CFTC Proposes New Rule for Regulating Prediction Markets

The Commodity Futures Trading Commission (CFTC) has proposed a rule expanding the definition of swaps to include event contracts, including sports-related ones. This is the agency's latest move to assert exclusive jurisdiction over prediction markets and counter pressure from state regulators.

The agency issued a notice of proposed rulemaking to define swaps as including event contracts based on sports, politics, culture, and weather. "The CFTC has historically recognized that many event contracts fall under the definition of a swap in the Commodity Exchange Act," the proposal states.

The move comes amid a regulatory standoff between the CFTC and state regulators over prediction markets. States argue that sports event contracts are sports betting, and jurisdiction over these markets belongs to them. The CFTC insists that such contracts, including sports-related ones, are swaps and fall under its exclusive jurisdiction.

Courts have also weighed in, with appellate courts issuing conflicting decisions. The Ninth Circuit Court of Appeals ruled against prediction markets, stating that sports contracts are sports betting. The Sixth Circuit Court of Appeals made a similar ruling against such platforms. Conversely, the Third Circuit Court of Appeals sided with the platforms, indicating that the CFTC has exclusive jurisdiction and that event contracts are swaps.

States continue to battle prediction markets, claiming that platforms operate as illegal gambling establishments. As reported by CoinGape, New York filed a lawsuit against Polymarket for alleged illegal gambling activities.

CFTC also issued an interim rule

The CFTC issued an interim final rule stating that casino-type products, including betting in sportsbooks and gambling, are not swaps and are excluded from the definition. "Casino-type products are not derivatives," said CFTC Chairman Mike Selig.

However, key stakeholders argue that prediction markets mimic sports betting, meaning platforms like Polymarket and Kalshi are also gambling products. The NFL filed an amicus brief supporting New Jersey's petition to the Supreme Court to clarify the regulatory framework for such platforms.

Robinhood also filed a petition to the Supreme Court supporting the CFTC's exclusive jurisdiction over prediction markets. However, data from Polymarket shows only a 31% chance that the Supreme Court will hear a case on sports event contracts by the end of the year. The CFTC's proposal could redefine the regulatory landscape for prediction markets, affecting their growth, jurisdiction, and operational dynamics.