Prediction markets still facing uncertainty as regulators sidestep sports contracts

Sports event contracts remained largely unaddressed at a joint SEC-CFTC roundtable this week, leaving unresolved questions for prediction markets Kalshi and Polymarket as state and federal regulators continue to scrutinize the products.

CFTC Rule 40.11 prohibits event contracts on subjects such as terrorism, war, assassination, and gaming. Several jurisdictions have challenged prediction markets, arguing they conflict with state laws. Despite the anticipation that the four-hour session would address how such contracts could be regulated, panelists did not provide clarity.

Industry executives participate

Executives from Kalshi, Polymarket, CME Group, Robinhood Markets, Crypto.com, and Kraken joined the discussions, which focused primarily on how regulatory harmonization between the SEC and CFTC could reduce duplicative oversight and provide a consistent framework for exchanges.

Kalshi co-founder Tarek Mansour and Polymarket founder Shayne Coplan participated in a panel on how harmonization efforts might create economic value while protecting investors. Both suggested their participation itself indicated regulators’ increasing willingness to engage with prediction markets.

“It is really inspiring to see how far we’ve come in having regulators willing to have us here,” Mansour said. Coplan, referencing a Department of Justice probe dropped earlier this year, joked about being “whisked away” by authorities.

Debate on innovation exemptions

Discussion during the roundtable centered on how innovation could be managed within current frameworks. CME Group CEO Terrence Duffy questioned proposals for “innovation exemptions,” which would allow exchanges more freedom to introduce new products.

“You cannot have a double standard,” Duffy said. “It has to be a single standard. When you talk about a lot of these innovation exemptions, a lot of them are the exact same products being traded today under a different name, under a different regulatory regime. If you want to talk about harmonization, you can’t have this innovation exemption and then exclude the incumbents.”

Coplan warned that rigid rules risk pushing platforms offshore. “I’m not asking for blanket approval, but when there’s new technological innovation, the American way is to embrace that, not to wait years for that to play out,” he said.

Company developments

Kalshi has used the CFTC’s self-certification process extensively, listing 647 new markets in 2023 and 1,364 so far this year. “We’re on course to list over 2,000,” Mansour said, adding that the company has also introduced parlay-style markets tied to NFL games.

Duffy noted that self-certification “is not approval,” adding, “and a lot of the people participating in the products do not understand that.”

Polymarket, which does not yet serve US customers, acquired CFTC-registered designated contract market QCEX in July, a move that gives it a pathway to operate domestically. The company is expected to launch a separate US-compliant exchange, but no start date has been announced.

Meanwhile, Coplan said adjusting its blockchain-based system to meet CFTC requirements has been difficult. “Once you build something on a blockchain, it’s very hard to map that to the existing regulatory matrix,” he said.

Partnerships and regulatory outlook

Last month, CME Group entered a partnership with FanDuel to form a joint venture offering event contracts tied to economic and financial indicators such as interest rates and GDP, though not sports contracts.

During opening remarks, SEC Chair Paul Atkins said the roundtable’s focus was on harmonization, not a merger of the two agencies. “What matters is building a framework where our agencies coordinate seamlessly, reduce duplicative regulation and give markets the clarity they deserve,” Atkins said.

While industry participants discussed regulatory collaboration, the session concluded without providing direction on how US regulators plan to handle sports event contracts, leaving the future of the product unsettled.