“With additional resources to address these new asset classes in the cash markets and crypto, as well as to deal with the explosive growth of prediction markets, I think that the CFTC certainly should receive additional resources.”
That was Carl Kennedy, a partner at New York law firm Katten Muchin Rosenman, speaking before a House subcommittee on Tuesday. His testimony cut to a problem that’s been simmering since prediction markets went mainstream: the federal agency theoretically in charge of overseeing them may not have the staff or statutory tools to actually do the job.
The hearing, convened by the House Committee on Agriculture’s Subcommittee on Commodity Markets, Digital Assets, and Rural Development, was titled “Examining Customer Protections and Market Integrity in Sports Event Prediction Markets.” But the discussion quickly turned to something bigger. Lawmakers wanted to know whether pending legislation, specifically the Digital Asset Market Clarity (CLARITY) Act, could finally give the Commodity Futures Trading Commission the firepower it needs.
Kennedy’s Warning: The CFTC Is Stretched Too Thin
Kennedy’s testimony painted a picture of a regulator struggling to keep pace with an industry that’s evolved faster than anyone anticipated. Kalshi and Polymarket have emerged as the dominant prediction market platforms, offering contracts on everything from election outcomes to interest rate decisions. Their combined trading volumes have surged in the past 18 months, drawing both retail speculators and institutional players looking for hedging instruments.
The problem? The CFTC is “short-staffed,” according to Kennedy. The agency has historically focused on traditional derivatives markets: futures contracts for corn, oil, interest rates. Event contracts on prediction platforms represent a fundamentally different beast, requiring different expertise and surveillance capabilities.
Kennedy argued that the CLARITY Act, currently under consideration in the Senate, could address both deficiencies simultaneously. The bill would grant the CFTC additional authority over digital assets and, by extension, the prediction market platforms that often operate on blockchain rails. More authority, Kennedy suggested, should come with more resources.
This isn’t an abstract concern. The CFTC’s budget has remained relatively flat even as its mandate has expanded to include crypto enforcement actions. Commissioner Caroline Pham has publicly noted the mismatch between responsibilities and resources, though she wasn’t present at Tuesday’s hearing.
Selig’s Jurisdictional Power Grab
To understand why this hearing happened at all, you need to understand what CFTC Chair Michael Selig has been doing since the Senate confirmed him in December.
Selig has taken the aggressive position that the CFTC holds “exclusive jurisdiction” over prediction market companies. His legal theory: event contracts traded on platforms like Kalshi and Polymarket qualify as “swaps” under the Commodity Exchange Act, putting them squarely in the CFTC’s regulatory domain.
This interpretation has consequences. If prediction markets are swaps, they’re federal instruments subject to federal rules. State gambling commissions? They can pound sand, according to Selig’s reading.
The chair has acted on this theory. Last week, he ordered Kalshi to ignore a ruling from a Michigan court. Kalshi’s response was that the directive “put [it] in an impossible position” between conflicting state and federal authorities. Imagine getting a court order from a state judge telling you to do X, then getting a federal directive telling you to ignore that order. That’s where Kalshi found itself.
Selig’s position is unusual for another reason: he’s the only Senate-confirmed member currently heading the CFTC. The leadership panel normally consists of five commissioners. Operating with a single confirmed commissioner gives Selig extraordinary unilateral authority, at least until the Senate fills the remaining seats.
States Are Fighting Back with Lawsuits
The CFTC’s jurisdictional claim hasn’t gone unchallenged. Democratic senators have characterized Selig’s approach as an “assault” on state authorities, and several states have responded with litigation.
Multiple US states have filed lawsuits against both Kalshi and Polymarket, arguing that these platforms are engaged in sports betting, which falls under state gambling regulations. The legal theory from the states’ perspective is straightforward: if you’re offering contracts on whether the Lakers beat the Celtics, that’s a sports bet, not a swap.
The platforms counter that their contracts are economically distinct from traditional gambling. A Polymarket contract on election outcomes, for instance, aggregates crowd wisdom in a way that produces valuable information signals. That’s the theory, anyway.
Some legal experts expect these cases to eventually reach the Supreme Court. The fundamental question, who gets to regulate prediction markets, states or the federal government, isn’t going away. Congress could answer it through legislation, which is partly why the CLARITY Act has become so important to both sides.
