A coalition of Democratic legislators has urged the Commodity Futures Trading Commission (CFTC) to implement regulations aimed at curbing insider trading and to limit event contracts that relate to elections, military operations, governmental actions, and sports.
In a communique spearheaded by Jeff Merkley of Oregon, these lawmakers requested that the agency act against what they referred to as “the swift decline of integrity” within prediction markets, including platforms such as Kalshi and Polymarket.
“We strongly advocate for you to exercise your authority to uphold the original purpose of prediction markets, along with the legislative goals embedded in the Commodity Exchange Act, by introducing a regulation that prevents insider trading and corruption, and prohibits event contracts concerning election outcomes, warfare, and military actions both domestically and internationally, sports, and governmental actions unless there exists a legitimate economic hedging interest,” they articulated.
The letter received additional support from Richard Blumenthal of Connecticut, Chris Van Hollen of Maryland, Sheldon Whitehouse of Rhode Island, and Rep. Jamie Raskin of Maryland.
Increased activity prompts regulatory scrutiny
Prediction markets have seen a rise in popularity over the past year, allowing users to bet on results that span politics, entertainment, and sports. This sector is facing increased scrutiny in light of several notable incidents.
Recently, authorities detained a US soldier who allegedly placed bets on Polymarket prior to military actions in Venezuela, leading to a $400,000 profit. Meanwhile, Kalshi suspended and penalized three political candidates for purportedly trading based on their own campaigns.
This year, lawmakers have put forward multiple bills aimed at addressing insider trading and limiting event contracts. Among them is a proposal by Merkley that would prohibit certain government officials from participating in prediction markets, while another seeks to ban contracts connected to elections, military actions, and sports.
Contracts linked to elections under fire
The lawmakers’ letter indicated that contracts related to election outcomes “threaten our democracy and electoral processes.”
“Such contracts were nonexistent in the United States prior to 2024, and there were valid reasons for that,” they noted. “Prediction contracts related to elections incentivize political insiders to undermine the will of American voters by manipulating their actions.”
Sports contracts dominate trading volumes
Contracts pertaining to sports represent a significant majority of trading on certain platforms. Reports from the Congressional Research Service indicate that sports accounted for nearly 90% of wagers on Kalshi as of February. On Polymarket, this category constituted 38% of all contracts.
This sector has faced opposition from state regulators and casino operators, who argue that such contracts fall within the realm of gambling regulation.
“Event contracts tied to the outcomes of sports events are a stark deviation from the intentions of the CFTC. They exemplify how these contracts can represent gambling and infringe upon the rights of states to regulate this activity,” the lawmakers stated.
Progress on federal rulemaking
The Commodity Futures Trading Commission initiated a public consultation process in March as part of its rulemaking efforts, with the comment period concluding this Thursday.
“The recent developments mark a significant step in the Commission’s ongoing commitment to foster responsible innovation in our derivatives markets,” said CFTC Chair Michael Selig in an announcement. “This signals the initiation of new rulemaking rooted in a logical and coherent interpretation of the Commodity Exchange Act, while assuring the public that the CFTC will oversee prediction markets.”
Tensions between federal and state oversight persist
This rulemaking effort arises amidst the CFTC’s ongoing opposition to several states attempting to regulate prediction markets. The agency has filed legal actions against states that issued orders to cease operations, asserting that regulatory authority lies at the federal level.
In April, a federal appellate court ruled that New Jersey regulators could not prevent the use of Kalshi for contracts tied to sports events.