CFTC Jockeys With Congress, States for Prediction Market Primacy

The legal battle over prediction markets is escalating between a Trump-appointed derivatives regulator and lawmakers at the state and federal levels, inflamed by controversial wagers on military action in Venezuela and Iran, while sports-based contracts draw ire from commissions that oversee gaming across jurisdictions.

More than a dozen bills have been floated this year on Capitol Hill—and in states including New York and New Jersey—taking aim at markets where consumers can bet on sports, elections, and other events or that could be susceptible to insider trading, according to a Bloomberg Law review.

Event contracts tied to violent geopolitical events are “morally repugnant and provide no social benefit,” Sens. Jack Reed (D-R.I.) and John Hickenlooper (D-Colo.) said in a letter this month to Michael Selig, chairman of the Commodity Futures Trading Commission. The lawmakers cited six newly created accounts on offshore platform Polymarket that made more than $1 million by betting on the timing of US or Israeli strikes on Iran and the ouster of Ayatollah Ali Khamenei, calling on Selig to crack down on trading in “death markets.”

Democratic-led bills in recent weeks sought to clarify or enforce an existing ban on trading in financial markets tied to violent events, as well as platforms letting users bet on sporting events that are historically regulated by states.

At the center of the maelstrom is the CFTC, the futures trading regulator with roughly 600 employees that Selig is leading alone with four commissioner seats vacant. In cases unfolding across the country, platforms such as Kalshi and Crypto.com are fighting with states about whether the 2010 Dodd-Frank Act that expanded the CFTC’s authority over swaps—a financial risk-hedging tool that fueled the 2008 financial crisis—was also intended to give it the exclusive power to police prediction markets.

Not content to stay on the sidelines, Selig’s CFTC filed an amicus brief Feb. 17 supporting Crypto.com’s Ninth Circuit appeal against Nevada, arguing state gambling regulators shouldn’t be able to “invade” the federal agency’s exclusive jurisdiction. In a video posted to X that same day, Selig warned other entities that might try to regulate the same issues. “We will see you in court,” he said.

What Lies Ahead

Industry watchers say they expected an aggressive response from Selig.

“I would be stunned if this was the last that we heard from the CFTC in the many, many cases that are going on right now,” said Rob Schwartz, a former CFTC general counsel and now a partner at Morgan Lewis.

The CFTC also issued an advance rulemaking notice and guidance on prediction markets Thursday, including a request for exchanges to engage with the agency before opening markets that are vulnerable to manipulation.

While federal legislation forcing Selig’s hand on prediction markets seems unlikely to advance, the CFTC is set to face more friction from individual lawmakers who say it isn’t being tough enough on the surging industry.

“There is a prohibition on the books listing contracts that involve gaming, assassination, war, illegal activity, but the CFTC has never enforced those as though they were prohibitions,” Schwartz said.

A CFTC spokesperson didn’t respond to multiple requests for comment.

Their ‘Playground’

Short of direct rulemaking or enforcement sweeps on prediction markets, the CFTC so far has mostly asked exchanges to police themselves.

An agency advisory last month applauded Kalshi’s actions to curb two instances of insider trading on the platform.

“The CFTC, and Selig in particular, recognize how quickly market structure evolves,” said Christopher Mendez, a partner and chair of the investment funds practice at Akerman LLP. “There is plenty of room and need for market participants outside of appointed agency regulators to set rules, set boundaries, and police themselves.”

Designated contract markets—exchanges that the CFTC oversees under the Commodity Exchange Act—"have an independent duty pursuant to the core principles of the Act to maintain audit trails, conduct surveillance, and enforce rules against prohibited practices,” the agency said in its advisory.

“Historically, the exchanges have been the first level review for monitoring market participants and their activity, with the CFTC conducting oversight primarily for fraud and manipulation,” said Matthew Kulkin, a partner and chair of the futures and derivatives practice at WilmerHale who formerly led the CFTC’s swap dealer and intermediary oversight division.

Relying on markets for some oversight functions “is consistent with the CFTC’s principles-based regime where the exchanges are each self-regulatory organizations responsible for the activities on their playground,” he said.

Boundaries for Traders

The CFTC’s prediction markets authority dates to 1992, when the agency recognized the University of Iowa’s political prediction markets, despite the “onslaught of lawsuits by states attempting to undermine our authority,” Selig said at a Futures Industry Association event March 9.

Markets today allow companies and investors to hedge against external events with widespread economic implications, the CFTC said in last month’s brief, arguing that event contracts fit under its authority to regulate swaps.

But a bipartisan group of attorneys general from nearly 40 states filed its own amicus brief March 10, arguing Selig’s CFTC has made a “sharp pivot” to expand its own powers and that courts shouldn’t defer to the agency’s interpretation, especially following the US Supreme Court’s 2024 ruling in Loper Bright Enterprises v. Raimondo.

Even amid the pushback on the CFTC’s bid to carve out a lane for itself, Selig seems intent on giving the industry clear rules to follow.

“A rulemaking would be incredibly helpful for market operators and for market participants as to which contracts are permitted and which are not,” WilmerHale’s Kulkin said.

But as it adopts a more proactive posture, CFTC veterans say the agency still has limited firepower, including a budget that was frozen at $365 million for fiscal 2026.

“I was at the CFTC for 13 years, and I don’t know that there was a time when the agency was adequately staffed for the tasks it had in front of it,” Schwartz said.