In the US, a stock exchange can begin offering new prediction markets very quickly – simply by filing a form confirming the market follows the law and then starting trades the next day. There’s no need to wait for approval. However, a loophole in the Dodd-Frank law, stemming from just three unclear words, could create problems. The Commodity Futures Trading Commission (CFTC) recently opened a process to clarify the meaning of these words and resolve the issue.
Summary
- Under CFTC Rule 40.2, a registered exchange may list a new event contract by self-certifying that it complies with the Commodity Exchange Act, without waiting for Commission approval, which is why new markets can appear within days of a news event.
- The Dodd-Frank Act added a Special Rule letting the CFTC prohibit event contracts that involve enumerated activities, unlawful activity, terrorism, assassination, war, or gaming, when they are contrary to the public interest.
- Rule 40.11 implements it as a 90-day review during which the Commission may request suspension of trading and must issue an order by day 90, with silence meaning the contract continues.
- The statute never defined “involve,” “gaming,” or “public interest,” and that vacuum produced the 2023 order barring Kalshi’s congressional-control contracts, the litigation that followed, and a proposed categorical ban in 2024 that was never finalized.
- On June 10, 2026 the Commission published a notice of proposed rulemaking to define the terms and formalize the process, with a settlement-based test for when a contract “involves” an enumerated activity and a structured three-step public-interest inquiry.
Unlike traditional financial markets which require approval before trading can begin, new prediction markets can start trading almost immediately in the U.S. by simply notifying the Commodity Futures Trading Commission that the market complies with existing laws. This fast-paced environment is what has allowed markets to appear so quickly – sometimes within days – for events like court rulings or data releases. However, this speed comes with a risk. Congress included a clause allowing the Commission to review and even ban these markets *after* they’ve begun trading, based on a vaguely defined legal standard. For fifteen years, the meaning of this standard has been unclear. This June, the Commission proposed a definition. This guide explains the entire process – how markets are listed, what this potential ban entails, the legal history surrounding it, and what the proposed rule changes would mean.
The default: certify and list
Section 40 of the Commission’s rules explains how registered companies can submit new products or changes to existing rules. It provides two different methods for doing so.
There are two ways to get a new product approved. Rule 40.3 involves submitting the product and waiting for the Commission’s approval. Rule 40.2 is a faster option called self-certification. With self-certification, the exchange simply files a statement confirming the product follows the law, provides the contract details and an explanation, and then lists the product. This doesn’t require Commission approval or a significant wait time. Essentially, the exchange is taking responsibility for verifying the product’s legality.
The idea is that exchanges already have ongoing responsibilities to ensure fair trading, meaning they must list only contracts that are difficult to manipulate and actively monitor their markets. Allowing exchanges to self-certify new contracts puts the decision-making power with those who best understand the products, enabling faster innovation while still allowing regulators to step in if needed. This is how an exchange connected to a brokerage was able to quickly start offering contracts on baseball games in May and World Cup matches by the tournament’s start in June – they only needed to submit two filings without waiting for formal approval.
Self-certification has been around for many years and isn’t limited to event contracts. It’s important to note that while it shares a name with a similar process used for digital assets – which we cover elsewhere – the two are distinct. The digital asset version deals with whether a blockchain is established enough to move beyond securities regulations, operates under different laws, and involves different parties than self-certification as applied here. While the term ‘self-certification’ is the same, the way it works isn’t.
The trapdoor: the Special Rule and Rule 40.11
In 2010, Congress limited this flexibility with the Dodd-Frank Act, but the restriction only affects agreements for events.
A specific regulation, found in Section 5c(c)(5)(C) of the Commodity Exchange Act, allows the government to prevent a registered exchange from offering contracts on certain events – even if those contracts meet all other requirements. This can happen if the event relates to one of five prohibited activities and the government decides it’s not in the public’s best interest. These forbidden activities include anything illegal under federal or state law, terrorism, assassination, war, gambling, and any similar activity specifically designated by the government.
Established in 2011 to put the Special Rule into action, Rule 40.11 outlines the process for reviewing certain submissions. If a submission concerns one of several specific activities, the Commission can begin a 90-day review period. During this time, it must ask the exchange to temporarily halt trading of the contract, publicly announce the review, and potentially seek public feedback. The Commission then has 90 days – or an agreed-upon extension – to approve or reject the contract. If no decision is made within that timeframe, the review ends and trading can resume.
