SEC delay on prediction markets ETFs echoes a long-fought bitcoin fund battle

Prediction markets ETFs may soon be coming to retail investors and even into retirement plans, but maybe just not as fast as anticipated.

The Securities and Exchange Commission during the second Trump administration has sought to distinguish itself from Biden era regulators with what it calls a move away from the "regulatory creep" that it says has held back markets and innovation. But it caught some in the financial industry off guard on Tuesday when it delayed the launch of 24 prediction markets ETFs, saying it needed more time to study the products before they were released to investors.

Roundhill Investments, Bitwise, and GraniteShares had all filed with the SEC in February to launch funds tied to prediction markets covering elections, economic data, and other real-world events. Under SEC rules, ETFs are automatically effective 75 days after filing unless otherwise halted by the SEC. That 75-day window was due to expire last week. The SEC's intervention should not be surprising, according to ETF experts, even if the SEC under the Trump administration is focused on steps to ease market access, as well as less aggressive oversight of novel financial products, such as in the crypto space.

Prediction markets ETFs do represent a new kind of regulatory challenge. Unlike traditional ETFs, these investments are tied to event contracts and essentially place bets on real-world events. Some of the most notable, but also controversial, contracts on predictions markets like Kalshi are the ones related to politics, such as election results, a focus for the ETFs.

The prediction markets ETF delay does evoke memories of the years it took for spot bitcoin ETFs to be approved by the SEC. But ETF experts say the delay is most likely to be temporary as the agency looks for more information from the issuers about how the funds will work. "With any kind of novel exposure in the ETF, there will always be some last minute hiccups," said Todd Sohn, chief ETF strategist as Strategas Securities. "You could replace any new type of asset class and ETF. It's usually the case where things get pushed back a bit," he said.

"We recognize that innovative ETF products often require additional review, particularly around liquidity, market structure, and investor protections. Our priority is making sure investors are comfortable with how these products work and understand the role they can play within a regulated ETF structure," said GraniteShares CEO Will Rhind in a statement to CNBC.

There is reason for regulators to take it slow. A novel private credit ETF that State Street launched last year ran into multiple SEC hurdles post-launch which ETF experts say should have been part of the pre-approval review process.

But the most obvious comparison is spot bitcoin ETFs, which faced years of SEC resistance before finally gaining approval in January 2024. Regulators spent months wrestling with concerns about market manipulation and whether the underlying crypto markets were mature enough to take on a regulated investment product. Before approving spot bitcoin ETFs, the SEC repeatedly rejected multiple applications, arguing that issuers had failed to demonstrate how they would prevent fraud or crypto manipulation.

"Investor protection and focusing on market manipulation ... is very important to me and obviously to the SEC. That is in our DNA," SEC Chairman Paul Atkins recently said on CNBC's "Squawk Box."

Questions about insider trading in prediction markets have intensified recently.

The Commodity Futures Trading Commission has primary oversight for prediction markets, but Atkins said in testimony before the U.S. Senate in February that the SEC needs to play an active role regulating this new area of financial activity. "Prediction markets are exactly one thing where there's overlapping jurisdiction potentially," Atkins said. "That is a huge issue we're focused on. ... It's mostly, at least currently, on the CFTC side. But we need to be harmonized in the way we're addressing these markets."

"Are prediction markets being manipulated? Is there any sort of inside information going on within those markets?" Sohn said. "The ETF wrapper is proven. It works, it is convenient, it's transparent. It is more about the markets that they're going to be tracking," he added.

The eventual approval of spot bitcoin ETFs required legal fights and political pressure. Grayscale successfully challenged the agency in federal court back in 2023 after judges said the SEC failed to explain why it treated spot bitcoin futures differently than bitcoin futures ETFs. Kalshi sued the federal government in a precedent-setting case in which it won the right to launch contracts on the 2024 presidential election.

According to Anthony Capozzolo, attorney at Lewis Baach Kaufmann Middlemiss who specializes in white-collar law and regulatory matters, a unique factor in this case is Trump family ties to prediction markets operators. Donald Trump Jr. is an adviser to both Kalshi and Polymarket, and he is affiliated with a firm that has an investment stake in the latter. "At the very least, they want to better understand what the impact of these ETFs may [be] on retail customers," Capozzolo wrote in an email to CNBC.

Sohn believes that despite the delay, the broader regulatory approach within the Trump administration leads him to the conclusion that the agency's pause does not reveal deeper opposition to the fundamental concept of predictions markets ETFs. "I think all systems go, until I see otherwise on the SEC website," Sohn said. But he added there are fair questions to be asked about primary prediction markets exchanges like Kalshi that are relatively young and do not have a long history of liquidity tests or market depth. "While it is growing, I don't know how deep of a market it is yet," he said.

This week, Kalshi announced it had raised another $1 billion from investors at a $22 billion valuation, doubling its valuation from just six months ago. It attributed the investor optimism specifically to the growth of its institutional trading business. The company said in a release that over the past six months, institutional trading volume increased 800%, representing annualized trading volume that had grown from $52 billion to $178 billion.

Nate Geraci, an ETF expert and president of NovaDius Wealth Management, wrote in an email that the delay reflects reasonable caution rather than hostility, and it draws a direct line to how the SEC handled spot bitcoin ETFs.

"ETFs have a long history of pushing boundaries to open up access to new investments and asset classes," Geraci wrote. "Given the novelty of prediction market ETFs, the SEC clearly wants to ensure that risks are properly disclosed to investors and that these products function as intended."

Geraci pointed to unique structural issues including what happens when there is a dispute about whether an event contract should be settled. "This delay demonstrates that even with a more lenient SEC, it is not simply greenlighting every ETF filing that comes across its desk," he wrote.

The SEC is the ultimate arbiter of how long the delay will last and what conditions will be imposed before approval. From the outside looking in, it's difficult to know what will lead to resolution and the timing over which it will take place. "Unless you are the issuer having discussions with them, it is kind of hard to know what the stickups are," Sohn said.

*Disclosure:* *CNBC and Kalshi have a commercial relationship that includes customer acquisition and a CNBC minority investment.*

Sign up for our weekly newsletter that goes beyond the livestream, offering a closer look at the trends and figures shaping the ETF market.