CFTC Orders Prediction Markets Not to Use Gambling Odds

One of the biggest attacks on prediction markets is that they’re legally no different from gambling. The governing body over them is trying to make that link a little less obvious.

The Commodity Futures Trading Commission (CFTC) has ordered prediction markets not to use American-style gambling odds when offering action on an event. Instead, the CFTC said that markets have to show the face value of the contract, referred to as nominal terms.

By taking this step, the CFTC appears to be trying to cut off one of the strongest legal arguments against prediction markets. Multiple state attorneys general have said that prediction market operators function as gambling.

That, they say, should place gambling under state-level rules and regulations. That’s the biggest dispute overall, as federal vs. state oversight will likely determine how prediction markets ultimately wind up governed.

Why Does the CFTC Want to Eliminate American Odds?

The CFTC has said the point is to prevent confusion on the transaction. In all likelihood, it’s meant to give the CFTC a talking point against accusations that prediction markets fall under gambling.

The distinction is important because the CFTC has staked its entire position on being the sole governing body for prediction markets. The CFTC believes that it should govern market providers, on the grounds that event contracts fall under its jurisdiction.

In order to make that claim, though, there has to be a strong correlation between the appearance of the sites and what constitutes an event contract. That means sites like Kalshi, Polymarket and others need to make clear that contracts are being purchased based on their value, not based on fixed odds set by a sportsbook.

To be in compliance, companies must confirm that they have received the letter and react to it by Aug. 31.

Will This Protect Prediction Markets?

It seems unlikely overall. Changing the view that consumers get isn’t likely to affect states’ legal argument. Throughout this debate, states have held that prediction markets are no different from gambling. Changing the odds shown isn’t likely to convince anyone in Congress to back down.

That said, Congress hasn’t reacted very quickly on this issue. While prediction markets have gained acceptance nationwide, an attempt to rein them in has stalled. Senate Bill 4469, introduced by Sens. David McCormack (R-Pa.) and Kirsten Gillibrand (D-N.Y.), would have restricted prediction markets, but it never got out of committee.

But the real worry for prediction markets is the court system. If the courts come back and say that what’s being offered is gambling, the model collapses. Providers would have to geofence certain states in order to be in compliance, and regulations would force providers to pay taxes.

Prediction markets have seen a slew of decisions go against them in recent weeks. In places such as Michigan and Wisconsin, both state and federal courts have ruled against the CFTC. The fact that they’re now openly trying to eliminate something associated with gambling says they know they’re likely to need a good legal strategy to survive.