CFTC Issues New Guidance Supporting Prediction Markets

The Commodity Futures Trading Commission (CFTC) is clarifying its stance on prediction markets. It has now reversed its regulatory posture by withdrawing efforts to restrict event-based contracts tied to politics and sports. 

The shift removed both a June 2024 proposal that sought to classify election-related derivatives as gambling and a Sept. 2025 staff advisory that imposed limits on sports-related contracts. Together, the actions reduced the immediate risk of a federal prohibition on trading contracts linked to political contests and sporting events on prediction market apps.

Chairman Michael S. Selig said that the earlier approach did not align with the original intent of the Commodity Exchange Act. The 2024 proposal had contended that the election contracts had no economic purpose and threatened the integrity of democracy. 

However, the commission later determined that the rationale for the proposal was unsound and that it was not made in accordance with the standards of administration. In withdrawing the proposal, the agency recognized that the event contracts can be included in the derivatives market. 

The withdrawal of the 2025 staff advisory proposal removed uncertainty for exchanges and clearinghouses. That guidance had created friction by raising unresolved questions about how federal derivatives law interacted with state gambling statutes. 

Many of these firms have experienced operational delays or legal issues due to unclear guidance, and Selig stated that the agency plans to consider a new rulemaking process for event contracts.

Additionally, Selig highlighted the value of innovation and transparency while adhering to proper administrative procedures, including public comment. For now, the commission's actions have lifted regulatory hurdles to the sector's expansion.

Legal pressure mounts

The CFTC's policy change came at a time when prediction markets were expanding significantly, with more legal scrutiny following Kalshi's expansion, which increased trading activity mainly in sports-based markets.

This expansion prompted financial and gaming organizations to announce plans to introduce similar markets to capitalize on event-based trading.

Although Kalshi was heavily involved in sports-related markets, it fell under federal, rather than state, sports betting laws, based on a determination that binary contracts related to real-world events constituted federal gaming laws. That definition now sat at the center of extensive litigation.

Kalshi now has 19 pending federal lawsuits, including in Tennessee and Massachusetts, which challenge the platform's legality or seek to clarify boundaries between federal and state authorities. Several suits were filed by state gambling regulators and tribal entities alleging that the platform operated as an unlicensed sports betting service. 

The prediction market operator has also taken its own course of action, contending that federal law preempts state gambling laws. More cases filed by private plaintiffs allege the platform exacerbates gambling-related harm, with some of the cases filed as class actions.