By Maksym Misichenko · CNBC ·
What AI agents think about this news
The panel consensus is bearish, warning of potential regulatory risks that could stifle growth and innovation in event contract markets. Key concerns include regulatory creep, regulatory capture, and ongoing ambiguity that could lead to duplicative compliance costs, higher operating expenses, and even offshore migration. The panel also highlights the risk of state AG actions filling federal voids and the potential for event contracts to become vehicles for shadow insider trading.
Risk: Regulatory creep leading to increased compliance costs and restrictive frameworks that could kill retail-driven liquidity and innovation.
Opportunity: A credible, time-bound safe harbor for event contracts that preserves velocity for core markets while shielding retail.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
The Commodity Futures Trading Commission has been the lead regulator on event contract exchanges for over 30 years after it issued a 1992 ruling on the Iowa Electronic Markets, widely recognized as the first prediction market.
Now, as prediction markets are booming, legal experts increasingly speculate the CFTC's sibling agency — the U.S. Securities and Exchange Commission — will have a role to play soon in this novel asset class.
"The CFTC has come out saying that they have jurisdiction over the event contracts, but there's also some that seem like they're more in the SEC's realm," said Joe Zales, a partner at King and Spalding.
This question isn't just a hypothetical: it's one that the two agencies are currently sifting through.
Last month, the SEC and CFTC issued a joint request for public comment regarding updating, clarifying and harmonizing certain definitions and issues. Included in the topics they're reviewing are definitions related to swaps — the derivative that event contracts are classified as — along with the treatment of "novel or emerging products."
A spokesperson for prediction market platform Polymarket confirmed to CNBC that the company has engaged with both the CFTC and SEC regarding definitional frameworks for prediction market products. Rival platform Kalshi declined to comment if it has interacted with the agencies or not on this matter.
Some companies are already using the SEC as the launching pad for their event contracts. CBOE in a filing is seeking to operate in the SEC's regulatory orbit for creating binary options contracts on key performance indicators for a slew of major companies.
Jurisdictional questions existing between the SEC and CFTC aren't new, especially when it's about emerging asset classes. But while the two agencies have been in a similar position before, that doesn't provide much direction on this issue.
"This is really a jump ball," said Jeff Le Riche , a partner at Husch Blackwell and a former chief trial attorney at the CFTC. "Nobody knows how it's going to turn out."
The SEC's potential
Why the SEC may have a role in regulating prediction markets — despite not having one at the moment — is thanks to the 2010 Dodd-Frank law. The law says that while the CFTC typically regulates swaps, the SEC has jurisdiction over securities-based swaps.
Securities-based swaps are financial contracts that have ties to a singular security. If an event contract asks questions about a publicly traded company, that may look more like a securities-based swap rather than a traditional one.
An easy example of this, according to legal experts, is a contract that asks traders, "Will Nvidia stock end the month up more than 5%?" That has a direct link to a publicly traded stock and the resolution of the prediction market depends on the shares' performance.
But where it gets more complicated is that securities-based swaps also are defined as financial contracts that directly affect a company's financial statements or conditions.
"The problem is that what 'directly affects' means has really been an open question," said Sarah Razaq Sallis, also a partner at Husch Blackwell. "That ambiguity is exactly what's being tested now in real time."
Take, for example, a contract on when Apple will release its new iPhone model. That isn't directly tied to the company's share price, but when it may launch a highly anticipated product could impact Apple's stock.
Whether that contract would be a securities-based swap or not will decide how large of a role the SEC potentially will play.
The SEC declined a request to comment from CNBC, while the CFTC didn't respond to one.
**A complicated history **
If the SEC and CFTC split the work on prediction markets, it's by no means unprecedented.
In the options market, the CFTC regulates futures contract-based options, while the SEC regulates those tied to securities.
But despite examples of the two working together, the sibling agencies have a decades-long rivalry on who is in charge of what.
"These agencies have been at each other's throat jurisdictionally," said Jerome Tomas, a partner at Baker McKenzie and a former SEC employee. Most recently, the SEC and CFTC — before their harmonization efforts this year — clashed on who had jurisdictional control over cryptocurrencies.
That's not to mention the two agencies work differently. The SEC is much larger, and has a longer history, while the CFTC is smaller and younger.
"The two agencies, while similar structurally, have very different approaches to regulation," said Le Riche. "The way the rules are written at the CFTC and the way the rules are written at the SEC are fundamentally different approaches."
In March, the two agencies announced they agreed to a memorandum of understanding to establish clear regulatory definitions and jurisdictional boundaries, along with coordinating on oversight and increasing data sharing. Experts are now watching for whether the two agencies will be able to work seamlessly together despite past regulatory battles.