Two key aspects of this system are particularly important. First, each review is handled individually, meaning similar contracts aren’t necessarily treated the same way. Second, the regulator has a limited time to respond – if they don’t act within 90 days, the exchange wins. This is unusual for financial rules and gives the industry a significant benefit.
The three words nobody defined
The Special Rule and Rule 40.11 rely on three vague terms – ‘involve,’ ‘gaming,’ and ‘public interest’ – that significantly impact outcomes but lack clear definitions.
As someone investing in these new crypto contracts tied to real-world events, I’ve been thinking about what exactly constitutes ‘gambling’ here. Are we actually *doing* the gambling ourselves because it’s linked to sports betting, or are we just trading a contract that *references* those bets? Is the actual gaming happening with the event itself, when we trade the contract, or is it more about where this trading takes place? It gets even trickier with politics – if some states ban betting on elections, does trading these contracts on a legal exchange still break those laws? And ultimately, is all of this good for everyone because it brings information together, bad because it encourages betting, or is there a sweet spot regulators need to figure out?
When creating Part 40 in 2011, the Commission intentionally didn’t resolve certain issues, leading to fifteen years of inconsistent results. This isn’t about faulting any specific decision; it’s a natural consequence of a law that allows for flexibility without clear guidelines. The current rule-making process aims to address and correct this problem.
The case history
There are four key events that have heavily influenced how things are done today, and understanding them is important because they serve as the foundation for current industry standards.
In 2012, a political contract issue arose, and the Commission began a review, asking for the contract to be paused and requesting feedback. Before any official ruling was made, the exchange canceled its approval, meaning the Commission didn’t need to clarify the contract’s details and the proposed ruling wasn’t released – this pattern of avoidance happened multiple times. PredictIt, a market linked to academic research, operated under a special agreement instead of formal certification, which eventually led to legal challenges.
In 2023, after a thorough review, the Commission blocked Kalshi from offering contracts based on which party would control Congress, arguing these contracts constituted illegal gambling and were not in the public’s best interest. Kalshi fought this decision in court, and the resulting legal process ultimately paved the way for regulated election markets – significantly shifting power away from the Commission and towards exchanges. Later, in 2024, the Commission suggested a much wider rule that would have banned contracts related to both political events and sports, but this proposal was never put into effect.
All four cases follow a similar pattern: someone claims power, there’s disagreement about what something actually means, and the issue isn’t solved with clear guidelines – instead, it ends through giving up, going to court, or simply being dropped. This past experience is exactly why the proposal for June 2026 was created.
The 2026 rulemaking
We’ve seen a significant rise in applications from companies wanting to run prediction markets, so we put out an advance notice back in March 2026. Following that, on June 10th, we formally proposed changes to Rule 40.11 with a public notice of proposed rulemaking – specifically addressing how these prediction markets serve the public interest.
This proposal addresses several key areas. First, it clarifies when a contract is considered to involve specific activities by focusing on what the contract actually resolves, rather than just loosely relating to those activities – this will reduce confusion. Second, it defines what constitutes ‘gaming’ for the purposes of these regulations. Third, it establishes clear public-interest factors and a specific three-step process the Commission must follow when evaluating a contract, replacing subjective judgment with a structured approach. Finally, it formalizes the review process: the Market Oversight Division will initially share concerns in writing, the exchange can then respond with proposed changes, the Division can make recommendations with another chance for the exchange to reply, and if no decision is made within 90 days, the review ends and the contracts can proceed. The proposal also allows the Commission to review similar contracts from different exchanges together.
The proposal doesn’t require exchanges to stop self-certification. It maintains the quick approval process under Rule 40.2 but adds a more organized review system afterward, suggesting the Commission wants things done quickly but with careful oversight. The final version of the rule is still uncertain, and industry groups, state regulators, and consumer advocates are currently voicing their opinions during the comment period.
The comment war underway
When a new rule is proposed, it naturally sparks debate. In this case, the groups involved have very different goals, making the final version of the rule difficult to predict.
The exchanges strongly prefer the proposed definition of “involve,” which focuses on settled agreements, because it would best safeguard their business. They believe a clear rule based on what a contract actually settles—rather than a vague connection to regulated activities—would exclude most sports and political bets from regulation, allowing them to operate with certainty. They also want to keep the current 90-day deadline for regulatory review, as a firm timeline is more valuable to them than any changes to the rules themselves.
