As the legal and regulatory environment for prediction markets continues to evolve, the U.S. Commodity Futures Trading Commission (CFTC) is proposing reforms to specify when event contracts on regulated markets are prohibited — such as bets on war, terror attacks and political murder.
The CFTC has recently taken to defending the legality of prediction markets, filing a series of lawsuits against various state authorities that have sought to ban these markets. Additionally, it has also brought enforcement action against individual traders, alleging that they engaged in insider trading on prediction markets.
On Wednesday, the regulator launched a consultation on proposed rule changes that aim to introduce a framework for assessing whether certain contracts should be prohibited in the first place.
Specifically, the proposals outline a process for assessing whether a contract is based on activity that’s captured under derivatives law — including war, terrorism, assassination and other illegal conduct — and, if so, whether the specific contract based on these kinds of events is considered contrary to the public interest, and shouldn’t be listed, traded, or settled on a CFTC-regulated facility.
Among other things, the proposals set out the factors that the CFTC would consider in determining whether a specific contract can be listed or not, and aim to establish the process for making these kinds of decisions.
The proposals come amid a rise in trading activity on prediction markets, and a shifting regulatory climate.
In 2024, the CFTC proposed rules that would have dealt with the same issue of determining whether certain contracts are contrary to the public interest, and can’t be traded on a regulated market. However, it withdrew those proposals to reconsider them, as various state authorities brought regulatory actions and litigation that challenged the CFTC’s claimed jurisdiction in this area.
More recently, the regulator has grappled with novel insider trading cases, including an allegation that a member of the U.S. military with confidential information about planned military action in Venezuela was using that inside knowledge to place bets on prediction markets.
“The CFTC will protect the integrity of our regulated markets without standing in the way of responsible innovation,” said CFTC chairman, Michael Selig, in a release.
“This proposal gives the commission a durable, transparent framework to identify the contracts Congress directed us to scrutinize while letting legitimate markets move forward,” he added.
The proposals were published on Wednesday for a 45-day comment period.