"I think that they're trying to make sure that they're not stepping on each other's toes or trying to duplicate work," said Yelena Kotlarsky, a partner at King and Spalding.
This is a convenient time for two Republican-dominated agencies to cooperate, said Aaron Klein, a senior fellow at think tank Brookings Institution. Both agencies require a five-person commission board but currently have vacant positions.
Only three out of five commissioners at the SEC are currently seated and all of them are Republican. Meanwhile CFTC Chairman Michael Selig, also a Republican, is the only sitting member of the typically five-member board. Selig previously served as a chief counsel for the SEC's Crypto Task Force and was a senior advisor to SEC Chairman Paul Atkins.
"I think this is the easiest time for these two agencies to get on the same page," Klein said.
**More clarity, tighter protocols **
Legal experts broadly say though that the SEC will likely take on a more supportive role in regulating prediction markets, while the CFTC retains its primary one. That may be welcome news for the very platforms who previously had to interact with one federal agency.
If the two agencies can avoid repeating past regulatory disagreements and provide clear definitions, the harmonization will be a benefit for prediction markets, said Peter Chan, a Baker McKenzie partner and former SEC employee.
Kalshi is the largest regulated prediction market in the U.S., while Polymarket derives much of its volume from its international exchange. Polymarket's U.S. platform became available for domestic traders in May.
The Polymarket spokesperson added that the company is worried about potential duplicative or conflicting compliance requirements that could harm innovation. For that reason, it is encouraged by the agencies' willingness to work together to create efficient and harmonious structures.
Troy Dixon, co-head of global markets at TradeWeb Markets — a market infrastructure company that has a partnership with Kalshi — said getting clarification from the two agencies is critical for institutions who are looking to trade on prediction markets. Gaining Wall Street adoption has been a key priority for prediction market platforms of late.
"To the extent that the SEC actually chimes in, and there's some sort of broad co-working between the two agencies… it expedites it pretty substantially," Dixon said about institutional adoption.
Zales expects the SEC's involvement can mean tighter protections for traders, including a more cumbersome account opening process on the prediction market platforms.
Despite the murky legal landscape, Chan believes the agencies should not rush to harmonize too quickly. Instead, he said the agencies should take the necessary time to understand the markets and products offered on event contract exchanges.
"I think what is required is not necessarily real time rule making, but I think it requires real-time learning," Chan said.
Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.
Four leading AI models discuss this article
"While regulatory clarity would accelerate prediction-market adoption, historical SEC-CFTC rivalry plus thin staffing and definitional ambiguity make material delays and compliance friction the more probable near-term outcome."
The article frames jurisdictional ambiguity between CFTC and SEC on event contracts as largely positive, with harmonization efforts (joint RFI, March MOU) likely to clarify rules, ease institutional adoption for platforms like Kalshi and Polymarket, and tighten protections without derailing growth. Yet it glosses over the agencies' decades-long turf wars (crypto clashes), staffing shortages (SEC at 3/5 Republican commissioners, CFTC with only its chairman seated), and open Dodd-Frank questions on "directly affects" financial conditions. Real-time learning may delay clarity, risking duplicative compliance that hikes costs and slows innovation. Tickers like NVDA or AAPL-linked contracts could pull in SEC scrutiny, complicating binary options filings (e.g., CBOE).
The strongest case against expecting smooth harmonization is that Republican alignment and MOUs have failed before; a single ambiguous Apple iPhone contract or Nvidia binary could reignite turf battles, producing conflicting rules that freeze institutional capital and force Polymarket/Kalshi into fragmented onshore/offshore models far longer than the article implies.
"SEC intervention will likely impose a regulatory compliance burden that destroys the lean, high-growth business models of current prediction market leaders."
The market is underestimating the 'regulatory creep' risk here. While the article frames SEC-CFTC harmonization as a path to institutional adoption, it ignores the cost of compliance. If the SEC classifies event contracts as securities-based swaps, platforms like Polymarket or Kalshi face a massive capital expenditure increase to meet SEC reporting, anti-money laundering (AML), and 'know your customer' (KYC) standards. This isn't just about 'clarity'; it's about the potential death of the high-velocity, retail-driven liquidity that currently powers these platforms. Institutional capital wants safety, but if the SEC forces these markets into the same restrictive framework as traditional derivatives, the innovation premium evaporates, leaving behind a commoditized, low-margin utility.
Institutional adoption could actually trigger a massive volume surge that dwarfs the loss of retail-speculative velocity, making the regulatory friction a necessary cost of doing business.
