Summary
Attorneys say the U.S. agency responsible for regulating derivatives markets could face significant challenges investigating insider trading and misconduct on prediction markets due to limitations in federal law, even if it succeeds in limiting the role of state regulators.
Bloomberg Law
"The US agency charged with overseeing derivatives might face difficulty rooting out alleged insider trading and misconduct on prediction markets given the outlines of federal law, even if it succeeds in elbowing out state regulators, attorneys say.
The CFTC wants to exclusively police the emerging prediction markets. For tackling insider trading, it’s bound by anti-fraud rules that parallel federal securities laws. And the burdens of proof, including a breach of a duty of confidentiality, may be a significant hurdle for trades that face public scrutiny.
“I think the government will find that it’s actually very, very difficult to apply the law as it currently exists to capture some of those cases,” said Morrison Cohen LLP’s Jason Gottlieb. “Not all of them. Some of them, people really are using material, nonpublic information, violation of duties of confidentiality, and the usual law applies.”
“But I think people will be surprised when they learn just how much of the stuff that they’re seeing is actually not illegal and it’s not covered by insider trading law,” he said.
Prediction markets allow people to wager on a wide range of binary outcomes, such as whether the US accepts a new nuclear deal with Iran before July or whether Oklahoma City will repeat as NBA champions. The Commodity Futures Trading Commission, Kalshi Inc., Crypto.com, and other platforms are grappling in court with states over who can regulate their event contracts, particularly sports ones.
States say sports prediction markets are gambling sites subject to their laws. Companies counter that their offerings are a hedging derivative traded on federally regulated markets, under the CFTC’s exclusive jurisdiction per the Commodity Exchange Act.
The agency is also aggressively taking that position through lawsuits, proposed rulemaking, and enforcement promises.
“Because the more they do, the more credibility they have as the enforcers, as the correct regulator for this type of market,” Troutman Pepper Locke LLP’s Stephen Piepgrass said. “And the more it feels like the Wild West, the more arguments the states have that, ‘hey, wait a minute, we’re the ones that have this great body of enforcement law around wagering, and it should apply here...’”
This article was originally published in Bloomberg Law.
