New CFTC Chairman Michael Selig on How to Regulate Prediction Markets

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• The CFTC regulates prediction markets because the definition of a "commodity" under the Commodity Exchange Act is extraordinarily broad, encompassing virtually everything except for expressly carved-out items like onions and motion picture box office receipts.  Copied to clipboard!
• The CFTC operates on a principles-based system of regulation, relying on exchanges to self-certify their rulebooks, which leads to differences in contract resolution, such as the split between Kalshi and Polymarket over whether Cardi B performed at the Super Bowl.  Copied to clipboard!
• CFTC Chairman Michael Selig emphasizes coordination, not consolidation, with the SEC, aiming to harmonize regulatory regimes and address gaps, particularly concerning the collision of traditional finance and digital assets like tokenized equities and on-chain trading.  Copied to clipboard!

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Super Bowl Prediction Market Disputes

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(00:01:36)

• Key Takeaway: Kalshi and Polymarket disagreed on whether Cardi B’s presence constituted a performance for betting settlement purposes.
• Summary: Prediction markets are increasingly integrated into pop culture consumption, evidenced by exotic bets placed during the Super Bowl. The resolution of the Cardi B performance bet highlighted differing interpretations of contract terms between platforms like Polymarket and Kalshi. The hosts noted a significant regulatory liberalization trend for these markets over the past few years.

CFTC’s Regulatory Philosophy

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(00:05:44)

• Key Takeaway: The CFTC regulates markets based on principles, not dictating what products can be traded, focusing instead on market integrity and investor protection.
• Summary: Chairman Selig views the CFTC as being at a pivotal moment due to innovation in crypto and prediction markets, expanding its historical role beyond traditional futures. Exchanges self-certify their rulebooks, which are approved by the agency, allowing for flexibility within established guardrails. The definition of a commodity is extremely broad, covering almost everything except for specific carve-outs like onions.

Insider Trading in Prediction Markets

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(00:09:32)

• Key Takeaway: The CFTC has anti-fraud and anti-manipulation authority that covers insider trading in commodities markets, including informational asymmetries in prediction markets.
• Summary: The CFTC actively polices informational asymmetries, such as individuals with inside knowledge trading ahead of customers or market events. The agency surveys market participants and collects data, including information on those associated with sports leagues. While the doctrine is similar to the SEC’s, nuances exist when dealing with informational asymmetries related to non-security events.

Commodity vs. Gambling Distinction

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(00:13:06)

• Key Takeaway: The CFTC distinguishes its regulated derivatives from pure games of chance by looking for a ‘real underlying’ economic risk that needs hedging, unlike roulette.
• Summary: Contracts based on games of skill, like Super Bowl outcomes tied to significant economic activity (tourism, vendors), are more likely to be considered valid derivatives than pure games of chance. The historical context shows the CFTC evolved to regulate organized derivative exchanges over off-exchange ‘bucket shops’ that bet against the house. CFTC-regulated contracts require clearinghouses, allow position offsetting, and reflect actual market activity, unlike traditional bookmaking.

CFTC Staffing and Resources

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(00:21:48)

• Key Takeaway: Despite reports of staff departures, the CFTC is actively staffing up, leveraging technology like AI to police growing markets efficiently.
• Summary: Chairman Selig refuted claims of inadequate enforcement staffing, noting that while the Chicago office needs personnel, the agency has critical mass in D.C. and New York and is actively hiring the ‘best and the brightest.’ The agency is processing exchange applications quickly, setting records for approval times. Technology, including AI, is being utilized to enhance market surveillance capabilities.

CFTC vs. SEC Jurisdiction

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(00:24:15)

• Key Takeaway: The CFTC and SEC have fundamentally different mandates: the SEC regulates capital formation, while the CFTC regulates risk mitigation and management for businesses hedging operational risks.
• Summary: Consolidation of the agencies is not favored because their purposes diverge significantly, stemming from different historical origins (SEC post-Great Depression, CFTC post-1970s expansion). Coordination, formalized through a Memorandum of Understanding, is prioritized to harmonize rules and prevent regulatory gaps, especially concerning dual registrants and tokenization of public equities. The agencies must work together on joint rulemaking for areas like decentralized finance.

Advertising and Regulatory Arbitrage

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(00:29:02)

• Key Takeaway: No-action letters granted to prediction markets bypassed traditional FCM intermediary rules, creating inconsistent marketing standards compared to regulated futures brokers.
• Summary: The CFTC is considering how to create consistent standards across market models, particularly where direct-to-clearinghouse structures lack the rules applied to Futures Commission Merchants (FCMs). The agency prefers establishing clear rules through notice-and-comment rulemaking rather than relying on patchwork no-action letters. Stakeholders will be consulted on appropriate marketing standards for these growing markets.

Crypto Regulation and Perpetual Futures

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(00:37:51)

• Key Takeaway: The industry is hopeful for the passage of the Clarity Act to establish a future-proof framework for crypto regulation in the U.S., preventing leadership loss to foreign jurisdictions.
• Summary: Chairman Selig expressed optimism that the Clarity Act is close to completion, emphasizing the need for statutory clarity over regulation by enforcement, especially following recent case law. Perpetual futures, popular in crypto, could potentially be considered for traditional commodities if demand exists, provided manipulation risks are assessed. The CFTC aims to set best-in-class standards to ensure innovation remains within U.S. markets.

Lines in Prediction Market Offerings

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(00:41:07)

• Key Takeaway: The CFTC will exercise its authority to prohibit contracts deemed highly susceptible to manipulation or those involving violent outcomes like assassinations.
• Summary: While the CFTC is not a merit regulator deciding what people should bet on, it has statutory authority to reject contracts that pose manipulation risks, such as those potentially eliciting dangerous behavior (like throwing objects). The agency differentiates its derivatives markets from state-regulated gambling based on structure, including the requirement for clearinghouses and position offsetting. The age of participation (18+) in financial markets is viewed as a societal/Congressional decision, not a regulator’s paternalistic role.