The CFTC has proposed new regulations to classify event contracts as swaps, aiming to assert its jurisdiction over prediction markets and limit state oversight.
CFTC Proposes Regulatory Changes
On September 28, the Commodity Futures Trading Commission (CFTC) submitted two significant proposals to the White House's Office of Information and Regulatory Affairs (OIRA) aimed at redefining the term "swap" to include event contracts. These contracts, which allow for yes-or-no bets on various outcomes, are currently offered on platforms such as Kalshi and Polymarket.
By classifying event contracts as swaps, the CFTC aims to assert its jurisdiction over these markets, effectively removing them from the purview of state gambling regulators. This move comes in the wake of conflicting court decisions regarding the legal status of such contracts, a matter that is now being reviewed by the Supreme Court.
Details of the Proposals
The first proposal, known as RIN 3038-AF82, seeks to formally categorize event contracts as swaps and will be open for public comment. The second, an interim final rule labeled RIN 3038-AF81, aims to exclude certain gambling products from the swap definition and could be implemented upon approval. Both proposals have been classified by the CFTC as not economically significant, and their full texts have yet to be published.
Chairman Michael Selig highlighted the importance of this classification, stating that if event contracts are deemed swaps, they will fall under the CFTC's exclusive authority, thus circumventing state gambling laws.
Legal Context and Implications
Several states have launched lawsuits against prediction market operators, alleging illegal gambling activities. In response, the CFTC is moving to block state oversight in favor of federal regulation. This regulatory initiative reflects a broader trend of the CFTC expanding its authority in the wake of the Clarity Act, which has seen regulators taking proactive steps in shaping policies related to cryptocurrency and prediction markets.
Moreover, the CFTC is intensifying its scrutiny of prediction markets, including investigating former Representative Adam Kinzinger over bets associated with his potential pardon. Recently, the agency issued warnings about "mention markets," which are contracts based on whether specific individuals will say certain words, citing their vulnerability to manipulation.
At the state level, New York has taken legal action against Polymarket, aiming to halt its operations, following earlier lawsuits against Kalshi for similar issues. As the CFTC's proposals are currently in the early stages, they represent the agency's intentions to clarify the regulatory framework surrounding prediction markets and resolve ongoing legal disputes.
