Reading The Tea Leaves: Forthcoming Regulatory Scrutiny Of Prediction Markets

Prediction markets have always sold themselves as crowd-sourced "truth machines." In 2026, Washington is treating them more like a fast-growing derivatives business with familiar vulnerabilities: jurisdictional turf fights, uneven compliance, and the oldest white-collar risks in the book—fraud and trading on nonpublic information. What follows is a primer on how the Commodity Futures Trading Commission (CFTC) is positioning itself to write the rules of the road for event contracts just as volumes (and scrutiny) are exploding.

I. The Expansion of Prediction Markets

Prediction markets are websites that allow traders to bid on whether events will or will not occur—for example, whether a particular cryptocurrency will trade above a certain value on a particular day, whether a politician will or will not win an election, or whether a particular company will run ads during the Super Bowl (a marketing opportunity the NFL denied prediction markets themselves this year).

The payout for traders if their "yes" or "no" bid comes to pass is fixed, but the price of purchasing one of those bids varies depending on the number of people purchasing each bid. The more people who buy a "yes" bid, thinking that the event is likely to occur, the more expensive a "yes" bid will be, and vice versa.

Once a niche curiosity among economists and tech enthusiasts, prediction markets have become phenomenally popular within the past year. DeFi Rate has reported that in August 2025, more than $2 billion in trades were made on prediction markets. By February 2026, that number had soared to $22.2 billion, with $17.9 billion of those trades made on Polymarket and Kalshi, two of the most popular prediction markets.

No hot market goes unregulated for long, and recent statements from the CFTC, the primary federal regulator for these markets, make clear that the CFTC is taking a look at this space. Although these statements signal a degree of receptivity for prediction markets, companies and traders in this space should keep an eye on what promises to be a significant regulatory year.

II. The CFTC's regulation of prediction markets

The CFTC generally regulates prediction markets on the theory that bids on the outcomes, referred to in regulatory parlance as "event contracts," are "swaps" under the Commodities Exchange Act (CEA). Only entities registered as "swap execution facilities" or "designated contract markets" with the CFTC may operate "a facility for the trading or processing of swaps." 7 U.S.C. §7b-3(a)(1).

Kalshi has been registered as a designated contract market (DCM) since November 2020. See In the Matter of the Application of KalshiEX LLC for Designation as a Contract Market (Nov. 3, 2020). Polymarket has had a rockier history. In 2022, the CFTC imposed a $1.4 million penalty on Polymarket and ordered it to cease U.S. operations for "operating an unregistered facility or non-designated contract market, in violation of the [CEA] and Commission Regulations, for the online trading of event-based binary options contracts, known as 'event markets.'" See In the Matter of Blockratize, Inc. d/b/a Polymarket.com, CFTC Docket No. 22-09 (Jan. 3, 2022).

In November 2025, however, the CFTC granted Polymarket a designation as a DCM able to operate in the United States. See In the Matter of the Petition of QCX LLC d/b/a Polymarket US to Amend Its Order of Designation.

III. CFTC regulatory priorities for prediction markets

In January, CFTC Chairman Michael Selig included prediction markets in his remarks outlining his priorities as chairman. See Remarks of Chairman Michael S. Selig at CFTC-SEC Event on Harmonization (Jan. 29, 2026).

A. Forthcoming CFTC Regulations

Chairman Selig explained his view that prediction markets "have operated within the CFTC's regulatory perimeter for more than two decades. But, despite their history, many view them as novel or unsettled. That uncertainty has not served our markets well, nor has it served the public interest." Emphasizing the CFTC's "support[ of] lawful innovation in these markets," he first directed CFTC staff to withdraw a Biden-era notice of proposed rulemaking that "would prohibit political and sports-related event contracts," see 89 Fed. Reg. 48968 (June 10, 2024), and a 2025 CFTC staff advisory that "cautioned registrants about offering access to sports-related event contracts due to ongoing litigation," see CFTC Staff Advisory 25-36 (Sept. 30, 2025).

Those documents were withdrawn on Feb. 4. See CFTC Rel. No. 9179-26 (Feb. 4, 2026). He then explained that CFTC staff would "move forward with drafting an event contracts rulemaking" that would "establish[] clear standards for event contracts that provide certainty to market participants." Finally, he "directed CFTC staff to work with [its] counterparts at the SEC to develop a joint interpretation" of certain statutory definitions, which would "draw clearer lines between certain commodity and security options, CFTC-regulated swaps, and SEC-regulated security-based swaps." On March 3, Chairman Selig, speaking at Milken Institute Future of Finance event, said that an advanced notice of proposed rulemaking will be issued in the "near future."

B. The CFTC's Exclusive Jurisdiction over Prediction Markets

Chairman Selig also "directed CFTC staff to reassess the Commission's participation in matters currently pending before the federal district and circuit courts," emphasizing that where "jurisdictional questions are at issue, the Commission has the expertise and responsibility to defend its exclusive jurisdiction over commodity derivatives." The CFTC swiftly made good on that promise, filing an amicus brief in the Ninth Circuit pressing its exclusive jurisdiction over prediction markets. See Dkt. No. 37.2, N. Am. Derivatives Exch., Inc. v. Nevada et al., No. 25-7187 (9th Cir. 2025).

The suit below concerned "event contracts that turn on the outcome of sporting events" offered by Crypto.com. N. Am. Derivatives Exch., Inc. v. Nevada on Rel. of Nevada Gaming Control Bd., 2025 WL 2916151, at *1 (D. Nev. Oct. 14, 2025).

