markets?

The new CFTC proposed rules for prediction markets will likely resolve little.

As prediction markets like Kalshi and Polymarket continue expanding into sports betting, election wagering, and controversial event contracts, the Commodity Futures Trading Commission's (CFTC) newly proposed rules on prediction market contracts aim to address mounting concerns over insider trading, gambling oversight, and bets deemed contrary to the public interest.

The United States has come under a lot of scrutiny of late for how it handles trading in the country. In almost every country there is one regulator that handles trading on both the stock market and on commodities but the U.S. has maintained separate entities for regulation where the Securities and Exchange Commission (SEC) handles trading on stocks, bonds, securities, securities exchanges, investment advisers, and mutual funds while the Commodity Futures Trading Commission (CFTC) handles trading on futures, options on futures, swaps, and most commodity derivatives markets. It was recently decided that cryptocurrency would fall under the regulation of the CFTC. For a while the UK and Canada had separate regulators, but those countries decided to merge them under one financial regulator to avoid conflict on questionable trades.

There really has been little conflict with the two separate markets when the SEC was overseeing trading on stocks and bonds while the CFTC oversaw trading on things such as oil, gold and even soybean futures. But that changed in 2020 when the CFTC designated Kalshi as a designated contract market because it offered trading in derivatives on things like what would be the highest recorded temperature in Los Angeles for the month of July, what would be the closing number for the S&P, which film would win the best picture Oscar and most notably the results of elections.

Election prediction markets fueled growth

The election markets are what got Kalshi and Polymarket in the news, as election betting itself was illegal at traditional sportsbooks in the U.S. but became legal at prediction market sites starting with the 2024 U.S. elections, once the CFTC dropped a complaint against Kalshi for offering those contracts. Kalshi and Polymarket consistently showed Donald Trump as the favorite to win the election in 2024 even when polls showed differently, leading the prediction market sites to claim that their offerings were in the public interest and were more accurate than polls since people are more honest when money is on the line.

Resistance from States

It should be noted that Kalshi, Polymarket and other prediction sites are unavailable to residents in 54 countries including the UK, Canada, Australia, most of Eastern Europe, Africa and Asia. Plus, in the United States many states issued stop-and-desist orders, including Arizona, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Montana, New Jersey, Ohio, Tennessee, Washington and Wisconsin, which and are challenging the legality of prediction markets. Several states, including Utah and California, also signed an amicus brief to try and stop prediction market sites from offering sporting events in their states. It seems the states are okay with the prediction market sites offering traditional climate or financial contracts but nothing that could be considered as gambling. Nevada is the only state that so far has been able to halt trading on Kalshi.

Until recently Kalshi was the only legal prediction site in the U.S. Since then, Polymarket entered the U.S. market along with all the new prediction sites plus prediction sites operated by sportsbooks such as FanDuel, DraftKings and BetFanatics. These companies have set up partnerships with prediction market companies like CME and Robinhood and all are regulated by the CFTC. Even Truth Predict, owned by Trump Media and Technology Group (i.e. the Trump family), falls under the CFTC. In fact Donald Trump posted a tweet on Truth Social stating that he wants to ensure that prediction markets and cryptocurrency remain the purview of the CFTC. It’s not lost on most that Trump has a vested interest in both and the last thing he wants is it being overseen by an entity that he can’t control such as state gambling commissions.

Prediction Markets Under Fire

Despite their success, prediction markets have come under a lot of scrutiny of late for several reasons including the following:

- They are taking bets on sporting events which most states believe comes under the purview of the state gaming commissions and not the CFTC.
- They offer odds on very controversial issues like terrorist attacks, death of key figures, deaths in catastrophic events, and similar “bad taste” markets.
- They are wrought with various large bets by insiders who almost certainly have information of what will be taking place.
- The resolution dispute for places like Polymarket is confusing and gives power to individuals who simply have more tokens to sway the votes rather than going to an actual knowledge base that is more qualified to resolve a simple yes or no answer.
- Many of the markets are very subjective, so what should be a simple yes or no solution is anything but. An example of this is whether Maduro being captured in Venezuela was an invasion by the U.S. military or not. Most believe it was but Polymarket resolved it as no.
- Prediction market sites like Kalshi and Polymarket have teamed up with American news agencies and social media sites, and several affiliates spread misinformation on these sites to affect the odds and create chaos. There has been speculation that Trump’s success in 2024 could have been affected by the constant posting of probabilities on sites like CNN, FoxNews and X to sway undecided voters.

