The US Commodity Futures Trading Commission (CFTC) announced its first proposal for rulemaking concerning prediction markets on Wednesday, marking a significant milestone in the regulator's engagement with these emerging and often contentious derivative exchanges. Stakeholders will have a 45-day window to comment on the proposal once it is published in the Federal Register, which has not yet occurred. This proposal is narrower than a broader announcement made in March.
The CFTC clarified that this rulemaking seeks to amend Regulation 40.11 and introduce Appendix F to part 40. It aims to provide a structured framework for assessing whether particular contracts relate to activities described in Section 5c(c)(5)(C) of the Commodity Exchange Act—activities including terrorism, assassination, war, gaming, or actions deemed unlawful under federal or state statutes—and whether such contracts contravene public interest.
This aspect of prediction market regulation is particularly pertinent to the gaming industry. Many ongoing lawsuits about prediction markets revolve around the interpretation of the Commodity Exchange Act and whether contracts tied to sports events should be classified as gaming, which would prevent their listing and trading.
CFTC Chairman Michael Selig has gained attention recently as the agency has sought to affirm its authority over prediction markets in legal and media circles. He stated that the proposal “gives the Commission a durable, transparent framework to identify the contracts Congress directed us to scrutinise while letting legitimate markets move forward.”
The 267-page proposal mentions the term “gaming” 222 times, with a noteworthy definition provided on page 161. It describes gaming as an activity typically pursued for fun or entertainment, governed by rules, and whose outcomes depend on participants’ luck, skill, or athletic ability. The proposal also specifies that elections and awards are contests, not gaming.
The proposal suggests that currently listed contracts already reflect a shift from the commission's earlier stance on gaming. The markets mentioned include contracts based on aggregate performances in sports events, such as final scores and season-long statistics. This revised interpretation contrasts sharply with previous CFTC assertions, which had equated gaming with gambling; an idea now referred to as a “previous error” in the latest proposal. A federal court in D.C. rejected this interpretation, with the commission concurring that categorizing all contract trading as gambling would render the review process impractical.
Definitions of gambling typically include “the act of risking something of value, especially money, for a chance to win a prize.” The proposal points out that if gaming were framed around wagering, it could extend the definition to encompass all event contracts, conflicting with the structure of the special rule.
The suggested framework connects to the CFTC’s “Special Rule,” or CEA section 5c(c)(5)(C), allowing the commission to restrict contracts involving terrorism, war, assassination, gaming, illegal activities under state or federal law, or any other activities perceived as contrary to the public interest. Critics argue that the CFTC has failed to enforce this rule amidst the recent expansion of prediction markets. Notably, former CFTC chair Caroline Pham had mentioned no known instances of the commission disallowing contracts.
The new proposal indicates that the CFTC perceives the Special Rule as a demanding requirement it is reluctant to apply. According to the text, determining whether a contract is prohibited involves three steps: confirming the occurrence of the underlying event, establishing that the contract falls under the defined categories, and conducting a public interest analysis to ascertain whether the contract contradicts the public interest. This assessment focuses on individual contracts; prediction markets often self-certify numerous contracts collectively, meaning disallowing a single one would not restrict entire markets.
Following the CFTC's prior notice of proposed rulemaking for prediction markets in March, over 3,500 comments were received. Under the Administrative Procedure Act, the CFTC must review all submissions, a process that may take months or years. In contrast, fewer than 10% of the submissions (about 300) in response to the latest proposal contained detailed comments and recommendations. The majority were either repetitive or non-substantive, originating from individuals, entities involved in prediction markets, trade associations, public advocacy groups, lawmakers, and others.
Opposition from gaming and financial advocacy groups to the proposed rulemaking is expected as lawsuits involving prediction markets continue to rise. The CFTC has taken legal action against six states—Arizona, Connecticut, Illinois, New York, Wisconsin, and Minnesota—challenging what it perceives as violations of its regulatory authority. Several states, including prominent gaming jurisdictions Nevada and New Jersey, are also in litigation with prediction markets.
Bill Miller, president and CEO of the American Gaming Association, criticized the proposal, stating, “This is a remarkable attempt to redefine what constitutes sports betting. It makes a mockery of Congressional intent while going against a bipartisan coalition of 41 attorneys general, countless legislators across the country, and the 81% of voters who recognise that the so-called ‘prediction markets’ are backdoor sportsbooks evading state and tribal law.”
In contrast, the Coalition of Prediction Markets, an industry lobbying group, expressed support for the CFTC's efforts, applauding its “commitment to protecting consumers and empowering American markets.” They believe the CFTC is effectively positioned to oversee these developments.
Conversely, Gambling is Not Investing, an advocacy group led by Mick Mulvaney, former White House chief of staff, condemned the proposed rules. Mulvaney stated, “This proposal deserves serious scrutiny from lawmakers, state officials, tribes, sports leagues, and anyone concerned about preserving the integrity of our gambling laws. A sports bet doesn’t stop being a sports bet just because you call it a contract. If it quacks like a duck, it’s sports gambling.”
