CFTC Fighting a Battle on Two Fronts to Save Prediction Markets From Themselves
The CFTC has been filing emergency orders to keep prediction markets alive in states trying to shut them down. Now, the CFTC may need to protect prediction market platforms from its own actions.
The CFTC has been in hyperdrive, suing state attorneys general and arguing in federal courts that it alone has jurisdiction over federally licensed exchanges.
In the last two weeks, it has also told those same exchanges to stop using American-style betting odds and to stop filing sloppy, template-style compliance paperwork.
The agency is simultaneously the prediction markets’ most powerful protector and, increasingly, its most frustrated supervisor. Both roles are becoming harder to play at once as what seems like an unavoidable clash in the Supreme Court looms.
The CFTC is Addressing Multiple Issues
The CFTC’s Division of Market Oversight published an advisory on August 12 flagging deficiencies in an increasing number of self-certification filings for market-maker, liquidity, trading, and incentive programs. The problem is straightforward: prediction market exchanges have been submitting incomplete, boilerplate paperwork. The CFTC cannot evaluate whether the programs comply with its core principles when the filings do not explain what the programs actually do.
Volume-based trading incentives may encourage wash trading and pre-arranged transactions. Market-maker programs that offer stipends, rebates, or loss guarantees may incentivize improper trading behavior. Simply put, the filings submitted to the CFTC do not address these risks. They are copying and pasting, and the CFTC is finally calling it out.
One detail stands out as significantly more impactful. The advisory specifically flags the use of “risk-free” language in incentive program marketing. That phrase has a particular resonance. Several states have explicitly banned sportsbooks from advertising risk-free bets on consumer protection grounds. The CFTC, the agency arguing in federal court that prediction markets are financial exchanges categorically different from sportsbooks, is now telling those exchanges to drop the same promotional language that sportsbook regulators already prohibited.
The CFTC is Guiding PMs to Not Resemble Sportsbooks
Last week, the CFTC told prediction markets to stop displaying prices in American betting odds format. This week, it told them to stop running incentive programs that resemble sportsbook promotions. Taken together, the two advisories describe a regulator looking at its wards and realizing they have been dressing up exactly like the thing the regulator keeps insisting they are not.
The CFTC’s core argument in every state lawsuit and every federal circuit is that prediction markets are financial derivatives exchanges operating under a framework designed for institutional commodity trading. That argument is harder to make when those exchanges display NFL contracts at +150 and advertise risk-free trades to retail customers.
State attorneys general have been making exactly this observation in their court filings. The Washington order, the New York petition, the Utah summary judgment- all of them rest partly on the argument that Kalshi and its peers function as sportsbooks regardless of their federal classification. Every piece of marketing material that looks like a sportsbook ad supports that argument. The CFTC’s advisories try to take that evidence off the table before it matters more than it already does.
The CFTC’s Free-For-All Culture is to Blame
The self-certification problem reflects how quickly prediction markets scaled under a permissive regulatory regime. When the CFTC approves products overnight, exchanges can self-certify new contracts without waiting for agency review, and the platform count grows faster than the regulator can track; corners get cut. Template-style filings happen when compliance teams cannot keep up with product velocity.
The CFTC enabled that velocity deliberately. Selig’s overnight Bitcoin perp approval, the hands-off approach to contract listings, and the aggressive expansion of product types created the conditions under which exchanges are now filing paperwork the CFTC says impedes its ability to evaluate compliance. The agency that cleared the runway is now asking why the planes are flying so fast.
That is not a comfortable position to be in when nine states are arguing in federal courts that the CFTC failed to regulate the industry it licensed. The advisories are a visible attempt to demonstrate that the agency is doing real oversight. Whether courts find them convincing depends on how quickly the exchanges clean up their filings and how much the Washington and New York proceedings develop before any circuit or Supreme Court ruling lands.
Prediction markets are running ahead of the rules, but the CFTC wrote them. Both things are true, and the agency is now dealing with both problems at once.
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