Author: Marc Hochstein, Vice President and Editor-in-Chief of Galaxy Research; Compiler: @金财经xz

The U.S. Commodity Futures Trading Commission (CFTC) proposed new regulatory requirements for prediction markets on Wednesday, a move that is expected to significantly reduce compliance uncertainty for platforms seeking to list new event contract platforms.

The 267-page document clarifies the definitions of "involving" and "gambling" - two seemingly straightforward terms whose meaning under federal commodities law was hotly contested during the previous administration's legal battle with prediction market giant Kalshi. The document lists a non-exhaustive list of contract types that are exempt from the CFTC’s public interest review (including economic indicators, foreign exchange rates, election results, legislative and appointment results, and award competitions), and such contracts will be easier to market. The proposals would also replace the existing, yet imperfect, public interest review approach with a structured, multi-factor framework – asking, for example, whether a contract provides meaningful hedging or price discovery utility and whether there are unusual risks of market manipulation or insider exploitation. The document also clarifies which sports-related contracts are unlikely to be judged contrary to the public interest.

The proposal will open a 45-day public comment period after it is published in the Federal Register.

Our point of view:

First, let’s talk about the macro background. The proposal comes as prediction markets have evolved from the preserve of academic circles into a growth industry and political ball. In its proposal, the committee noted that more than 8,000 event contracts were traded last month, compared with just 220 for all of 2021 (and that data almost certainly does not include Polymarket’s main offshore exchange data).

Meanwhile, the booming business is under fire from state gaming regulators, who claim the platform is operating illegally in their jurisdictions, and regulators and law enforcement are scrutinizing it for alleged insider trading. Prediction markets have gone the way of cryptocurrencies, becoming a frequent target of Sen. Elizabeth Warren, D-Mass., and other progressive critics, while also drawing opposition from some conservatives, state regulators and gambling interests.

However, the proposal comes just 40 days after the end of the comment period for the CFTC’s Advance Notice of Proposed Rulemaking (ANPR) for prediction markets. By Washington standards, the turnaround was unusually fast.

We are not lawyers, and we dare not claim to have read the entire proposal (the full text is 79,139 words, almost as long as "Paradise Lost"). But our overall impression is that this signals a significantly more open approach by the CFTC to prediction markets. We wouldn’t be surprised to see states challenge this proposed rule in court to protect their turf. Then again, we’re neutral on sports betting itself.

One thing seems clear: The CFTC, led by 36-year-old Chairman Michael Selig, is moving quickly to set clear rules of the road for prediction markets.