CFTC Signals Major Shift in Prediction Markets Regulation Amid Legal Battle with States

The U.S. derivatives regulator is preparing to release new guidance and launch a formal rulemaking process for prediction markets, as the debate over whether these platforms constitute financial exchanges or gambling continues to intensify.

Speaking at a Milken Institute event, CFTC Chairman Mike Selig announced that the agency plans to clarify which types of prediction market contracts can be listed on federally regulated exchanges and establish clear evaluation standards for these products.

“We’re going to be setting very clear standards as to the types of prediction markets that can be self-certified in our markets,” Selig stated. “We’re also planning to move forward with an advanced notice of proposed rulemaking in the near future that will set the stage for more fulsome rulemaking.”

Prediction platforms allow traders to buy and sell contracts linked to specific outcomes—ranging from political races and inflation figures to geopolitical developments. These platforms operate under federal derivatives law, placing them under CFTC supervision rather than state gaming commissions.

Selig emphasized that these platforms operate under stricter regulatory oversight than traditional casinos. “We’ve got state gambling and gaming rules and regulations and licenses, and they’re able to offer a certain product, they’re able to serve a bunch of alcohol for free to people and let them bet on sports,” he explained. “Our products are very much heavily regulated and have stringent requirements. It’s a different regime; they can exist in parallel.”

The CFTC’s position suggests federal derivatives oversight can coexist with state-regulated gambling frameworks, even as state regulators challenge prediction markets in court. The agency recently filed a legal brief defending its authority over event contracts, arguing that state regulators cannot override federal derivatives law when contracts are listed on federally regulated exchanges.

“We certainly don’t go into casinos to evaluate whether they’re offering legal over-the-counter swaps,” Selig said. “But we make sure that we assert our authority where it makes sense and where we see states getting a little ahead of themselves.”

The friction between Washington and the states has intensified over the past several months. Multiple state regulators have moved to restrict or block prediction market operators from offering contracts within their borders, particularly those tied to sports outcomes.

Industry observers say the forthcoming rulemaking could significantly reshape the legal battle. Former CFTC Special Counsel Rob Schwartz noted on social media that the agency appears poised to clarify how event contracts fall within its jurisdiction. “The real headline: the CFTC is planning to release very soon an Advanced Notice of Proposed Rulemaking on event contracts,” Schwartz wrote. “We know a lot now about how the Commission views its jurisdiction, and very little about what additional regulation is under consideration.”

Critics warn that the CFTC’s stance represents federal overreach. Former New Jersey Attorney General Matt Platkin criticized Selig’s position on social media, suggesting the chairman “sounds more like counsel for the industry than a regulator.”

Legal experts predict the rulemaking could trigger further court challenges. Attorney Daniel Wallach said the move may create a new litigation front between federal regulators and states. “This will open a new litigation front—federal court APA challenges by states and tribes asserting that the CFTC acted arbitrarily, capriciously and in excess of its statutory authority when it issued regulations for activity (i.e., sports gambling) never authorized by Congress,” Wallach wrote.

Lawmakers have also begun weighing in on the issue. Some members of Congress have pressed the CFTC to rein in contracts they consider controversial or socially sensitive. Meanwhile, the gambling industry is lobbying for legislation that would curb prediction markets offering sports-related products.

Selig has argued that prediction markets serve a wider public purpose. “We’ve seen the disinformation, the hoaxes, the fake news and all of the ability of certain individuals to control gatekeepers and make sure that the polls say what they want them to say right before an election,” he said. “But the prediction markets tend to get it right.”

He also contends that pushing such markets out of the United States could weaken transparency. “I would have less confidence if they were the center of prediction markets were in China or Russia or somewhere else,” Selig said. “I think it should be here in the United States.”

Drawing a parallel to digital assets, he warned that heavy-handed restrictions could drive activity offshore, where oversight is weaker and transparency thinner. “The more we try to block these markets, we saw it with crypto; it just goes offshore,” he said. “So my view on this stuff is that we’ve got to set the right rules and regulations for it here in the United States, or otherwise we’re just going to have black markets offshore.”

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