Michael Selig’s Commodity Futures Trading Commission (CFTC) laid out the roadmap for the regulation of prediction markets, as it vowed to ‘protect the integrity of our regulated markets without standing in the way of responsible innovation’.
An extensive document comes off the back of months of speculation and intense debate, aiming to establish a ‘durable, transparent framework to identify the contracts Congress directed us to scrutinise while letting legitimate markets move forward’.
The latest CFTC framework would allow sports contracts, but would look to halt the elements of sports contracts that could be vulnerable to manipulation.
This is specifically the case when it comes to single activities within the game, such as a specific pitch thrown by an MLB pitcher or the outcome of a specific shot taken by a specific player, citing public interest concerns due to their susceptibility to manipulation or the use of insider information.
Micro markets are challenged as the framework takes aim at the impact of their potential risk to hindering the integrity of sports, and running in contradiction to the motive of the regulated market.
It stated: “The risk that athletes’ in-game decisions would be influenced by such event contracts is contrary to the integrity of the game.”
However, some sports outcome markets will broadly be allowed under the new framework, with limitations.
Whilst shrinking their offering due to the limitations, avoiding an outright ban on sports contracts will be key to the progress of the prediction market sector.
There is seemingly no room for leniency when it comes to casino-style games, though, with the Commission underpinning that event contracts involving games whose outcome depends on random chance are likely to be contrary to the public interest.
The level of random chance would eliminate any signing off on prediction market contracts, ruling out the expansion of the sector into the casino game-style space.
It emphasised that when an outcome is dictated by luck, it can’t be predicted and would therefore not be in the public interest to offer as markets.
Whilst the framework leaves some room for the offering of political markets, it also scrutinises them as a contract, partly due to the elevated risk they face of insider trading.
There has been widespread pressure on the CFTC to prohibit political markets. However, whilst warning the sector about political markets, it doesn’t go as far as to prohibit them.
There are still hurdles to be overcome for the CFTC’s prediction market framework, despite the political empowerment of the regulator.
A 90-day review will now commence, likely fuelling further debate around the role of prediction markets in the sports betting space and intensifying lobbying around the discussion.
It could also provide time for the prediction markets and traders to put forward the case for their legitimacy
Conflict is likely to continue to flare up until the settlement of the bill, as arguments remain over the infiltration of prediction markets within the US sports betting arena.
