SEC role in prediction markets comes into focus as contracts expand

U.S. regulators are weighing how to divide oversight of fast-growing prediction markets, with legal specialists saying the Securities and Exchange Commission may soon have a role alongside the Commodity Futures Trading Commission. The question affects platforms including Polymarket and Kalshi, as well as exchanges considering contracts linked to corporate performance and share prices.

The CFTC has been the primary federal regulator for event-contract exchanges for more than three decades, following a 1992 ruling involving the Iowa Electronic Markets, which is widely regarded as the first prediction market. Event contracts allow traders to take positions on whether a defined outcome will occur, and they are treated as a form of swap.

Joe Zales, a partner at King and Spalding, told CNBC that the CFTC has asserted jurisdiction over event contracts, but that some products appear closer to the SEC’s remit. The distinction matters because U.S. law assigns different types of derivatives to different agencies.

Definitions under review

The SEC and CFTC last month issued a joint request for public comment on whether certain derivatives definitions and related issues should be updated, clarified or harmonized. The review includes definitions connected to swaps and the treatment of novel or emerging products, according to the agencies’ request.

A spokesperson for Polymarket told CNBC the company has had discussions with both agencies about definitional frameworks for prediction-market products. Kalshi, a rival platform, declined to say whether it has engaged with the SEC or CFTC on the issue.

Cboe has also brought the question into SEC territory. In a filing, the exchange operator is seeking to create binary options contracts tied to key performance indicators for a range of large companies under the SEC’s regulatory framework.

Jeff Le Riche, a Husch Blackwell partner and former CFTC chief trial attorney, described the jurisdictional question to CNBC as unresolved. He said the outcome remains uncertain.

Why the SEC could enter the market

The possible SEC role stems from the Dodd-Frank Act of 2010. The CFTC generally oversees swaps, while the SEC regulates securities-based swaps, which are contracts linked to a single security or certain company-specific financial conditions.

Legal experts cited by CNBC said a contract asking whether Nvidia’s share price will rise by more than 5% in a month would have a direct connection to a listed stock. A contract on the timing of a new Apple iPhone release could be harder to classify, because the event is not directly based on Apple’s share price but could affect the company’s market value.

Sarah Razaq Sallis, also a partner at Husch Blackwell, told CNBC that the meaning of what “directly affects” a company’s financial condition remains unsettled and is being tested as new products develop. The SEC declined CNBC’s request for comment, and the CFTC did not respond.

Coordination and market impact

The SEC and CFTC have previously split oversight in other markets. In options, for example, the CFTC regulates products based on futures contracts, while the SEC regulates those tied to securities. The agencies have also clashed over jurisdiction, including in cryptocurrency oversight, according to CNBC.

In March, the agencies announced a memorandum of understanding aimed at clearer definitions, jurisdictional boundaries, coordinated oversight and greater data sharing. Yelena Kotlarsky, a partner at King and Spalding, told CNBC the agencies appear to be trying to avoid duplicated work.

Aaron Klein, a senior fellow at the Brookings Institution, said the current leadership structure may make cooperation easier. CNBC reported that three of five SEC commissioner seats are filled, all by Republicans, while CFTC Chairman Michael Selig, also a Republican, is the only sitting member of the CFTC’s normally five-member commission.

Several legal experts told CNBC they expect the SEC to play a supporting role if it becomes more involved, with the CFTC remaining the principal regulator for prediction markets. Peter Chan, a Baker McKenzie partner and former SEC employee, said clearer definitions could benefit the sector if the agencies avoid past disputes.

Polymarket’s spokesperson said the company is concerned about duplicative or conflicting compliance obligations and is encouraged by the agencies’ work toward coordinated structures. Troy Dixon, co-head of global markets at Tradeweb Markets, which has a partnership with Kalshi, told CNBC that regulatory clarity is important for institutions considering trading on prediction markets.

Zales said SEC involvement could bring tighter investor protections, including more demanding account-opening procedures. Chan cautioned that regulators should take time to understand event-contract markets and the products listed on them before moving too quickly. CNBC disclosed that it has a commercial relationship with Kalshi that includes customer acquisition and a minority investment.

This story draws on original reporting from CNBC.