Prediction markets get tailored U.S. guidance from former foe CFTC

• The U.S. Commodity Futures Trading Commission made two moves on Thursday to begin establishing policy for prediction market oversight, with a staff-issued advisory to regulated firms and the issuance of a document that marks the start of a formal rulemaking process.
• The CFTC was once a legal opponent of certain activity at the same firms it's now championing under Chairman Mike Selig.

Prediction market firms such as Polymarket and Kalshi have a new set of guidelines for U.S. operation, with the Commodity Futures Trading Commission laying out initial guidance and a proposed permanent rule Thursday for what the agency called "a proven source of reliable information for news media, sports leagues, financial institutions, and everyday Americans."

The agency had once been a legal adversary of the prediction markets, warning that certain betting ran afoul of derivatives laws and that the CFTC couldn't function as a global policy force combating fraud and manipulation in political markets all over the world. But under Chairman Mike Selig, the CFTC abandoned its old legal fight and embraced the firms. It's now issued a non-binding staff advisory to the prediction market firms regulated by the CFTC as "designated contract markets," and started a binding rule process.

"This begins the process of new rulemaking grounded in a rational and coherent interpretation of the Commodity Exchange Act, while reassuring the American people that the CFTC will exercise its exclusive jurisdiction over prediction markets," Selig said of the regulatory process which is starting with what's known as an "advanced notice of proposed rulemaking."

Selig, who can operate as the sole authority at the regulator because he's the only member of what's meant to be a five-person commission, quickly moved to push the new policy effort. He's also been waging a rhetorical campaign against state regulators who claim authority over sports betting, saying his agency is the primary regulator of that space. Numerous states sued prediction market providers alleging they're also subject to their jurisdiction, at least for sports-related bets, and Selig filed a recent court brief arguing the CFTC holds sole jurisdiction.

The CFTC's new advisory lays out how DCMs — a list that includes Kalshi, Coinbase and Polymarket — should get trading products cleared with the regulator and it says the firms should only handle "trading contracts that are not readily susceptible to manipulation."

It also noted that the firms that are listing sports contracts should engage in "communications with such relevant sports governing bodies or authorities when developing terms and conditions, compliance and market oversight programs for sports-related events contracts."

The agency's rulemaking initiative, though, is much more complex and will likely take months to put into place. At this stage, the CFTC is seeking public comments about how it should proceed. The next step will be a more fleshed-out proposal, and then a final rule, each a lengthy process under administrative law.

The agency has put a 45-day deadline on comments, which is relatively fast, suggesting a speedy timeline.

The prediction markets are platforms in which users can buy and sell contracts that bet on a typically binary outcome, such as the winner of a sporting contest or the victor in an election. Selig has argued that the process belongs in the hands of the derivatives watchdog in the same way that futures contracts do.

The initial rulemaking document underlines that firms engaging in this business have a legal responsibility to police their activity for market manipulation, as evidenced recently by Kalshi's announcement it had punished a couple of its customers.

The rulemaking text noted "the number of applications for DCM registration has more than doubled over the past year, largely from entities that are interested primarily, or exclusively, in operating prediction markets." At this stage, the 32-page document poses a series of questions to help outline what direction the more concrete proposal should take.

Read More: Senate Democrats push prediction market limits, including banning bets on war, death

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