Jay Clayton, the previous chair of the SEC from 2017 to 2020, identified for his robust stance on cryptocurrencies and defending retail traders, has just a few ideas on prediction markets—an area that’s rising dangerously quick and more and more blurring the road between investing and playing.
“In any new factor—and I don’t wish to get forward of the CFTC or the SEC—it’s important to ask your self: What perform is that this product performing?” He stated yesterday (Dec. 2) throughout an interview at a semafor occasion hosted on the New York Inventory Alternate.
One such “new factor” Clayton handled throughout his SEC tenure was preliminary coin choices, or ICOs. His view was that ICOs serve the identical function as IPOs and due to this fact are topic to U.S. securities legal guidelines.
“Individuals had been like, Oh no, it’s not a inventory, it’s a coin. Properly, it’s an funding in an organization that you just count on to get a return, so the perform it’s performing is identical as a inventory or the identical as some type of bond,” Clayton stated.
He then returned to prediction markets. “The actual query is what perform are prediction markets offering?” He stated. “When does it look similar to a cash-settled choice on a inventory? And when does it seem like a wager on a soccer recreation? These are two totally different features… If I am going into the betting store and purchase a cash-settled choice on American Categorical, ought to it simply be regulated as a wager or ought to it’s regulated as a cash-settled choice?”
There’s no simple reply. Within the U.S., prediction-market contracts are handled as derivatives or occasion contracts, placing them beneath the authority of the Commodity Futures Buying and selling Fee (CFTC). Each Polymarket and Kalshi function beneath particular CFTC licenses as regulated exchanges beneath U.S. derivatives regulation. Nevertheless, some sorts of occasion contracts—significantly these tied to sports activities or gaming outcomes—could face extra restrictions beneath state-level playing legal guidelines.
Each firms have had bumpy paths in reaching U.S. clients. Polymarket was banned by the CFTC in 2022 for providing unregistered occasion contracts. Some U.S. customers stayed on the platform by utilizing VPNs. It formally returned to the U.S. final month after receiving an amended Designated Contract Markets license from the CFTC. Kalshi has confronted comparable scrutiny, together with a Nevada courtroom ruling final month that a few of its sports activities contracts fall beneath state gaming regulation fairly than federal oversight.
“Individuals search for regulatory reduction by offering an in depth sufficient perform to one thing that’s extremely regulated, after which they’ll function beneath much less regulation…However it’s important to ask your self, is it far sufficient away from a present perform that’s lastly regulated that it must be regulated in a different way?” Clayton stated. “Fortunately, I don’t have to consider these issues.”
Clayton is now the U.S. legal professional for the Southern District of New York, a task President Trump appointed him to in April.
Prediction markets are breaking into the mainstream. The younger founders of each Polymarket and Kalshi not too long ago turned billionaires as their firms’ valuations soared.
Final month, the NYSE’s father or mother firm, Intercontinental Alternate Inc. (ICE), introduced plans to take a position $2 billion in Polymarket and distribute its knowledge to establishments worldwide. Polymarket is reportedly nearing a valuation between $12 billion and $15 billion because it pursues a brand new funding spherical.
