The U.S. Commodity Futures Trading Commission (CFTC) has unveiled its inaugural set of proposed rules for prediction markets.
The CFTC, the primary federal regulator for these markets, aims to establish a framework for determining which trading contracts are contrary to the public interest and constitute illegal products.
Under the Commodity Exchange Act, the regulatory focus is on contracts related to terrorism, assassination, war, gambling, and other activities illegal under state or federal law. However, the Commission is not imposing a blanket ban on all event-based contracts; those related to sporting events and elections are not subject to a complete prohibition.
The proposed rules specifically detail the criteria for identifying contracts that cross the red lines of terrorism, war, and assassination—categories already voluntarily delisted by licensed domestic exchanges.
A grey area remains concerning the definition of "gambling," with sports-related event contracts being a focal point of debate. Nevertheless, the draft explicitly lists certain types of sports-related contracts that will not be permitted.
The Commission acknowledged in its announcement that these proposed rules are not exhaustive and that further regulatory details for prediction markets will follow.
Following the publication of these rules, a 45-day public comment period will commence.
CFTC Chairman Rostin Behnam, appointed by President Joe Biden, stated, "The CFTC will uphold the integrity of licensed markets while not hindering compliant innovation. This draft provides the Commission with a durable, transparent framework to fulfill Congressional mandates for scrutinizing high-risk contracts while safeguarding the operation of lawful markets."
Behnam added in a post on social media platform X that the Commission would continue to balance market integrity with fostering beneficial innovation in its ongoing rulemaking.
The draft establishes a complete process for evaluating contract prohibitions: first, determining if a contract is genuinely tied to a real-world event; second, assessing if that event falls into high-risk categories defined by the Commodity Exchange Act; and third, conducting a public interest impact assessment to decide whether to ban the contract from trading.
The past year has seen explosive growth in prediction markets, prompting regulators worldwide to accelerate the development of corresponding regulatory frameworks.
Several U.S. state governments have filed regulatory lawsuits against related trading platforms, arguing that their sports-related products constitute gambling, which falls under state jurisdiction. The CFTC, however, holds a different view, asserting that all event-based contracts are swaps and thus subject to exclusive federal oversight.
Meanwhile, lawmakers from both parties in Congress have expressed concerns about these platforms, particularly regarding potential insider trading risks, though Congress has not yet passed specific legislation targeting prediction markets.
Regarding sports-related contracts, the draft provides clear distinctions, explicitly prohibiting certain types.
The rule document states: "Within the gambling category, the Commission will permit contracts based on objective, authoritative data with complete risk management systems that settle on the overall outcome of an event. However, games based purely on random chance and high-risk fringe sports contracts are prohibited, such as those based solely on athlete injuries, referee decisions, single in-game actions, on-field altercations, or events involving athletes below the collegiate level."
The Commission stated that the term "gambling" is broad and has established a unified definition: an activity undertaken for leisure, with fixed rules, where the outcome is determined by the skill of the participants and can be quantifiably judged.
Under this new definition, election-related contracts are not considered gambling as they lack a leisure or entertainment purpose.
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