A controversial new form of financial activity is on the rise, and a federal regulatory agency is aggressively asserting its oversight role. That sounds good, except for the fact that the head of the agency is a strong booster of the activity and seems mainly concerned with undercutting more aggressive state-level regulation.
Prediction markets run by companies such as Kalshi and Polymarket have exploded in popularity among people looking to bet not only on sports but just about anything else under the sun. Unfortunately, that includes things such as military actions, and there is growing evidence suggesting that government employees are among those placing the wagers and are collecting substantial winnings through illicit means.
Recently, a U.S. Army Master Sargeant was charged with using classified information to place successful bets on Polymarket about the timing of the U.S. military operation to capture Nicolas Maduro in Venezuela. We are likely to see more cases targeting this new form of insider trading.
The Justice Department is responsible for bringing federal criminal cases, but it is unclear which agency has responsibility to regulate the prediction services. The Commodity Futures Trading Commission is claiming that power for itself.
Congress created the CFTC in 1974 for the purpose of regulating futures contracts, which had long been used to trade agricultural commodities and later spread to a variety of financial instruments known as derivatives, which include options and swaps whose value derives from an underlying asset. The CFTC’s current mission statement says its role is “to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.”
Prediction bets have no connection to commodities of any kind and thus do not seem to qualify as derivatives. That has not stopped the CFTC, which for the past five months has been run by Michael Selig, who was nominated by Trump after working at a corporate law firm representing cryptocurrency industry clients.
Under Selig, the CFTC has sought to muscle out state governments, some of which have taken the sensible position that prediction markets are really a form of gambling and thus should be overseen by state agencies that regulate casinos, horse racing, and lotteries. Selig is fighting against what the CFTC calls “state encroachment” by filing lawsuits against Arizona, Connecticut, Illinois, Minnesota, New York, and Wisconsin. The agency recently submitted an amicus brief supporting Kalshi in a dispute with regulators in Ohio.
These disputes over jurisdiction are more than a turf war. The CFTC seems to want to assert its authority so that it can exert a mild form of regulation on the prediction markets. In fact, the agency is putting more emphasis on leniency across its activities.
The CFTC has just issued an advisory document indicating it plans to depend more on voluntary self-reporting of misconduct, which suggests that investigations will take a back seat. It is difficult to believe that aggressive new companies such as Kalshi and Polymarket are going to be quick to report wrongdoing.
When parties do self-report, the CFTC is offering generous rewards, including big reductions in fines and the possibility of a declination, an arrangement in which the agency does not file charges against the cooperating company.
It appears that the CFTC has already been scaling back enforcement. Since Selig took office, the agency has announced only a handful of penalty actions, and those cases appear to have been initiated before he arrived—and before the second Trump Administration began.
We are only beginning to recognize the perils posed by the new prediction services. Letting a regulatory agency that is not interested in robust enforcement is not the way to guard against those dangers.
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