The conflict that erupted at a CFTC-hosted meeting on Thursday can be seen as more than just a regulatory attempt. Prediction markets like Kalshi and Polymarket increasingly use cryptocurrency-based settlement systems, while the regulator involved in the conflict decides which approach should be applied to regulating event contracts and perpetual futures in the United States.
The stakes are high, as the prediction market volume grew to $63.5 billion in 2025 from $16.5 billion in 2024. Whether Washington imposes federal-level regulation of the prediction market or leaves it to the states could determine whether liquidity smoothly consolidates or becomes fragmented. CME Group CEO Terry Duffy noted on Thursday that the existing regulatory system could also be exploited by unscrupulous market participants.
Duffy Criticizes Self-Certified Contracts
At the meeting of the Commodity Futures Trading Commission's (CFTC) Market Risk Advisory Committee, Duffy criticized the number of event contracts that exchanges have self-certified rather than submitted for review. He pointed to contracts concerning what former President Donald Trump might say in his State of the Union address and when Venezuela's President Nicolás Maduro might be ousted from power.
"Effectively, there are people who manipulate these contracts," Duffy said, as reported by Sarah Wynn from The Block. "It is not good for our industry. It is terrible for our industry."
There is a certain irony in his warning. CME has supported event-based contracts—100 million such contracts have been traded since the product's launch in December—and has pointed to this as proof of demand from the "next generation of potential traders."
Yet on Thursday, he linked market integrity to former President Trump's vision of turning the U.S. into the "world's crypto capital," stating that questionable contracts jeopardize this endeavor.
Selig Counters with 'Fake News'
Commodity Futures Trading Commission (CFTC) Chairman Michael Selig immediately challenged Duffy's examples, stating that the specific contracts he mentioned were never listed on a U.S. exchange.
"That happened offshore, and that is fake news," Selig said.
Duffy stood his ground. "I'm just raising the issue, it's not good for markets," he responded.
This situation illustrates a larger jurisdictional struggle. While Selig asserted that the CFTC has "exclusive jurisdiction" over prediction markets, including sports contracts, many states insist that such products constitute gambling, falling under state law.
The Commission is considering additional rule changes and stronger retail protections. "We have heard the public's concerns loud and clear regarding insufficient consumer protection in retail," Selig said on Thursday.
Insider Trading Scandals Fuel Backlash
Congress is also examining prediction markets following two highly publicized cases. A U.S. soldier has been charged with placing bets on the capture of Venezuela's President using classified information. Meanwhile, former President Donald Trump's well-known teleprompter operator is suspected of placing bets on Kalshi regarding events that would occur during the President's address to Congress, having received insider information about it.
Lawmakers have proposed imposing restrictions on sports and gambling contracts, and the Senate passed a law prohibiting its members from trading on prediction markets. Companies Kalshi and Polymarket announced new control measures aimed at combating manipulation and insider activity.
The tension turned personal when Kalshi's Chief Operating Officer Luana Lopez Lara asked Duffy if CME had ever encountered manipulation.
"My compliance department has more people than you and your entire company," Duffy replied.
"Perhaps you could learn a little about efficiency," Lopez Lara retorted.
"Perhaps you should look at sound markets," Duffy responded.
Why Crypto Traders Should Follow This
The dispute is already in court. As reported by Cryptopolitan, in June, CME sued the CFTC and Selig over the agency's approval of Kalshi's products, arguing that these products should be regulated under swap rules, not futures rules.
This decision has significant implications not just for prediction markets. Since then, Kalshi has expanded into crypto perpetual contracts, offering contracts on 13 cryptocurrencies after launching BTCPERP on June 3.
If CME succeeds in challenging the CFTC's policy framework, the legal basis supporting these products could also weaken. This would place not only prediction markets but also some of the newest regulated crypto derivatives under new legal scrutiny.
Federal Government of the United States │ ▼ ┌───────────────────────────┐ │ CFTC │ │ Commodity Futures │ │ Trading Commission │ └────────────┬─────────────┘ │ Federal Derivatives Regulator │ ┌──────────────────┴──────────────────┐ ▼ ▼ ┌────────────────┐ ┌───────────────┐ │ KALSHI │ │ OTHER DCMs │ │ Prediction │ │ / Derivatives │ │ Market │ │ Platforms │ └───────┬───────┘ └────────────────┘ │ │ │ DISPUTE │ ▲ ▼ │ ┌───────────────────────┴──────────────────────┐ │ STATE AUTHORITIES │ │ State Gaming Regulators + │ │ State Attorneys General │ └──────────────────────┬─────────────────────┘ │ Lawsuits under Gambling Laws │ ▼ ┌──────────────────────┐ │ FEDERAL COURTS │ │ To decide whether │ │ federal authority │ │ trumps state laws │ └────────────────────┘
Here is the real situation: there is no single, clear hierarchy. There are three overlapping centers of authority:
- The Commodity Futures Trading Commission (CFTC) claims that federally-regulated derivatives/event contracts fall under federal commodities law.
- States argue that event-based contracts, especially for sporting events, may constitute gambling under state law.
- Federal courts are increasingly tasked with deciding where federal jurisdiction ends and state jurisdiction begins.
Recent litigation shows this is not just theory. Washington state compelled Kalshi to restrict several markets, while the CFTC took the opposite stance in its broader struggle with state regulators.
