Paradigm Files Comment Letter on the CFTC’s Prediction Markets Rulemaking

Today, Paradigm filed a comment letter with the Commodity Futures Trading Commission in response to the agency’s advance notice of proposed rulemaking regarding prediction markets. For years, we have been calling for clear, principles-based regulations on prediction markets that will allow them to grow in America in a responsible manner. After years of wishes cast to the heavens, the CFTC has heard our prayers. The CFTC’s ANPRM reflects exactly the kind of flexible, principles-based approach that Congress intended when it modernized the CEA and gave the CFTC exclusive authority to regulate these markets.

Of course, this action is not the first move this CFTC has made on this subject. The agency was right to withdraw its 2024 proposal attempting to revive the ill-conceived economic purpose test, a rigid, one-size-fits-all framework designed for traditional agricultural futures that has no business being applied to modern event contracts. As Commissioner Mersinger explained at the time, the test would have automatically invalidated entire categories of contracts that serve genuine hedging and informational purposes, and would have improperly substituted the CFTC’s judgment for investors’ own decisions about how to manage their risk.

But our letter urges the Commission to go a step further and formally repeal Rule 40.11(a), which still provides significant discretion for the CFTC to designate broad classes of event contracts as contrary to the public interest, and which has been the subject of much confusion during the ongoing litigations. The ANPRM is a strong signal that the CFTC understands the direction here; Rule 40.11(a) should be updated to match that signal, replacing categorical prohibitions with the individualized public interest determinations that the CEA’s text actually calls for.

Our letter also addresses three more targeted issues:

• First, on margin trading, we recommend the CFTC allow prediction market customers to trade event contracts on margin, with appropriate guardrails, just as they can with other futures contracts on designated contract markets. Requiring full pre-funding disadvantages customers and markets alike, particularly for longer-duration event contracts where liquidity matters most; the CFTC can address investor protection concerns through margin limits and disclosure requirements without foreclosing the option entirely.
• Second, on insider trading, we support restrictions, and particularly where a single individual controls the outcome: the manipulation risk in those contracts is qualitatively different from a contract on a team’s or player’s aggregate performance, and Core Principle 3 is a natural fit for managing it.
• Third, on blockchain-based prediction markets, we support technological innovation but not regulatory arbitrage—an off-shore architecture shouldn’t be a mechanism for escaping CFTC oversight, and the Commission’s rulemaking should make that clear while leaving room for responsible on-chain innovation.

Prediction markets are genuinely valuable as information aggregators, as hedging tools, and as proof that regulated financial markets can serve a much wider range of purposes than traditional derivatives markets have historically covered. The CFTC’s willingness to engage seriously with how to regulate them well is exactly what this moment calls for. We look forward to continued engagement as the Commission moves toward a final rule.

You can read Paradigm’s full comment letter here.