The US Commodity Futures Trading Commission (CFTC) has unveiled its first regulatory framework for prediction markets, setting out a proposal to govern the sector under US law.
The plan, issued by the agency on Wednesday, would set standards for certain types of betting while largely leaving markets tied to elections and politics out of the category of activities that would trigger increased scrutiny.
Where the line is drawn
The new one proposal describes how the agency would begin determining whether a contract should be prohibited. Under the draft, the CFTC says it will for the time being consider both sports betting and bets involving games of chance and pure luck to fall under “gaming.”
At the same time, it suggests that betting on sports outcomes is unlikely to be broadly against the public interest, while wagering money on gambling or pure games of chance probably would.
The framework further argues that prediction markets based on sports scores, price differentials, win-loss results, progress in tournaments and similar data can perform a ‘price discovery’ function and provide meaningful information.
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Where the proposal draws stricter boundaries, this concerns specific categories sports-related betting. The CFTC indicated that betting on player injuries, fights, children’s sports, refereeing, or wagering structured in a manner that could encourage cheating would be unlikely to meet the public interest standard.
The draft also addresses election-related contracts, noting that election betting “is contests, not gambling” and therefore falls outside the “enumerated activities” that would allow the CFTC to apply its 90-day review process to event contracts.
The agency’s proposal also focuses heavily on how it would evaluate whether a contract overreaches in areas such as terrorism, war or assassination – topics that, the draft says, are domestically regulated exchanges have largely avoided offering.
45 day comment period for prediction markets
In its announcement, the CFTC acknowledged that the rules released Wednesday are “thin” and said additional regulations on prediction markets could be introduced in the future. After Wednesday’s publication, the proposed rule will undergo a 45-day public comment period.
CFTC Chairman Mike Selig emphasized the commission’s intent as it prepares for further steps in the regulatory process. He said in a statement that the CFTC would protect the integrity of its regulated markets while allowing “responsible innovation.”
Selig added that the new prediction markets proposal provides a sustainable and transparent framework for identifying the contracts Congress has directed the agency to investigate, while allowing legitimate markets to continue.
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In addition to defining the types of bets that can fall on different sides of the line, the proposal outlines a step-by-step process for bans. The CFTC would first determine whether the contract is actually linked to an event that takes place.
It would then evaluate whether the event fits within the categories defined in the Commodity Exchange Act, and ultimately conduct a public interest analysis to decide whether to ban or allow the contract from the prediction markets.
Featured image created with OpenArt; chart from TradingView.com