Overview
- On September 28, the Commodity Futures Trading Commission (CFTC) forwarded two regulatory proposals to the White House's Office of Information and Regulatory Affairs (OIRA) that aim to redefine the term "swap" in relation to event contracts, which include yes-or-no bets on platforms like Kalshi and Polymarket.
- The proposed regulations categorize event contracts as swaps, thereby placing them under the CFTC's jurisdiction and out of the reach of state gambling regulators, amidst ongoing conflicting court decisions now being reviewed by the Supreme Court.
- This action reflects a continued trend of the CFTC establishing its own regulatory framework as questions surrounding integrity and oversight grow.
The CFTC is actively working to solidify its regulatory authority over prediction markets by sending two key proposals to the White House. These proposals seek to alter the legal definition of "swap" to encompass event contracts, which are essentially bets on outcomes of events.
The commission submitted these proposals to the OIRA on September 28 for review prior to their publication. The first proposal, labeled RIN 3038-AF82, aims to clarify that event contracts are included as swaps and is set for public comment. The second proposal, an interim final rule (RIN 3038-AF81), seeks to exclude "casino-style gambling products" from the swap definition and may be enacted upon approval. The CFTC has classified both proposals as not economically significant, and their full text has not yet been released.
The classification of contracts as swaps is crucial in a significant jurisdictional dispute. If deemed swaps, they would fall under the exclusive authority of the CFTC, a point emphasized by Chairman Michael Selig, which would also remove them from the jurisdiction of state gambling regulators.
Several states have initiated lawsuits against prediction market operators, accusing them of illegal gambling practices, prompting the CFTC to counteract by blocking state oversight. This regulatory move follows a series of conflicting court rulings regarding the classification of these contracts, a matter now under the scrutiny of the Supreme Court.
This initiative is part of a broader strategy by the CFTC to assert its regulatory powers without waiting for congressional action, aligning with a trend post-Clarity Act where regulators are taking the lead in shaping crypto policy. Recently, the agency submitted another rule concerning crypto markets to the White House, highlighting concerns over "mention" contracts that could be manipulated based on public statements.
In addition, the CFTC is ramping up its scrutiny of prediction markets, including investigations into former Representative Adam Kinzinger regarding bets related to his potential pardon. Earlier this week, the Commission issued a warning against "mention markets," indicating that contracts based on whether a specific individual will say certain words are highly prone to manipulation.
At the state level, New York has also taken legal action against Polymarket, aiming to prohibit its operations within the state, following a previous lawsuit against Kalshi for similar reasons.
Currently, the CFTC's proposals are indicative of its intentions rather than finalized regulations. By attempting to redefine the swap classification, the CFTC seeks to resolve the ongoing disputes that courts and states have been addressing on a case-by-case basis.