Federal regulators came out with their first proposed rules on how to oversee prediction markets on Wednesday.
The Commodity Futures Trading Commission, which has taken the lead as the federal regulator over the markets, will seek to develop a framework to determine if contracts are contrary to the public interest and illegal.
Those questions surround contracts that relate to terrorism, assassinations, war, gaming or illegal conduct under state and or federal law, based on the Commodity Exchange Act. The commission did not outright ban any type of event contract based on the category of the trade, like those related to sports or elections.
The proposed rule focuses heavily on how the commission will determine if a contract crosses too much into the realm of terrorism, war or assassinations, topics that domestically-regulated exchanges have avoided offering contracts on.
The CFTC rules left some grey area around gaming, which has been the source of much controversy on the question of sports-related event contracts, though it detailed some sports-related contracts that the commission will not allow.
In a release, the commission acknowledged the rules proposed on Wednesday were thin, and noted that further rulemaking regarding prediction markets may come in the future.
After Wednesday’s announcement, the proposed rule will now face a 45-day public comment period.
“The CFTC will protect the integrity of our regulated markets without standing in the way of responsible innovation,” said CFTC Chairman Michael Selig, who was appointed by President Donald Trump, in a statement. “This proposal gives the Commission a durable, transparent framework to identify the contracts Congress directed us to scrutinize while letting legitimate markets move forward.”
Selig in a post on X added that the commission will “balance market integrity with responsible innovation” as it continues future rulemaking processes.
The rule establishes a process to determine how contracts will be prohibited. The commission will first determine if the contract is in fact based on an event happening. Then, it will consider if that event falls within the categories defined in the Commodity Exchange Act, and then conduct a public interest analysis to decide if it should be prohibited or not.
Prediction markets have exploded in popularity over the past year, creating a scramble to figure out how to regulate them.
States have challenged the platforms, believing their sports-related offerings amount to betting, something that is under their jurisdiction. However, the CFTC argues all contracts — no matter their topic — are swaps, which gives the agency exclusive authority to regulate them.
At the same time, bipartisan members of Congress have expressed concerns about the platforms and potential risks for insider trading, though no official legislation on the markets has been considered.
On the question of sports, the rule was explicit that some contracts will not be allowed.
“Within gaming, the Commission aims to permit contracts settled on aggregate sports outcomes with objective data and integrity infrastructure, while prohibiting pure‑chance games and high‑risk sports‑adjacent designs (e.g., injury, officiating‑only, discrete actions, altercations, pre‑collegiate events),” according the rule.
The commission noted gaming, though, could be interpreted very broadly. It settled with one that defines it as something done for recreation or to entertain, is governed by rules and is based on measurable outcomes determined by skilled activity during the activity.
Using the new definition, the CFTC concludes contracts related to elections were not gaming, as they aren’t for recreation nor entertainment.