SEC Eyes Prediction Markets, May Challenge CFTC’s Hands-Off Approach

The regulatory landscape for prediction markets, where users wager on outcomes ranging from elections to stock prices, may be on the verge of a fundamental shift. SEC Chair Paul Atkins explicitly identified the sector as an area of “overlapping jurisdiction potentially” with the CFTC during his Senate Banking Committee testimony. While the CFTC has been considered the default federal regulator, Atkins emphasized the need for harmonized oversight, stating, “We need to be harmonized in the way we’re addressing these markets.” This indicates a potential move toward a dual-regulatory model similar to that governing security futures—derivatives contracts tracking stocks or narrow-based indexes, which are already jointly regulated by both agencies.

Atkins’s comments, made in response to questioning from Senator Dave McCormick (R-PA), suggest the SEC believes it has sufficient existing authority to intervene. When asked if new legislation from Congress would be required, Atkins replied, “I think we have enough authority. A security is a security regardless of how it is.” He pointed to the “nuance” in prediction market products, noting that their classification depends on “wording and what exactly is being done.” This implies the SEC could focus on markets tracking assets already regulated as securities, such as individual stocks, bringing a new layer of scrutiny to a sector that has operated under the CFTC’s relatively light-touch framework.

The SEC’s potential involvement comes as the prediction market sector has experienced meteoric growth. According to the provided text, the industry more than quadrupled in size last year, emerging as a $63.5 billion market barely two years after beginning operations in the United States. This explosive growth has created significant financial players: sector leaders Kalshi and Polymarket have surged to valuations of $11 billion and $9 billion, respectively. The sheer scale and financial heft of these platforms have inevitably drawn greater regulatory attention, moving them from a niche innovation to a mainstream financial concern.

Historically, prediction market companies have “enjoyed extremely hands-off regulation by the CFTC, which relies heavily on registered platforms to self-regulate.” This permissive environment has facilitated rapid innovation and expansion. However, the SEC’s interest signals that this era of primary CFTC oversight may be ending. The agency’s focus on whether products are “structured and ‘worded'” as securities suggests a more granular, legalistic approach to regulation, contrasting with the CFTC’s broader commodities-based framework. This shift could impose new compliance burdens related to disclosure, registration, and trading protocols on platforms whose business models were built under different expectations.

The SEC is not the only regulator questioning the current oversight regime. State regulators have launched a parallel offensive, challenging the CFTC’s lax approach through litigation. As noted in the source material, state regulators have filed “numerous lawsuits arguing that sports-related event contracts—which constitute the overwhelming majority of prediction markets’ business—are in fact unlicensed sports betting operations under state jurisdiction.” This creates a pincer movement for the industry: facing potential federal securities regulation from the SEC on one side, and state-level gambling enforcement actions on the other.

This multi-front regulatory pressure underscores the ambiguous legal status of prediction markets. Are they innovative financial instruments, casual betting platforms, or something in between? The CFTC has treated them largely as event contracts falling under its purview. State lawsuits aim to reclassify them as gambling. Now, the SEC’s Paul Atkins introduces a third possible classification: securities. The outcome of this jurisdictional tug-of-war will have profound consequences. A coordinated SEC-CFTC approach could provide clearer, albeit stricter, federal rules that preempt state gambling claims. Conversely, fragmented oversight could stifle the industry’s growth, forcing platforms like Kalshi and Polymarket to navigate a patchwork of conflicting regulations.

As the SEC contemplates its move, the prediction market sector stands at a crossroads. Chair Atkins’s testimony marks a clear intent to examine the sector through the lens of securities law. The coming months will likely see increased scrutiny of how contracts are worded and structured, particularly for markets tied to securities prices. For an industry that has flourished under a hands-off model, adapting to potential SEC oversight—while simultaneously battling state regulators—will be its greatest challenge yet. The harmonization Atkins seeks may ultimately define the future viability and structure of this $63.5 billion market.