New Rules Proposed

As a result of the pushback, the CFTC put out a press statement last week indicating it was create a new set of rules and was asking for public feedback due by July 27th on whether these rules are satisfactory.

The new prediction market rules,which would amend CFTC Regulation 40.11 and add a new Appendix F to Part 40, would prohibit any bets that are deemed to be contrary to the public interest. This would include bets on terrorism, assassinations and war. The new rules would also define gaming contracts that would likely allow markets on futures such as the winner of a game, the attendance at a game or the Super Bowl champion but would exclude markets on things like injuries or markets that could be easily manipulated by players such as those that got Jontay Porter and Emmanuel Clase suspended. It appears prop bets in general may be disallowed. The CFTC said that the legality of any contract would be made on a case-by-case basis where the CFTC would allow only bets it deems whether is in the public interest.

Opposition

No doubt the CFTC will get a lot of pushback from companies like Kalshi and Polymarket who believe everything they offer is in the public interest and will undoubtedly sue the CFTC as Kalshi did successfully in 2024 to allow bets on elections and sports. Unfortunately, while bets on events like the invasion of a country, the outcome of a war and or the number of deaths in a catastrophic event are tasteless, they are also the bets that bring the most interest and bets. By many accounts over $40 billion was wagered by Americans on offshore prediction markets (e.g. Polymarket) for contracts related to invasions, war and deaths, but it would be surprising if more than $400,000 was bet on the closing price of the S&P 500, Bitcoin or the price of soybeans which is what the CFTC usually regulates. And since the prediction sites take a commission on all wagers, it would be foolhardy for them not to fight to have those types of bad taste bets still included. There will also likely be a cry from bettors who have become used to these prediction markets and have relied on them to build their bank accounts whether they used inside information or not. There may also be some pushback from the White House given Trump’s comments relating to the importance of prediction markets as they currently exist plus his family’s new involvement in the industry. Moreover, Congressmen and Senators on Capitol Hill still rely on the prediction markets to help spread information on social media and other agencies in the fashion they like such as quoting the percentages in elections whether accurate or not.

What is unclear is whether sportsbooks like FanDuel or DraftKings will oppose the new rules or not. Even though they invested a lot of money into developing their prediction market sites, their main source of revenue is still traditional sports betting. So, if most sports betting (excluding futures) is deemed illegal on prediction sites and only legal as part of a sportsbook that is regulated by the state gaming commissions, the sportsbooks would almost certainly not challenge, since Kalshi and Polymarket are getting most of their revenue on sports. There is also calls for election betting in the U.S. to be legalized and allowed as part of sportsbook betting such as is the case in the UK, Australia, Canada and almost every country that has legalized sports, since there is no indication that the betting done at sportsbooks has any effect on the election results. So most sportsbooks argue that the federal rule which bans election betting in all 50 states to protect election integrity is just laughable when people in all 50 states can bet on the elections at prediction market sites. What is even more silly is that betting on elections at FanDuel is deemed wrong but betting on elections at FanDuel predicts is okay. It’s just illogical.

Can New Government Rules Rein in Prediction Markets?

So the CFTC decided it had to do something to stop all the bad press that was being generated from the insider trading  and pushback from states and concocted this new set of rules that they believe will make everyone happy. The truth, however, is that once they receive feedback from the public, prediction sites and possibly the White House, these new rules will be rejected and they will have to start over. The CFTC created the mess they’re in by not stopping Kalshi’s $54 million bet on the Ayatollah Khameni’s fate or the number of children that would starve in Gaza, not to mention not bothering to appeal the court’s decision that allowed Kalshi to offer sports betting. And now that Polymarket, which has offered even more controversial bets, is regulated by them, there is little doubt the CFTC will be told they can’t put the genie back in the bottle and need to support all the markets that they have been willing to back previously.

The CFTC did give themselves an out by saying all markets will be looked at on an individual basis to see if they are in the public interest. Thus a market on whether the Cuban president be ousted could technically be deemed in the public interest but a market on whether Trump will be impeached for a third time will be deemed a violation of the rules. And the CFTC would have full control of the decision without need of explanation.  

Sports "betting"

But the real question that must be answered is what about sports betting? Kalshi will say the courts and CFTC already made their decision that it is permissible, but with so many states trying to get it blocked and force the prediction markets under the gambling commissions, it will have to come to a head in the Supreme Court one way or another. The court will have to decide which is more important, state’s right or the CFTC. The answer isn’t obvious and may not be decided before Trump leaves office in 2029. However, one thing is almost certain winning prediction --  the rules the CFTC put out will be deemed inadequate by all parties and will not solve current issues with prediction markets. 

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