We’ve been tracking the CLARITY Act’s tortured path through Congress for months. The bill has faced multiple deadline crunches as lawmakers try to push it through before August recess. The stakes are high: if the bill doesn’t advance soon, it could die when Congress scatters for campaign season.
What’s Actually in the CLARITY Act?
Here’s where things get frustrating for anyone trying to analyze the bill: the full text still hasn’t been released.
Republican senators pushing for a vote say they expect to publish the bill’s language “soon,” in time for a potential floor vote before the chamber breaks for August state work periods. But as of Tuesday’s hearing, the specific provisions addressing prediction markets remained undisclosed.
What we do know comes from fragments and lobbying disclosures. In June, gambling industry groups petitioned the Senate to add language that “explicitly prohibits event contracts tied to sports and casino-style gaming.” That’s a direct shot at Kalshi’s sports-related contracts. The gambling industry sees prediction markets as unregulated competition, and they’ve got political muscle.
The White House has also weighed in. The Trump administration reportedly “agreed to the most comprehensive and wide-ranging ethics provision in history” as part of negotiations over the bill. According to administration statements, they’ve “bent over backward to accommodate [Democrats’] concerns” on ethics language.
That ethics provision matters because crypto legislation has been dogged by conflict-of-interest allegations. Any bill that passes needs to address the appearance problem, even if the underlying policy remains pro-industry.
The CLARITY Act isn’t just about prediction markets. The bill would establish a broader framework for how the CFTC regulates digital assets in cash markets, complementing the stablecoin provisions that have already generated significant debate. The prediction market provisions would be layered on top of this crypto framework.
Why Prediction Markets Have Exploded
To appreciate the scale of what regulators are dealing with, consider how dramatically prediction markets have grown.
Polymarket processed over $3.6 billion in trading volume during the 2024 US presidential election cycle. That single event drove more volume than the platform had seen in its entire history up to that point. Kalshi, which operates with CFTC approval for certain contract types, has seen similar growth in its event contract markets.
The appeal is obvious. Traditional futures markets let you hedge against commodity price movements or interest rate changes. Prediction markets let you hedge against (or speculate on) nearly any quantifiable future event. Will the Fed cut rates in September? Will a hurricane make landfall in Florida? Will a particular bill pass Congress?
For traders, these contracts offer information-rich signals that traditional polling or forecasting often misses. For platforms, they represent lucrative trading fees on high-volume, high-velocity markets.
But the same characteristics that make prediction markets valuable also make them difficult to regulate. A contract on Fed rate decisions looks like a financial instrument. A contract on Super Bowl outcomes looks like a sports bet. Where do you draw the line? Who draws it?
These questions don’t have obvious answers, which is why both state and federal regulators have claimed authority and why the courts may ultimately have to sort it out.
What Happens Next
The hearing didn’t produce any immediate legislative action, but Kennedy’s testimony gave supporters of the CLARITY Act a policy argument to work with. If you want the CFTC to effectively police prediction markets, the argument goes, you need to give them the tools and the budget. The CLARITY Act could be that vehicle.
For Bitcoin and Ethereum market participants, the CLARITY Act’s broader provisions on digital asset classification matter more than the prediction market language. But the two issues are intertwined: the same bill that determines which crypto tokens fall under CFTC versus SEC jurisdiction will also determine whether prediction markets face federal or state oversight.
The timeline remains tight. Republican senators want a vote before August recess. Democrats want ethics provisions and, in some cases, restrictions on sports-related prediction contracts. The gambling industry wants carve-outs protecting their turf.
The Supreme Court angle deserves watching too. If states keep suing and federal courts keep issuing conflicting rulings, the question of who regulates prediction markets could land on the Court’s docket within two years. A legislative solution through CLARITY would preempt that, giving Congress control over the outcome rather than nine justices.
For now, the industry waits. Kalshi and Polymarket continue operating in legal uncertainty, caught between state gambling regulators who want them shut down and a federal regulator who claims exclusive jurisdiction but may lack the resources to actually oversee them.
Kennedy captured the tension in his testimony: the CFTC needs authority and resources to handle prediction markets. Whether Congress delivers both remains the open question.
As Kennedy put it, looking at the subcommittee members: “I do believe that with additional resources, they’re about to perhaps receive additional authorities under the CLARITY Act.” The “perhaps” is doing a lot of work in that sentence. The bill still needs to pass.
