The U.S. Commodity Futures Trading Commission (CFTC) has proposed novel rules for prediction markets, signaling that contracts for sporting events are generally not contrary to the public interest even though federal law classifies them as “gaming.”
Released on Wednesday, application distinguishes contracts for sporting events from pure games of chance, arguing that markets based on final results and win-loss records can facilitate determine prices. However, contracts relating to player injuries, refereeing decisions or other results that could encourage manipulation are unlikely to meet the public interest test.
The proposal also clarifies that election contracts are not considered “gaming” under applicable federal law. Reuters reported This could further reduce regulatory uncertainty for platforms like Kalshi and Polymarket, which rose to prominence during the 2024 US presidential election as investors increasingly turned to prediction markets to gauge the outcome of the race.
The draft regulations are open to public comment for 45 days and could facilitate define the future regulatory framework for U.S. prediction markets.
Gary Kalbaugh, a partner at Cahill Gordon & Reindel LLP in New York, said the proposal is based on principles rather than blanket consent, noting that each deal would still be subject to an individual public interest analysis.
“‘Games’ are defined more broadly than expected to include sporting events,” Kalbaugh wrote Wednesday. “Contracts setting aggregate results (final scores, wins-losses, season statistics) are presumably permissible.”
Source: Gary Kalbaugh
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The increased regulatory clarity comes at a time when prediction markets are seeing a surge in adoption
The proposed rules come as prediction markets – described in the bill as an “asset class” – continue to gain momentum, with Kalshi and Polymarket achieving multi-billion dollar valuations amid growing interest from investors and institutions.
Both companies have expanded their links with classic financial markets. Kalshi recently partnered with Nasdaq to launch a novel category of forecast markets that allows users to forecast the future valuations of private companies ahead of their initial public offering.
Meanwhile, Polymarket has partnered with Dow Jones to integrate real-time forecast market data into its media brands, including The Wall Street Journal.
“Forecasting markets continue to become more mainstream, and newly formed partnerships with news organizations and more companies are rapidly entering this space.” he said Melinda Roth, professor of sports law and corporate finance at Georgetown University Law Center. “As these markets continue to evolve, the unanswered question is whether event contracts are financial instruments or simply gambling.”
Analysts at Bernstein say forecast markets are seeing increasing institutional adoption as investors seek alternative macro-hedging tools in the form of binary contracts.
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