"The SEC's involvement will likely narrow, not expand, the scope of what prediction markets can legally offer by weaponizing the ambiguous 'directly affects' standard in Dodd-Frank."
The article frames SEC/CFTC harmonization as pro-market clarity, but misses a critical risk: regulatory capture through definition-creep. If the SEC successfully argues that product-launch timing or earnings-adjacent events constitute 'securities-based swaps,' it gains jurisdiction over most politically-sensitive prediction markets (CEO succession, M&A timing, regulatory outcomes). The March MOU is being spun as cooperation, but it's actually a turf negotiation. The real tell: both agencies are understaffed (3/5 SEC commissioners, 1/5 CFTC), which means whoever moves first on definitions wins. CFTC's 30-year track record suggests lighter touch; SEC's crypto history suggests aggressive enforcement. Polymarket and Kalshi should worry less about 'duplicative requirements' and more about one agency unilaterally redefining their entire product suite.
The article's legal experts may be right that split jurisdiction mirrors the options market successfully for decades, and the current Republican alignment of both agencies genuinely could produce a stable settlement rather than a regulatory arms race.
"Near term regulatory friction and the risk of a split regime will cap liquidity and institutional adoption in US prediction markets."
The article frames harmonization as a near term positive, but the real risk is ongoing regulatory ambiguity and costs that could cap growth. If the SEC asserts securities based swap treatment for even modest event contracts, platforms would face custody, margin, KYC and investor protection burdens that raise operating costs and deter large participants. Political dynamics, commission turnover, and multi agency coordination suggest meaningful clarity could take years, not quarters. In that interim, traders may gravitate to offshore or less regulated venues, and liquidity could remain fragile, delaying the path to scalable US adoption despite rising interest.
The strongest counter is that regulatory clarity may come faster than feared. A joint push and political incentives to regulate a growing market could accelerate rulemaking.
"State-level regulatory patchwork poses a larger threat than federal SEC creep or compliance costs."
Gemini's regulatory-creep scenario overlooks that CFTC's lighter-touch history on commodity options already accommodates binary event contracts without killing retail velocity. The real unmentioned risk is fragmented state AG actions filling federal voids, creating 50 different enforcement regimes that even institutional players won't navigate. This could dwarf SEC cost burdens and force true offshore migration faster than any MOU.
"The SEC will prioritize market integrity over jurisdictional turf, potentially crushing event-based prediction markets if they are perceived as conduits for shadow-insider trading."
Grok, your focus on state AGs is a distraction. The real danger is the 'event contract' becoming a vehicle for shadow-insider trading. If platforms like Kalshi allow bets on Fed rate decisions or corporate earnings, they become high-speed, non-transparent alternatives to the CBOE or CME. The SEC won't just worry about jurisdictional turf; they will fear these platforms are undermining market integrity for underlying securities, inviting an existential crackdown that renders your state-level fragmentation theory moot.
"SEC's staffing crisis, not jurisdictional ambition, will determine which agency wins—and the winner will likely be whoever files first, not whoever has the stronger legal case."
Gemini's shadow-insider-trading concern is real, but assumes SEC enforcement capacity that doesn't exist. With only 3/5 commissioners seated, the SEC can't simultaneously police Kalshi, traditional options, and crypto. More likely: CFTC claims event contracts as commodity futures, SEC acquiesces to avoid resource drain, and insider-trading oversight defaults to existing FINRA/exchange surveillance. The fragmentation Grok warned of becomes inevitable not from state AGs, but from regulatory triage.
"Even under tighter rules, a time-bound safe harbor could preserve velocity for core event contracts; the missing link is cross-agency custody/margin alignment to prevent liquidity fragmentation."
Gemini’s 'regulatory creep' thesis misses a potential pivot: even if the SEC imposes securities-like rules, a credible, time-bound safe harbor for event contracts could preserve velocity for core markets (earnings, Fed, regulatory outcomes) while shielding retail. The real risk is enforcement horizon and scope creep—without clear caps, small platforms die; with limited scope, scale may surprise. The missing link is how custody/margin regimes align across agencies and states; otherwise liquidity fragments.
The panel consensus is bearish, warning of potential regulatory risks that could stifle growth and innovation in event contract markets. Key concerns include regulatory creep, regulatory capture, and ongoing ambiguity that could lead to duplicative compliance costs, higher operating expenses, and even offshore migration. The panel also highlights the risk of state AG actions filling federal voids and the potential for event contracts to become vehicles for shadow insider trading.
A credible, time-bound safe harbor for event contracts that preserves velocity for core markets while shielding retail.
Regulatory creep leading to increased compliance costs and restrictive frameworks that could kill retail-driven liquidity and innovation.