Prediction markets in the U.S. just received a clear signal from regulators that the sector is expanding quickly, and federal oversight is moving in step.
On Thursday (March 12), the U.S. Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight released new guidance addressing event-based derivatives or markets, including contracts tied to sports, politics, and other real-world outcomes. The advisory arrives as interest in prediction markets grows and as crypto-focused trading venues increasingly explore listing these types of products.
The document acknowledges the rising popularity of the markets but also stresses the need for tighter surveillance, stronger compliance systems, and clearer contract design. It also signals the agency’s intention to closely scrutinize exchanges that list event contracts. CFTC Chairman wrote on X: “Prediction markets are here to stay and under my leadership, I’ll protect the agency’s jurisdiction over these markets and allow them to flourish in the US.”
However, legal experts say the advisory could have far-reaching consequences for sports-related prediction markets in particular, especially as federal regulators begin talking more directly with professional sports leagues about market integrity.
Sports prediction markets moving into the mainstream with new CFTC guidance
Prediction markets give traders a place to speculate on whether a real-world event will occur. Contracts can be structured around election outcomes, economic indicators, policy decisions, or the results of sporting events.
According to the CFTC, these markets are rapidly gaining traction with the public.
In the advisory, staff wrote that: “Prediction markets… are rapidly increasing in popularity with the American public both as a financial asset class and as a proven source of reliable information for news media, sports leagues, financial institutions, and everyday Americans.”
Participants trade instruments known as event contracts. These derivatives pay out based on whether a specific outcome occurs.
From a legal standpoint, the CFTC says many of these contracts fall under derivatives law because their value depends on “the occurrence, nonoccurrence, or extent of an event.” As a result, when they are listed on regulated derivatives exchanges, they fall within the agency’s jurisdiction.
It reinforces that stance at a time when crypto-based trading platforms and decentralized finance projects are experimenting with event markets tied to real-world outcomes.
Regulators appear increasingly willing to allow innovation in the space.
Why exchanges carry the compliance burden
The advisory also states that exchanges themselves bear primary responsibility for ensuring markets remain fair and resistant to manipulation.
The CFTC describes exchanges as “front-line regulators.” In practical terms, that means trading venues must monitor activity continuously, enforce rules against abuse, and ensure contracts meet legal requirements before they are listed.
The commission stresses that exchanges must list only products that are not “readily susceptible to manipulation.”
As front-line regulators, DCMs should be proactive, ensuring proper surveillance and oversight of trading in all of the products that they list, accounting for the particular characteristics and attributes of each product.
CFTC Staff Advisory, Division of Market Oversight
To meet that standard, exchanges are expected to monitor trading activity in real time and identify suspicious patterns that might signal manipulation or insider trading. They must also implement systems that prevent price distortion or settlement manipulation. This comes as Kalshi released an advert stating that it’s a regulated exchange that doesn’t allow insider trading or markets on death, while Polymarket has teamed up with Palantir to build a monitoring system designed to detect suspicious activity across sports prediction markets.
Event contracts often settle in cash rather than through delivery of an asset. Traders simply receive a payout based on the final outcome of the event.
However, the structure can create risks. Participants might attempt to influence the underlying event or manipulate the data used to determine settlement.
Because of that possibility, regulators point out the need for clear settlement rules and reliable data sources.
The advisory also reiterates the CFTC’s self-certification framework, which allows exchanges to introduce new derivatives quickly. Once a contract is submitted and certified as compliant with the Commodity Exchange Act, it can begin trading as soon as the next business day unless the commission intervenes.
Even so, regulators retain authority to halt or amend contracts that later appear to violate regulatory standards.
Sports prediction markets and the CFTC manipulation dilemma
The advisory devotes significant attention to sports-related event contracts, where manipulation risks can be easier to imagine.
Contracts tied to the actions of a single athlete, referee decision, or isolated incident during a game could present heightened risks. For example, markets structured around injuries, unsportsmanlike conduct, referee calls, or in-game altercations may depend on the behavior of only a few individuals.
The CFTC warns that these types of markets may “create a heightened potential for manipulation or price distortion.”
To address those concerns, the memo says exchanges should coordinate with sports leagues and integrity units when designing sports-related contracts. That could include data-sharing agreements, restrictions on insider participation, and reliance on official league data to settle markets.
The commission also notes it is already engaged in discussions with professional sports leagues on these issues. These conversations suggest regulators may play a larger role in shaping how sports-related event contracts operate.
This development could complicate the landscape for state-regulated sportsbooks, which already operate under a separate regulatory framework governing sports wagering.
Legal observers say the advisory may intensify tensions between federal derivatives regulators and the state-based system that currently oversees sports betting in the United States.
Legal experts see conflict ahead
The guidance has already drawn attention from legal analysts who track gambling law and sports betting regulation.
Daniel Wallach, a legal gaming expert, said the advisory appears to acknowledge sports-related event contracts as potentially permissible within derivatives markets even as other regulations remain in place.
“CFTC advisory on prediction markets places agency’s imprimatur on ‘sports-related event contracts’ as ‘consistent with DCM Principle 3,’ notwithstanding Rule 40.11(a)(1) regulatory ban (still in effect) on event contracts relating to ‘gaming.’ Court battle 2.0 seems inevitable.”
The comment highlights a possible conflict between existing rules and the new advisory language. Rule 40.11 still contains restrictions on event contracts tied to gaming, leaving questions about how sports-related derivatives would be treated in practice.
Former CFTC General Counsel Rob Schwartz also pointed to the advisory’s significance.
“To my mind, the DMO advisory is the more newsworthy of the two releases today. It shows the Commission’s sharp focus on the potential for market abuse and that it may need more information from DCMs than it is currently receiving to evaluate event contracts.”
Schwartz’s remarks reiterate the commission’s growing concern about whether exchanges are providing sufficient detail when submitting event contracts for listing.
Regulatory tensions remain
Even as the advisory outlines a path forward for prediction markets, several unresolved issues remain.
One challenge involves insider information. Participants connected to real-world events may possess non-public knowledge that could influence contract outcomes. Athletes may know about injuries before they are reported, political staff may anticipate policy decisions, and corporate insiders may be aware of upcoming announcements.
Detecting and policing such information flows could prove difficult.
Jurisdictional tensions also persist as prediction markets increasingly intersect with cryptocurrency platforms and decentralized trading systems. Regulators may disagree about whether certain products should be classified as derivatives, securities, or gambling instruments.
The CFTC also reiterates that some event contracts may be prohibited if they are deemed “contrary to the public interest,” including contracts involving war, terrorism, or assassination.
Still, the advisory sends a general signal about the future of prediction markets.
Federal regulators are treating the exchanges emerging as a legitimate, though closely monitored, corner of the derivatives industry, even though it may come at the cost of traditional betting.
Featured image: Canva
