CFTC scraps Biden-era proposal to ban political event contracts as states press prediction markets

The Commodity Futures Trading Commission (CFTC) has officially withdrawn a controversial proposal initiated during the Biden administration that sought to prohibit event contracts based on political outcomes. The move, announced following internal deliberation, signals a major retreat from federal efforts to strictly define and regulate prediction markets that deal with elections, legislative results, and geopolitical events.

### Background on the Ban Proposal

The initial proposal, put forward in late 2022, aimed to ban contracts tied to activities that the agency classified as ‘gaming’ rather than legitimate risk hedging or economic purpose. This targeted exchanges, such as Kalshi and Polymarket, which offer derivative products based on non-financial events. Proponents of the ban argued that allowing trading on political results risked undermining electoral integrity and blurred the lines between regulated derivatives and unregulated gambling.

### CFTC Withdrawal Rationale

The CFTC’s decision to withdraw the proposal reflects significant internal regulatory division and the practical difficulty of establishing a clear, legally defensible framework. Sources close to the commission suggested that the proposal lacked the consistent majority support necessary to survive inevitable legal challenges. By withdrawing, the CFTC avoids a protracted legal battle over the scope of its authority concerning novelty derivative contracts.

### Paradoxical State-Level Pressure

Despite the federal pullback, prediction markets are facing intense and increasing pressure at the state level. While the CFTC has backed down on a blanket ban, several state attorneys general (AGs) are actively pursuing regulatory action, classifying these contracts as illegal gambling under state statutes. The focus has particularly been on markets dealing with election outcomes, where AGs argue that these activities violate anti-gambling laws, especially when accessible to retail investors.

This regulatory divergence creates a paradoxical environment for the industry. On one hand, the largest federal hurdle has been removed, providing temporary relief. On the other, the legal battlefield has merely shifted from Washington D.C. to state capitals, forcing prediction market platforms to navigate a complex, fragmented, and increasingly hostile regulatory landscape outside of federal derivatives law.

Source: CFTC scraps Biden-era proposal to ban political event contracts as states press prediction markets