After the Nevada Gaming Control Board "deemed these contracts to be sports wagering subject to Nevada's gaming laws" and sent Crypto.com a cease-and-desist letter, Crypto.com sought "to permanently enjoin the Nevada Gaming Control Board... from pursuing civil or criminal enforcement against [Crypto.com] for offering event contracts." Crypto.com argued that its event contracts "are legal under federal law and that Nevada law is preempted due to the CFTC's exclusive jurisdiction over transactions on DCMs," but the district court refused to grant a preliminary injunction, finding that "based on the pleadings, [Crypto.com's] event contracts are not 'swaps' falling within the CFTC's exclusive jurisdiction."

In announcing the amicus brief urging reversal, Selig argued that "CFTC-registered exchanges have faced an onslaught of lawsuits seeking to limit Americans' access to event contracts and undermine the CFTC's sole regulatory jurisdiction over prediction markets" and that "the CFTC has the expertise and responsibility to defend its exclusive jurisdiction over commodity derivatives, and that's exactly what we'll do." See CFTC Rel. No. 9183-26 (Feb. 17, 2026).

C. The CFTC's Enforcement Priorities for Prediction Markets

Although Selig did not discuss enforcement priorities in his remarks, an advisory issued by the CFTC Enforcement Division on Feb. 25, 2026, may provide a clue as to what those priorities may be. See Advisory on Enforcement Authority over Event Contracts, CFTC Rel. No. 9158-26 (Feb. 25, 2026) (Advisory). The Advisory described two internal enforcement actions taken by Kalshi against traders on its platform for breaches of Kalshi's rules.

• The first trader was a political candidate trading on his own candidacy on Kalshi. The trader acknowledged to Kalshi that these trades violated Kalshi's prohibition on "trading in a contract over which the trader has direct or indirect influence over the outcome," and Kalshi "imposed a $2,246.36 financial penalty (disgorgement of $246.36 related to the improper trading activity, plus a $2,000.00 penalty) and a 5-year suspension from direct or indirect access to the exchange."
• The second was "an editor for a YouTube channel who likely had advanced knowledge of the contents of the channel's videos prior to the time they were publicly posted" and traded an event contract related to that YouTube channel. Kalshi "concluded there was reasonable belief that the trades were based on material non-public information misappropriated in violation of a pre-existing duty" and imposed a "$20,397.58 financial penalty (disgorgement of $5,397.58 in profits from the illicit trading, plus a $15,000.00 penalty) and a 2-year suspension from direct or indirect access to the exchange."

The CFTC's expectations of prediction market operators. The CFTC itself did not take action against either trader, noting that "Kalshi's internal enforcement program handled these matters." But the Advisory emphasized that "DCMs have an independent duty pursuant to the core principles of the [CEA] to maintain audit trails, conduct surveillance, and enforce rules against prohibited practices," suggesting that the CFTC expects prediction-market operators to police their users for violations of the CEA.

Indeed, the CFTC's order allowing Polymarket to resume U.S. activities noted Polymarket's "represent[ation] that it complies, and will remain subject to and compliant, with all provisions of the [CEA] and the Commission's regulations applicable to designated contract markets (DCMs), including self-regulatory responsibilities applicable to DCMs."

The CFTC's own regulatory role. But it is also clear that the CFTC will not be content to rely on prediction-market operators' compliance with their own "self-regulatory responsibilities." The Advisory reaffirmed that the CFTC "has full authority to police illegal trading practices occurring on any DCM" and that, in "appropriate cases," it "will investigate and prosecute violations."

Indeed, it observed in the Advisory that each of these trades described above may have violated Section 6(c)(1) of the Commodity Exchange Act and the CFTC's implementing regulations at 17 CFR §180.1(a)(1) and (3). The first trade was potentially part of a "manipulative scheme or artifice to defraud, or engaging or attempting to engage in an act, practice or course of business that operates as a fraud on any other person" and the second may have constituted "misappropriation of confidential information in breach of a pre-existing duty of trust and confidence to the source of the information (commonly known as 'insider trading')."

This focus on fraud and insider trading echoes the remarks made by Jay Clayton, the United States Attorney for the Southern District of New York, shortly after Chairman Selig's comments. He explained his view that making a bid on a "prediction market doesn't insulate you from fraud [charges]," and said that he expected to see prosecutions brought involving prediction markets.

Clayton may have an additional arrow in his quiver when it comes to insider trading on prediction markets. On Jan. 3, 2026, the United States captured Venezuelan President Nicolás Maduro and his wife and brought them to the United States to face charges. Hours before the raid, a brand-new account on Polymarket bid $30,000 on an event contract that Maduro would be removed from office by the end of January, earning more than $400,000 when that happened.

Suspecting that "the individual behind the trade had inside knowledge of the administration's planned operation," Representative Ritchie Torres introduced the Public Integrity in Financial Prediction Markets Act of 2026, H.R. 7004, to "prohibit[] federal elected officials, political appointees, Executive Branch employees, and congressional staff from buying, selling, or exchanging prediction market contracts tied to government policy, government action, or political outcomes when they possess material nonpublic information or could reasonably obtain such information through their official duties."

IV. Conclusion

Although Selig's comments suggest some measure of open-mindedness and even enthusiasm for prediction markets, no multibillion-dollar platforms can expect a free pass from regulation. The CFTC has made clear that it views event contracts available on prediction markets as resting firmly and exclusively within its jurisdiction and intends to clarify the applicable rules and to enforce them.

And for their part, federal prosecutors and lawmakers have signaled that traditional fraud and insider trading theories apply with equal force in this new context. Whether through formal rulemaking, jurisdictional litigation, or high-profile enforcement actions, the coming year is likely to define not only how prediction markets operate, but also how traders can make use of them.

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