Key Takeaways:
A jurisdictional battle between the SEC and CFTC over prediction markets could reshape a $1 billion-plus industry with no clear winner yet.
The Commodity Futures Trading Commission has served as the primary regulator for event contract exchanges since a 1992 ruling on the Iowa Electronic Markets, the first recognized prediction market. But as trading volumes surge — Kalshi took in over $1 billion on Super Bowl contracts alone this year — legal experts increasingly expect the U.S. Securities and Exchange Commission to claim a role in overseeing this novel asset class.
"The CFTC has come out saying that they have jurisdiction over the event contracts, but there's also some that seem like they're more in the SEC's realm," said Joe Zales, a partner at King and Spalding.
The jurisdictional question is not hypothetical. Last month, the SEC and CFTC issued a joint request for public comment on updating definitions related to swaps — the derivative classification that event contracts fall under — along with the treatment of "novel or emerging products." A spokesperson for Polymarket confirmed to CNBC that the platform has engaged with both agencies on definitional frameworks. Rival platform Kalshi declined to comment on whether it has done the same.
At stake is which agency writes the rules for an industry that processed billions in trading volume this year. The answer depends on how regulators classify contracts tied to publicly traded companies — and whether those contracts constitute securities-based swaps under the 2010 Dodd-Frank law.
The SEC's legal foothold
Dodd-Frank grants the SEC jurisdiction over securities-based swaps — financial contracts tied to a single security. A contract asking whether Nvidia stock will end the month up more than 5% has a direct link to a publicly traded stock, making it a candidate for SEC oversight. But the law also defines securities-based swaps as contracts that "directly affect" a company's financial condition, a phrase legal experts say remains ambiguous.
"The problem is that what 'directly affects' means has really been an open question," said Sarah Razaq Sallis, a partner at Husch Blackwell. "That ambiguity is exactly what's being tested now in real time."
A contract on when Apple will release its next iPhone model is not directly tied to the company's share price, but a product launch could move the stock. Whether that counts as a securities-based swap will determine how large a role the SEC plays.
Some companies are already testing the SEC's jurisdiction. CBOE filed a proposal to operate binary options contracts on key performance indicators for major companies under the SEC's regulatory framework, according to a filing with the agency.
A history of rivalry, a moment of cooperation
The SEC and CFTC have clashed over jurisdictional boundaries before, most recently over cryptocurrency oversight. The SEC is larger and older; the CFTC is smaller and operates with a different regulatory philosophy.
"The two agencies, while similar structurally, have very different approaches to regulation," said Jeff Le Riche, a partner at Husch Blackwell and a former chief trial attorney at the CFTC. "The way the rules are written at the CFTC and the way the rules are written at the SEC are fundamentally different approaches."
In March, the two agencies signed a memorandum of understanding to establish clearer regulatory boundaries, coordinate oversight, and increase data sharing. The timing is politically convenient: the SEC has three of five commissioner seats filled, all Republican, while CFTC Chairman Michael Selig — a Republican who previously served as chief counsel for the SEC's Crypto Task Force — is the only sitting member of the typically five-member board.
"I think this is the easiest time for these two agencies to get on the same page," said Aaron Klein, a senior fellow at the Brookings Institution.
What clarity would mean for the industry
Legal experts broadly expect the SEC to take a supportive role while the CFTC retains primary authority. For platforms that previously dealt with only one federal agency, clear definitions would reduce compliance uncertainty.
Troy Dixon, co-head of global markets at TradeWeb Markets — which has a partnership with Kalshi — said clarification from both agencies is critical for institutional adoption, a key priority for prediction market platforms. "To the extent that the SEC actually chimes in, and there's some sort of broad co-working between the two agencies… it expedites it pretty substantially," Dixon said.
Zales expects SEC involvement could bring tighter trader protections, including more cumbersome account-opening processes. But Peter Chan, a partner at Baker McKenzie and former SEC employee, cautioned against rushing. "I think what is required is not necessarily real time rule making, but it requires real-time learning," he said.
The CFTC's proposed rulemaking last month argued that prediction markets serve a price-discovery function that justifies federal oversight, even for sports-based contracts. A federal court in New York ruled last week that state gambling regulations apply to Kalshi event contracts, a decision likely headed to the Supreme Court. The outcome of that case, combined with the SEC-CFTC harmonization effort, will determine whether prediction markets operate under one regulator, two, or a patchwork of state and federal rules.
Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.
This article is for informational purposes only and does not constitute investment advice.
