The CFTC fosters responsible innovation within derivatives markets

US crypto platforms received a major regulatory reprieve this week after the Commodity Futures Trading Commission (CFTC) decided to withdraw a Biden-era proposal that sought to prohibit sports and political prediction markets, which are driving the popularity of modern event contracts today. 

Regarding this decision to drop the proposal, Mike Selig, the newly confirmed chair of the CFTC, released a statement dated Wednesday stating that, “the agency has canceled a 2024 notice concerning proposed rules that would have prohibited event contracts related to sports, politics, and war. This ban was deemed ‘contrary to the public interest.” 

Selig further elaborated that this proposal illustrates the previous administration’s measure to achieve rigorous oversight by prohibiting political agreements ahead of the 2024 presidential election. Moreover, he argued that the CFTC does not plan to issue final rules based on this proposal.

“The Commission is withdrawing that proposal and will create new rules based on a clear and logical understanding of the Commodity Exchange Act,” he said. 

The CFTC also scrapped advisory guidance that had warned regulated firms against offering certain event contracts amid legal ambiguity. By removing these regulatory barriers, the agency hopes to provide the legal certainty that crypto-linked and traditional prediction markets have lacked.

The CFTC fosters responsible innovation within derivatives markets

Concerning the CFTC’s recent decision, sources familiar with the situation, speaking on the condition of anonymity, revealed that the federal regulatory agency’s strategy seeks to foster responsible innovation within derivatives markets, in strict accordance with Congressional intent.

Notably, the US Commodity Futures Trading Commission’s decision is also part of its ongoing efforts to regulate prediction markets such as Polymarket and Kalshi, which have surged in popularity for offering in-play, real-time betting on a range of events, with a strong focus on sports.

These prediction market platforms, as well as Coinbase and Crypto.com, have been subject to several legal challenges from states alleging that they are operating without valid licenses. Responding to this assertion, the platforms denied the claims, declaring that their regulation falls strictly within the CFTC’s purview.

On the other hand, Selig pointed out that the federal regulatory agency retrieved a September letter that reminded organizations subject to the CFTC’s oversight and registration requirements of their core duties in managing sports event contracts and called for the urgent preparation for legal issues.

Selig demonstrates a heightened interest in establishing event contract regulations

Regarding the September letter, analysts conducted research and found that it was initially released ahead of a possible federal shutdown. It ordered the entities to prepare for potential disruption that may result from trading and clearing sports-related event contracts.

In addition, the letter highlighted that the CFTC team was aware of various state laws and lawsuits related to sports event contracts. Considering the impacts they can have, the letter urged firms to prepare for such actions through strategic planning, disclosures, and risk management policies and procedures.

According to Selig, the advisory was adopted to highlight litigation considerations; however, it unintentionally triggered confusion throughout the market. Afterwards, he expressed a keen interest in collaborating with staff to establish event contract regulations.

In the meantime, towards the end of last month, the CFTC chair disclosed that the federal regulatory agency would partner with the US Securities and Exchange Commission’s Project Crypto. In this collaboration, Selig noted that the partnership would align with their digital asset strategies. The project is scheduled to take effect in July this year and seeks to establish a comprehensive regulatory framework for digital assets.

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