The U.S. Commodity Futures Trading Commission (CFTC) released a draft regulation for prediction markets on Wednesday, categorizing sports betting as "gambling" and defining red lines, with contracts related to player injuries and match-fixing identified as contrary to public interest; election betting is considered "competition" rather than "gambling", receiving a more lenient exemption.

Written by: Yang Chen

Source: Wall Street Journal

The U.S. derivatives regulatory body has officially proposed a regulatory framework for the prediction market industry, attempting to balance market order regulation and innovation encouragement.

On Wednesday, the CFTC published a regulatory draft that establishes acceptable standards for sports betting while placing election and political betting outside a more stringent regulatory category. Following the release of the draft, there will be a 45-day public comment period during which the regulatory body will decide based on feedback whether the draft will be finalized.

The release of the draft coincides with the rapid expansion of the prediction market industry and ongoing regulatory controversies.

Platforms such as Kalshi and Polymarket have attracted billions in funding, but at the same time, there have been frequent insider trading allegations, and several U.S. state governments as well as Native American tribes have filed lawsuits seeking to halt sports-related contracts.

Election Betting Receives "Exemption," Sports Betting Defined Red Lines

One of the core points of the draft is the differential qualitative classification of various types of prediction contracts.

The CFTC stated that sports events and games of chance fall under the category of "gambling". Under federal law, the agency has the authority to initiate a review process of up to 90 days for contracts related to gambling events and can block related contracts from being listed on public exchanges if deemed "contrary to public interest."

Regarding sports betting, the draft preliminarily identifies that prediction contracts based on sports event scores, odds differences, win-lose results, and event advancement "can serve a price discovery function and provide valuable information," thus broadly not violating public interest. However, bets on player injuries, match-fixing, children's sports events, and bet types that may induce cheating behaviors are likely deemed contrary to public interest.

In contrast, election betting is given a more lenient classification. The draft clearly states that election betting is considered "competition" rather than "gambling," and therefore is not within the scope of "enumerated activities" that the CFTC can initiate a 90-day review on. Election betting is a significant revenue source for the ongoing expansion of the industry.

Industry Expansion Accelerates, Insider Trading Controversies Emerge

The prediction market industry has recently attracted a large number of new entrants, including sports betting companies and cryptocurrency firms, several of which are linked to the Trump family and its business interests. These platforms allow users to place binary bets on the outcomes of almost any event, pooling billions from global bettors.

However, alongside the rapid expansion of the industry, insider trading allegations have also surfaced. Recent cases include:

A U.S. special forces soldier betting on the arrest of Venezuelan leader Nicolas Maduro; former congressman George Santos being accused of betting on his attendance at Trump's State of the Union address; and an Italian Google software engineer being charged with trading on insider information.

In response, the CFTC, Kalshi, and Polymarket have stated they are taking proactive measures to prevent insider trading and emphasized that relevant cases have been identified and voluntarily reported by the platforms themselves.

Regulatory Background: Legal Pressure and Innovation Protection

The CFTC's proposal of the draft is also a direct response to external legal pressures. Currently, several U.S. state governments and Native American tribes have filed lawsuits against sports-related contracts, asserting that such contracts are essentially illegal gambling and seeking judicial intervention to stop them.

CFTC Chairman Michael Selig stated in a statement that the proposed new regulations aim to protect market integrity while not hindering "responsible innovation." The draft will undergo a 45-day public comment period before the regulatory body makes a decision on the finalization.