US Prediction Market Regulation: Speed vs. Oversight

The US financial industry's rapid innovation in prediction markets is possible due to a unique regulatory framework. Under CFTC Rule 40.2, registered exchanges can list new event contracts by self-certifying that they comply with the Commodity Exchange Act, without waiting for Commission approval. This allows new markets to appear within days of a news event.

The Dodd-Frank Act added a Special Rule in 2010, allowing the CFTC to prohibit event contracts that involve certain activities or are contrary to the public interest. However, the statute never defined key terms such as 'involve', 'gaming', and 'public interest.'

For 15 years, these undefined terms led to unpredictable outcomes in cases like Kalshi's congressional-control contracts being barred by the Commission in 2023. The pending rulemaking aims to settle these ambiguities with a settlement-based test for when a contract 'involves' an enumerated activity and a structured three-step public-interest inquiry.