Commodity Futures Trading Commission Headquarters in Washington, December 23, 2022.
Ting Sheng | Bloomberg | Getty Images
Federal regulators on Wednesday released the first proposed rules on how to oversee prediction markets.
The Commodity Futures Trading Commission, the leading federal regulator of the market, aims to create a framework for determining whether contracts are in the public interest or illegal.
These questions concern contracts related to terrorism, assassination, war, gambling, or illegal activities under state and federal law under the Commodity Exchange Act. The commission did not outright ban all types of event contracts based on transaction categories, such as those related to sports or elections.
The proposed rule focuses on how the commission will determine whether a contract goes too far into areas such as terrorism, war or assassination, which domestically regulated exchanges have avoided offering.
The CFTC’s rules leave a gray area when it comes to gaming, which has been the source of much controversy over sports-related event contracting issues. The release states that future rulemaking may address “the appropriate handling of event contracts related to games.”
In a release, the commission acknowledged that Wednesday’s proposed rules were flimsy and noted that further rulemaking regarding prediction markets may occur in the future.
After Wednesday’s announcement, the proposed rule will go through a public comment period.
“The CFTC will protect the integrity of our regulated markets without getting in the way of responsible innovation,” CFTC Chairman Michael Selig, appointed by President Donald Trump, said in a statement. “This proposal would give the Commission a durable and transparent framework to identify the contracts Congress has directed us to scrutinize while advancing the legal market.”
Prediction markets have exploded in popularity over the past year, leading to a battle over how to regulate them.
States have challenged the platform, believing that sports-related offerings amount to gambling and fall under their jurisdiction. However, the CFTC argues that all contracts, regardless of subject matter, are swaps, which gives the CFTC exclusive authority to regulate them.
At the same time, bipartisan members of Congress have expressed concerns about the platforms and the potential risks of insider trading, although no formal market legislation is under consideration.
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