Former SEC chair Jay Clayton has raised concerns about the rapid expansion of prediction markets, prompting a critical decision for US regulators: Are these markets akin to Wall Street derivatives or merely a form of gambling? This determination will significantly impact how platforms such as Polymarket and Kalshi function within the United States.
During a discussion at a Semafor event at the New York Stock Exchange on December 2, Clayton emphasized the importance of assessing these platforms based on the fundamental economic roles of their products, rather than getting caught up in the technological aspects. In his conversation with interviewer Liz Hoffman, Clayton drew parallels between the current rise of event contracts and his past challenges overseeing initial coin offerings (ICOs).
Clayton recalled his tenure as SEC chair, when he categorized many ICOs as unregistered securities. Despite the “coin” label, they were performing similar capital-raising functions as stocks or bonds. He suggested a similar dilemma now exists with prediction markets, where traders engage with binary contracts on events like sports outcomes or election results. These actions may resemble bets on the surface, yet structurally, they can mirror cash-settled options.
The critical issue, according to Clayton, is discerning when a prediction contract aligns more with a cash-settled stock option versus when it appears to be a sports bet. These distinctions place the contracts into vastly different regulatory categories.
Currently, the Commodity Futures Trading Commission (CFTC) regulates most prediction-market contracts as “event contracts.” Both Polymarket and Kalshi have obtained specialized CFTC permissions to operate as designated contract markets or similar exchange structures. Nonetheless, this federal imprimatur has not shielded them from state-level regulatory challenges.
For instance, Polymarket had to settle for $1.4 million with the CFTC in 2022 and subsequently blocked US users after being found to offer unregistered event contracts. It has since re-entered the US market through a CFTC-regulated affiliate platform, managing to navigate back into its primary market.
Kalshi, which has accrued significant volumes in political and sports contracts, faced a significant setback in Nevada. A federal judge in Las Vegas determined that its sports-outcome products did not qualify as “swaps” under the Commodity Exchange Act, relegating them to state gaming law rather than conferring exclusive CFTC jurisdiction. This ruling vacated a prior injunction that protected Kalshi from Nevada’s enforcement actions, opening the path for state gaming regulators to potentially classify its sports contracts as unlicensed gambling. Kalshi is currently appealing this decision.
Clayton refrained from commenting on specific platforms but was direct about the industry trend: companies often seek regulatory leniency by aligning their functions closely with highly regulated entities, thereby operating under reduced oversight. For regulatory bodies, the challenge is determining when such arguments lose credibility and whether these markets require distinct regulation.
As prediction markets gain traction beyond the crypto niche and into mainstream finance, Clayton’s insights come at a critical moment. In October, Intercontinental Exchange (ICE), the NYSE’s parent company, agreed to invest up to $2 billion in Polymarket, suggesting an $8 billion pre-money valuation. ICE also aims to package and circulate Polymarket’s event-probability data to its institutional clientele, potentially integrating it into trading and risk management systems.
This significant investment could propel Polymarket’s valuation into the low-teen billions, whereas Kalshi’s last funding round has valued it around $5 billion. The founders of these companies have reached paper-billionaire status, highlighting the aggressive valuation of the sector.
Simultaneously, traditional betting companies are eyeing the prediction market sphere. DraftKings and FanDuel have announced plans to introduce prediction-style products, aiming to cater to the “financial betting” demand while remaining compliant with state gaming licenses.
For regulators, this convergence intensifies the definitional challenge. A single user might engage with a Polymarket contract through a brokerage, participate in a Kalshi market framed as a futures product, or place a similar wager through a licensed sportsbook app—all focused on the same event outcome.
The CFTC asserts that event contracts fall under its jurisdiction, especially when they resemble derivatives related to measurable outcomes like elections or economic indicators. However, state regulators, tribal gaming authorities, and organizations such as the American Gaming Association contend that many sports and entertainment markets are simply a form of gambling under a different guise, which falls under state law.
This division has already led to contradictory court rulings. New Jersey courts have previously supported Kalshi’s stance that its contracts fall under federal oversight, while judges in Maryland and Nevada have ruled otherwise, increasing the possibility that this issue may eventually reach the US Supreme Court.
Clayton approached the matter from a functional rather than an ideological perspective. His extensive experience with securities and crypto products taught him to bypass marketing labels and concentrate on the risk the contract actually transfers and its utility. From that viewpoint, a binary contract used by institutions to hedge fuel prices or policy risk is more akin to a derivative than a bet, whereas a mobile-first market encouraging retail users to speculate on NFL games resembles sports betting, notwithstanding its exchange engine underpinnings.
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