Federal regulators are moving toward a more formal and assertive framework for overseeing prediction markets, with the Commodity Futures Trading Commission (CFTC) positioning itself as the central rulemaking and enforcement authority, according to a new analysis by Pryor Cashman.
The analysis, published in the New York Law Journal, depicts a rapidly expanding market that regulators increasingly view not as a niche innovation but as a form of derivatives trading subject to familiar legal and compliance risks. As trading volumes surge into the tens of billions of dollars, federal agencies are converging on a regulatory approach that combines formal rulemaking, jurisdictional consolidation and heightened enforcement.
At the center of that effort is the CFTC, which has long treated prediction market “event contracts” as swaps under the Commodity Exchange Act. Pryor Cashman notes that forthcoming regulation will focus on codifying that approach through new rules tailored specifically to event contracts. CFTC Chairman Michael Selig has already directed agency staff to draft a dedicated rulemaking that will “establish[] clear standards for event contracts that provide certainty to market participants.”
This rulemaking is expected to replace a more restrictive posture adopted under the Biden administration. Selig has ordered the withdrawal of prior proposals that would have banned certain categories of contracts, including those tied to political and sports outcomes. In their place, the agency is expected to adopt a principles-based framework that permits such markets while imposing clearer compliance obligations.
A key component of the anticipated framework is interagency coordination. Selig has instructed CFTC staff to work with the Securities and Exchange Commission on a joint interpretation of statutory definitions that delineate the boundary between CFTC-regulated swaps and SEC-regulated security-based instruments. The goal is to “draw clearer lines” across overlapping jurisdictions and reduce regulatory uncertainty that has historically complicated the sector.
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At the same time, the CFTC is asserting exclusive jurisdiction over prediction markets as commodity derivatives platforms, a position that is likely to shape both litigation and regulatory policy. Selig emphasized that “the Commission has the expertise and responsibility to defend its exclusive jurisdiction over commodity derivatives,” signaling a more aggressive stance in disputes with state regulators and other authorities.
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Enforcement is expected to be another central pillar of the emerging regime, per Pryor Cashman. While the CFTC continues to rely in part on exchanges’ self-regulatory responsibilities, recent agency guidance underscores that operators must maintain robust surveillance systems, enforce trading rules and prevent misconduct such as manipulation and insider trading.
The agency has made clear that it will not defer entirely to platform-level enforcement. It “has full authority to police illegal trading practices occurring on any” designated contract market (DCM) and will “investigate and prosecute violations” where appropriate.
Recent examples cited in the analysis highlight the types of conduct regulators are targeting, including trading based on control over an event’s outcome and the misuse of material nonpublic information. These cases mirror traditional securities enforcement theories, suggesting that prediction markets will be subject to analogous anti-fraud standards.
Federal prosecutors are also signaling their intent to pursue cases in this space. Jay Clayton, U.S. Attorney for the Southern District of New York, stated that placing trades on a prediction platform “doesn’t insulate you from fraud [charges],” and indicated that criminal prosecutions are likely to follow.
Lawmakers are also beginning to engage, according to Pryor Cashman. Proposed legislation would restrict trading by government officials with access to sensitive information, reflecting concerns about insider trading risks in markets tied to political or policy outcomes.
Taken together, Pryor Cashman concludes that the coming regulatory framework will not only formalize the CFTC’s authority but also embed prediction markets within the broader architecture of U.S. financial regulation. Through coordinated rulemaking, jurisdictional litigation and stepped-up enforcement, federal agencies are poised to define both how these markets operate and the limits of permissible trading activity.
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