US Regulators Move to Clarify Rules for Prediction Markets, Favor Sports and Elections Over Manipulation Risks

The US Commodity Futures Trading Commission (CFTC) has taken a significant step toward defining the legal boundaries for prediction markets by proposing a framework that distinguishes between contracts based on verifiable sports outcomes and those that could encourage manipulation. The draft rules, released publicly for a 45-day comment period, signal a willingness to recognize prediction contracts tied to final scores, win-loss records, and season statistics as valuable tools for price discovery—an acknowledgment that these markets can serve a function beyond gambling. At the same time, the proposal places stricter scrutiny on contracts linked to officiating decisions, player injuries, or other variables susceptible to subjective influence, indicating regulators are prioritizing market integrity over unrestricted speculation.

This development arrives as platforms like Kalshi and Polymarket have grown into multibillion-dollar entities, drawing institutional and retail interest during high-profile events such as the 2024 US presidential election. By explicitly stating that election contracts are not classified as gaming, the CFTC is addressing a longstanding grey area that has created regulatory uncertainty for operators. The move suggests a broader shift toward treating prediction markets as a legitimate asset class, provided they operate within a framework that minimizes manipulation risks and maintains transparency.

Prediction Markets Gain Regulatory Recognition as a Distinct Asset Class

The CFTC’s draft proposal marks one of the first formal attempts by a major US financial regulator to categorize prediction markets as a distinct asset class rather than dismissing them outright as gambling. The document describes these markets as mechanisms for price discovery, a concept traditionally associated with commodities and financial derivatives. This framing implies that contracts tied to publicly verifiable outcomes—such as the winner of a football game or the outcome of a presidential election—can provide meaningful signals about future events, much like futures contracts in traditional markets.

Industry observers have long argued that prediction markets offer utility beyond speculative betting, including insights for policymakers, researchers, and businesses. The CFTC’s approach aligns with this view by creating a presumption that contracts settling on aggregate sports outcomes are permissible, unless evidence suggests they pose a risk to market integrity. This principles-based stance contrasts with a more restrictive, rules-based approach and reflects a growing acceptance of prediction markets as a legitimate financial innovation.

Sports Event Contracts Receive Clear Path, While High-Risk Contracts Face Scrutiny

Under the proposed framework, contracts based on final scores, win-loss records, and season statistics are considered presumptively permissible, meaning they would generally meet the public interest test required for market approval. This classification is significant because it removes much of the ambiguity that has surrounded sports betting-like instruments in the US, where federal law has historically treated such activities as gaming. The distinction is critical for platforms that rely on these contracts to attract traders and liquidity.

In contrast, the CFTC has signaled that contracts tied to officiating decisions, player injuries, or other outcomes that could be influenced by subjective judgment are unlikely to clear the public interest hurdle. Regulators are concerned that these variables introduce too much uncertainty and potential for manipulation, which could undermine market confidence. This selective approach suggests that while the CFTC is open to innovation in prediction markets, it is equally committed to preventing practices that could distort price signals or enable unethical behavior.

Election Contracts Explicitly Excluded from Gaming Classification

One of the most consequential aspects of the proposal is the CFTC’s clarification that election contracts are not considered gaming under federal law. This determination directly addresses a longstanding regulatory gray area that has forced platforms to navigate uncertain legal terrain. During the 2024 US presidential election, platforms like Polymarket and Kalshi saw unprecedented trading volumes as users sought to hedge or speculate on election outcomes. The lack of clear rules had created compliance risks, but the new proposal signals that such contracts can operate within a regulated framework if they meet the public interest standard.

Legal experts note that this clarification could pave the way for greater institutional participation in election prediction markets, as companies and funds may feel more confident entering a space with clearer regulatory guidance. However, the framework remains principles-based, meaning each contract will still undergo a case-by-case review to assess its potential for manipulation or market disruption. This nuance underscores the CFTC’s cautious approach, balancing innovation with risk mitigation.

Public Comment Period Offers Industry a Chance to Shape Final Rules

The 45-day public comment period provides stakeholders—including prediction market operators, legal experts, and consumer advocates—an opportunity to influence the final shape of the rules. Industry participants are likely to advocate for broader permissibility of sports event contracts, arguing that the current framework already includes safeguards against manipulation through liquidity requirements, reporting standards, and trading limits. They may also push for clearer definitions of what constitutes an impermissible outcome variable, such as officiating decisions.

Consumer protection groups, on the other hand, could argue for stricter oversight of all prediction contracts, citing concerns about speculative excess or the potential for vulnerable individuals to incur losses. The CFTC’s willingness to solicit feedback suggests it is open to refining the framework based on real-world use cases and potential unintended consequences. This collaborative approach is typical of modern regulatory practices, where agencies seek to balance innovation with public welfare.

Implications for Platforms Like Kalshi and Polymarket

For companies like Kalshi and Polymarket, the CFTC’s proposal represents a potential inflection point. Both platforms have built multibillion-dollar valuations by capitalizing on the demand for event-based contracts, but their growth has been constrained by regulatory uncertainty. The new framework could accelerate their expansion by providing a clearer path to legal compliance, particularly for sports and election contracts. However, the case-by-case review process means operators must still invest in robust compliance systems to monitor contracts and demonstrate their public interest value.

The distinction between permissible and impermissible contracts also creates operational challenges. Platforms will need to design their markets with built-in safeguards to prevent manipulation, such as requiring verifiable data sources for settlement or imposing limits on trading volumes for high-risk contracts. This could lead to more conservative market design choices, at least in the short term, as operators wait for further clarification from the CFTC.

Broader Impact on Financial Markets and Data-Driven Decision Making

Beyond the prediction market sector, the CFTC’s proposal has implications for the broader financial ecosystem. By recognizing prediction markets as a legitimate asset class, regulators are endorsing the idea that crowdsourced insights can have tangible value. This could encourage other financial institutions to explore similar models for forecasting economic indicators, corporate earnings, or even geopolitical events. The rise of AI-driven analytics and large language models may further amplify the utility of these markets, as algorithms can process vast amounts of data to identify patterns and anomalies.

For businesses and policymakers, the development of regulated prediction markets could provide a new source of actionable intelligence. For example, a corporation might use a prediction market to gauge consumer sentiment ahead of a product launch, or a government agency could monitor market signals to assess public opinion on policy proposals. The CFTC’s framework, if finalized, could serve as a template for other jurisdictions considering similar regulations, fostering global consistency in how these markets are governed.

Next Steps for Stakeholders and What to Watch

The immediate next step is the conclusion of the 45-day comment period, after which the CFTC will review feedback and potentially revise the proposal before finalizing the rules. Stakeholders should prepare detailed responses that address both the opportunities and risks outlined in the draft. Operators of prediction markets will need to assess how the final rules affect their existing contracts and whether they need to pivot their market designs to comply with the new framework.

Legal and compliance teams should closely monitor the CFTC’s guidance and any subsequent enforcement actions, as these will set precedents for how the rules are interpreted in practice. For traders and investors, the clarity provided by the framework could lead to increased participation, but they should remain cautious about contracts that fall into the higher-risk categories, such as those tied to officiating or injuries. Ultimately, the CFTC’s proposal is a step toward legitimizing prediction markets, but the journey toward full regulatory acceptance is far from over.

In the longer term, the success of this framework could influence other US regulators, such as the Securities and Exchange Commission (SEC), to adopt similar approaches for markets involving event-based contracts. Internationally, jurisdictions grappling with the rise of prediction markets may look to the CFTC’s model as a reference point. For now, the industry stands at a crossroads—one where innovation meets regulation, and where the future of event-based trading will be shaped by the rules now under consideration.