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 to revive an economic purpose test that was designed for traditional agricultural futures. Bringing back that test to modern event contracts would risk entire categories of contracts used for hedging and informational purposes, and would improperly substitute the CFTC’s judgment for investors’ own decisions about how to manage their exposure.
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. The ANPRM is a strong signal that the CFTC understands Rule 40.11(a) should be updated, and we support the agency following that signal.
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. Pre-funding disadvantages both customers and markets, particularly for long-term contracts where liquidity matters most. Investor protection measures like margin limits and disclosure requirements can be easily addressed through future rulemaking, but we encourage the CFTC not to foreclose the option entirely.
Second, on insider trading, we support reasonable restrictions where a single individual controls the outcome, and Core Principle 3 is a natural fit for implementing those restrictions. But the manipulation risk in those types of contracts is qualitatively different from a contract on a team’s or player’s aggregate performance, and the agency should recognize that difference when crafting its rules.
Third, on blockchain-based prediction markets, we support technological innovation but not regulatory arbitrage. The Commission’s rulemaking can leave room for responsible on-chain innovation while ensuring that off-shore architecture doesn’t become a mechanism for escaping CFTC oversight.
Prediction markets are genuinely valuable information aggregators and hedging tools, and they are proof positive that markets can serve a much wider range of needs than traditional derivatives have historically covered. The CFTC’s willingness to engage on how to regulate them 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.