State AGs Urge CFTC to Limit Scope of Prediction Markets
Commentary by Steven Lofchie
A coalition of 41 attorneys general argued that the CFTC lacks jurisdiction over sports-related event contracts and urged the agency to prohibit event contracts tied to elections, military actions, and government decisions.
In a comment letter responding to the CFTC Advance Notice of Proposed Rulemaking on how prediction markets should be regulated, (see prior coverage,) the attorneys general argued that sports-related prediction market contracts constitute gambling - not financial hedging tools - and, therefore, fall outside CFTC jurisdiction under the Commodity Exchange Act. The coalition said that the states have regulated sports gambling for over a century and are better equipped to protect consumers from associated public health and financial harms.
The coalitions called on the CFTC to prohibit election-related event contracts, arguing they create financial incentives for political insiders to manipulate outcomes and pose a threat to democratic integrity. On national security, the coalition cited the recent arrest and indictment of a U.S. Army soldier involved in the capture of Venezuelan President Nicolás Maduro, who allegedly placed bets on Polymarket ahead of the raid and collected over $400,000 - an example, the coalition said, of how military event contracts enable insider trading and expose nonpublic government information.
The coalition further warned that government officials with access to material nonpublic information could easily exploit prediction markets, and that third parties could be incentivized to bribe or coerce insiders for that information.
The coalition also urged the CFTC to use its commercial hedging standard to prohibit event contracts with no legitimate hedging value - citing examples such as whether a celebrity will attend a sporting event or what color tie the President wears at the State of the Union.
Commentary
Forty-one AGs agreeing on something tells you that the issue is not one of political partisanship. The question on the scope of prediction contracts - whether regulated by the CFTC (or perhaps the SEC) or by the States - is better settled by Congress than by the Courts. Of course, that assumes Congress is able to reach some agreement.
That said, election contracts should be permissible and regulated by the CFTC. National elections are clearly events of national economic significance. Even local elections can be; going long on Mandami becoming Mayor of New York City could have been a good way to hedge the price risk of owning property in New York City,
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The DOJ and the CFTC filed parallel charges against an active-duty U.S. Army Master Sergeant, alleging he used classified nonpublic military information to place bets on a prediction market and profit from the capture of former Venezuelan President Nicolás Maduro.