Crypto.com, and contract prediction markets platform provider Kalshi, have reportedly attracted an investigation with the U.S. Commodity Futures Trading Commission. The CFTC’s inquiry revolves around whether these contracts comply with U.S. derivatives laws designed to prevent market manipulation and ensure fair trading practices. The investigation aims to shine more light on the challenges that emerging financial products face in navigating the complex web of U.S. regulatory requirements.
Regulatory Spotlight on Super Bowl Contracts
According to Bloomberg, which first reported the story, the CFTC contacted Crypto.com and Kalshi seeking detailed explanations of how their Super Bowl bets comply with derivatives rules. Crypto.com had informed the CFTC by a letter of Dec 19, 2024, about its plans to start trading these Contracts beginning on December 23, but the vacation schedule and also worry about a federal shutdown meant there wasn’t any appropriate time for the CFTC to review the products before initial trading.
Crypto.com which is an operator of a regulated U.S.-based derivatives exchange and maintains that its offerings are legal. It told Cointelegraph:
“We firmly believe in the legality of our events contracts and believe the CFTC is the appropriate regulator to bring federally regulated market integrity, manipulation controls, and product availability in all 50 states. We will continue to offer these contracts while we work with the CFTC.”
Kalshi,- which runs a prediction market where users can bet on everything from the outcomes of sporting events to what happens during the advertising breaks of the Super Bow-isn’t left out. A spokesman for the agency confirmed it also is reviewing similar contracts from Kalshi, making clear the agency’s broader interest in the quickly changing landscape of event-based financial products.
Understanding the Legal Framework
The legal premise in the U.S. for derivatives is murky, with the CFTC charged with a duty to ensure that financial products are incapable of manipulation and in conformity with laid-down regulations. Companies selling derivatives under the Commodity Exchange Act must demonstrate that their products meet these criteria, especially when they involve contracts based on events that resemble traditional bets.
Crypto.com and Kalshi allegedly used a process called “self-certification,” by which firms can launch new products while the CFTC is reviewing them. The process is legal, but places the onus on companies to comply as regulatory interpretations are constantly evolving.
As the CFTC can’t instantly halt trading of those contracts, with every enforcement action against them being subject to a review period as long as 90 days, with the Super Bowl on February 9, 2025, that all but guarantees these event contracts might remain live through the game. This, however, does not eliminate the CFTC’s option to later limit or ban these markets once its review is done, affecting future offerings.
Broader Implications for Prediction Markets and Crypto Derivatives
This inquiry marks a critical juncture in how cryptocurrency, prediction markets, and traditional financial regulation will coexist. Platforms like Kalshi and Crypto.com are part of a new generation of financial products further muddling the lines between derivatives trading and speculative betting.
Super Bowl markets at Kalshi have reportedly drawn more than $2.4 million in trading volumes in everything from “Kansas City vs. Philadelphia Football” to an additional $1.5 million betting about the ads that run during the game. Those numbers illustrate the upward trajectory event contracts are taking toward using the financial markets in innovative ways for traders.
Also, Robinhood Derivatives recently announced a partnership with Kalshi that lets select traders bet on Super Bowl outcomes. The deal is the latest example of traditional financial firms embracing event-driven trading products, adding complexity to the regulatory environment.
Insights on CFTC’s Stand
Regulators say the CFTC’s moves are indicative of a wider trend of more aggressive policing of new innovative financial products. Caroline Pham, the commission’s new chair, has signaled that the agency will pay closer attention to novel issues popping up in the derivatives market – including the proliferation of crypto-based and event-driven contracts.
The mandate of the CFTC is to protect market integrity and ensure that products are not susceptible to manipulation. While event-based contracts are an innovative product such as Super Bowl wagers, they invite some very valid concerns about market fairness, particularly when they are pegged to highly public events, said Angela Dawson, a regulatory analyst at FinTech Insights.
Crypto industry advocates, however, argue that increased regulation could stifle innovation. They emphasize that platforms like Kalshi and Crypto.com are providing valuable financial products that allow for risk management and market engagement beyond traditional assets.
Potential Outcomes and What’s Next
As the CFTC’s review continues, the outcome could set important precedents for the future of event-based contracts and crypto derivatives in the U.S. If the agency decides that such products are in violation of derivatives regulations, it could impose fines, restrict future offerings, or even ban similar contracts altogether.
However, the investigation also offers an opportunity for greater regulatory clarity. In working with the CFTC, Crypto.com and Kalshi may help shape the rules that will govern event-based financial products and could clear the way for broader adoption in the future.
For now, both exchanges have promised to keep Super Bowl markets on offer as they work with the regulators. It’s a balance between fostering financial innovation and robust regulatory oversight, and one that will shift as crypto and traditional finance continue to converge more.
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FAQs
1. Why is the CFTC investigating Crypto.com and Kalshi?
It probes if the event contracts offered by Crypto.com and Kalshi fit in with US commodity derivatives law amid concerns on their market integrity issues and the chance of their results being easily manipulated.
2. Will the CFTC immediately bar these Super Bowl bets?
Sources say the CFTC cannot immediately halt trading. It has to go through a formal review process that takes as long as 90 days. Given that the Super Bowl is on February 9, it may mean the contracts continue through the event.
3. What does “self-certification” in derivatives markets imply?
Self-certification allows firms to launch new financial products as the CFTC reviews them. Companies remain responsible for compliance with regulations, even as review is underway.
4. How does this investigation affect the crypto industry?
The investigation shows the growing regulatory scrutiny for crypto exchanges, particularly as they enter relatively new markets such as event-based contracts. The result may be more articulated rules for similar products in the future.
5. What if CFTC deems these contracts non-compliant?
If the CFTC finds them to be non-compliant with the laws related to derivatives, then there is a possibility of fines being imposed, restrictions on future offerings, or an outright ban on such products.
Glossary
- CFTC (Commodity Futures Trading Commission): The US regulatory agency charged with oversight of the derivatives markets, which include futures, options, and swaps.
- Derivatives: Financial contracts whose value is derived from the performance of an underlying asset, event, or index.
- Prediction Markets: Websites where people can buy and sell contracts depending on future events, from elections and sporting events to economic indicators.
- Self-Certification: The possibility for companies to introduce new financial instruments even while review by regulators is still in process, as long as companies themselves guarantee that relevant laws are complied with.
- Events-Based Contracts: A financial instrument where traders can make bets on any particular event such as a sport or election.
