US CFTC Issues Guidance on Prediction Market Contracts

Key Insights

• US CFTC issues first advisory on prediction markets as sector continues to boom.
• The guidance states that contracts on war, assassination, and terrorism are illegal as they are against public interest.
• CFTC seeks to address insider trading and market manipulation in prediction markets with new guidance.

The US Commodity Futures Trading Commission (CFTC) has finally issued guidance on prediction markets. That broke its long silence on the sector. CFTC chair Mike Selig confirmed this in a post on X, noting that it is long overdue.

Along with the guidance, the CFTC also issued an Advanced Notice of Proposed Rulemaking (ANPRM). They are seeking public comment on potential regulations and amendments.

Speaking on development, Selig noted that it is the opening salvo for the agency. It was once opposed to prediction markets. He said:

CFTC Says Contracts on Wars, Assassination and Terrorism Are Illegal

The CFTC guidance is not a surprise, given the rapid growth of the prediction market over the past few years. The staff advisory now provides clarification on how registered prediction market platforms must comply with existing regulations.

According to the guidance, designated contract markets (DCMs) must avoid listing event contracts that are contrary to the public interest. It explained that the CFTC will define what qualifies as such prohibited events. These include contracts tied to assassination, terrorism, and war.

It stated:

This clarification comes after prediction platforms such as Polymarket and Kalshi faced criticism for listing contracts tied to war. Polymarket had attracted major backlash after listing a market for nuclear weapon detonation this year, forcing it to remove the contract.

However, this has not stopped the platforms from listing other events connected to war. Such contracts have drawn heightened criticism. Examples include wagers on whether the US will attack Iran or whether Iran’s former supreme leader Ayatollah Ali Khamenei will be removed.

Some critics point to the inhumanity of betting on death or the destruction of other people. However, some note that it also allows those with insider military information to profit from those bets.

Over the past few months, insiders have allegedly profited from US military actions in Venezuela and Iran by accurately predicting events based on them.

Unsurprisingly, legislators, including six Democrat Senators, have called on the CFTC to prohibit such prediction contracts. The CFTC guidance appears to align with the popular backlash.

Regulator Wants Prediction Platform to Address Market Manipulation and Insider Trading

It also addresses concerns about insider trading. DCMs are now required to conduct real-time monitoring to ensure fair and equitable trading and prevent abuse. The CFTC noted that it could investigate and bring civil action against any suspicious activity.

Interestingly, the regulator noted that prediction platforms should list contracts that are not susceptible to manipulation. It expects the DCMs to review these contracts and engage CFTC staff when designing them.

Prediction platforms have been given the option to submit new products to the CFTC for review. This process must occur before the products are introduced to the public. This is only voluntary, as such platforms can self-certify that their products meet the standards.

Meanwhile, the guidance is only an initial step, and the CFTC has also issued a notice seeking public comments on event contracts. The ANPRM invites comments on how to regulate prediction markets under existing laws, among other topics.

According to the regulator, it will use the information to determine how to proceed with future rule-making for the sector. The ANPRM will be open for 45 days.

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