CFTC Seeks "Balanced Regulation" of Prediction Markets
Commentary by Steven Lofchie
The CFTC identified obstacles to the regulation of prediction markets and said it will hold a public roundtable as it considers next steps.
The CFTC said that the goal of the roundtable is "to inform the Commission's approach to regulation and oversight of prediction markets, including sports-related event contracts." The CFTC said that the roundtable "is a necessary first step in order to establish a holistic regulatory framework that will both foster thriving prediction markets and protect retail customers from binary options fraud such as deceptive and abusive marketing and sales practices."
The CFTC identified several obstacles to balanced regulation, including:
- existing CFTC orders, rules and interpretations on event contracts.
- federal court rulings, including interpretations of "gaming."
- the CFTC's legal arguments in ongoing litigation.
- legal positions of CFTC-registered entities on event contracts and gaming.
- staff guidance, enforcement actions and regulatory practices.
- laws and regulations applicable to DCMs and FCMs.
- constitutional and federal law issues, such as the Commerce Clause, states' rights, federal preemption and tribal sovereignty.
The CFTC said that the public roundtable will be held "approximately 45 days at the conclusion of its requests for information on certain sports-related event contracts."
CFTC Acting Chair Caroline D. Pham noted that, despite her repeated dissents and other objections dating back to 2022, the CFTC's interpretations of event contracts "are a sinkhole of legal uncertainty and an inappropriate constraint on the new Administration." She asserted that prediction markets "are an important new frontier" in which the CFTC "must break with its past hostility to innovation and take a forward-looking approach to the possibilities of the future."
Commentary
The permissible scope of prediction markets is, from both a legal and a policy standpoint, a fascinating question.
Recently, the focus has been on prediction markets concerning the elections. Elections have material economic consequences, which would justify having prediction markets on the outcome. Further, the prediction markets seemed to produce good results, at least better than some of the polls.
Beyond predictions about elections, many of the contracts at issue do not seem to have any economic significance. They just appear to be about people having fun. Should that be ok?
At what point do prediction markets cross the line into being "legalized gambling," and should the government care if prediction markets are legalized gambling, at least when gambling is itself now legal? Given that many of the States are now in the business of running lotteries, it is hard to be self-righteous on the issue.
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