State gambling regulators disagree strongly with this approach. They’re arguing in courts across a dozen or more states that sports contracts *are* bets, no matter how they’re presented at the federal level. They believe a narrow federal definition of gambling would undermine state authority over activities they’ve regulated and profited from for years. Tribes who rely on gaming agreements with states also object, pointing to their history of successfully defending those agreements when challenged. Finally, consumer groups and organizations focused on problem gambling argue that these offerings function essentially the same as betting, and regulators should prioritize protecting people from addiction and financial harm over simply maintaining market fairness.
As a crypto investor, I’m really keeping a close eye on what’s happening with Congress right now. There’s a bill being considered that could completely ban crypto-related sports contracts on major exchanges, and if that passes, a lot of the current regulatory discussions become less important. The timing of any new rules is crucial. If the regulators finalize rules *before* Congress acts, it influences the debate. If they wait, they have to adjust to whatever Congress decides. I’m watching both the official comment sections for these rules *and* the progress of this bill – neither one tells the whole story. The industry’s own statements about what they’re worried about will likely be the clearest signal of what outcomes they’re trying to avoid. It’s a complex situation, playing out through lawsuits, public comments, and potential new laws all at the same time.
What this means in practice
For a participant, three consequences follow from the mechanism.
Markets can emerge and disappear quickly. If a contract you’re holding was approved for listing by the exchange, regulators still have the power to investigate and temporarily halt trading. Exchanges have previously removed their approval of contracts, effectively shutting down the market without any trades taking place.
When a new asset begins trading, the exchange initially determines if it complies with the law – this is called self-certification. How well an exchange makes that determination depends on their understanding of regulations and how much risk they’re willing to take. If a market offers products that stretch the boundaries of what’s allowed, its survival hinges on whether the exchange accurately assessed the chance of regulatory scrutiny. As crypto.news has previously reported, this product is structured as a simple ‘yes’ or ‘no’ offering, which differs from traditional trading.
Currently, many important legal issues in this field are being settled through a specific process. This includes contracts for sports and politics, as well as anything related to regulated gambling. These matters all come before the Commission via reviews of products that companies self-certify under regulation 40.11 – meaning this little-known rule is surprisingly central to shaping the future of the industry. In effect, anyone tracking legal developments in this sector is really following the implications of Part 40.
Ultimately, this system impacts traders in a way that’s often unseen until their access to a market is suddenly cut off. The products listed on U.S. exchanges aren’t permanently approved; they’re only available because the exchange has certified them and the regulatory commission hasn’t raised objections – it’s a much more tentative process than it appears. Contracts are added based on an internal decision about whether they comply with rules, and can be removed just as quickly if regulators begin to investigate or the exchange pulls its approval, sometimes without any formal order or warning to traders. This all happens without needing court involvement, a hearing, or even advance notice for those who hold positions in these contracts.
Here are a few simple but important practices to keep in mind. Choose platforms with proven reliability – a history of following the rules is valuable information. Be extra cautious with contracts related to sensitive areas like sports or gambling, as these carry a higher risk of regulatory changes in addition to normal market risks. Always read the platform’s policy on what happens to your open bets if trading is halted or a market closes unexpectedly; this can vary and is the most crucial detail when things go wrong (which is exactly what this guide prepares you for). The same features that make American prediction markets quick also mean they can be shut down, so understanding both sides of this coin is key to participating responsibly. All of this operates within existing federal regulations.
Frequently asked questions
What is self-certification for event contracts?
CFTC Rule 40.2 lets registered exchanges quickly list new contracts. Instead of waiting for the CFTC to approve them, the exchange simply confirms the contract follows all relevant laws and regulations. This puts the responsibility for ensuring compliance on the exchange itself, allowing trading to start almost instantly – which is why we often see new markets pop up so quickly after major news events.
Does the CFTC approve prediction markets before they trade?
Typically, exchanges don’t need prior approval. They can choose to get voluntary approval under Rule 40.3, but most often they simply self-certify. The Commission usually steps in later, reviewing contracts to make sure they comply with the law and, if necessary, blocking those that don’t.
What is the Special Rule?
In 2010, the Dodd-Frank Act amended the Commodity Exchange Act, giving the CFTC the power to ban certain event contracts. Specifically, Section 5c(c)(5)(C) allows the CFTC to prohibit contracts involving illegal activities, terrorism, assassination, war, or gambling if the Commission believes they are harmful to the public interest. Rule 40.11 puts this authority into practice.
How does the 90-day review work?
If a proposal involves any of the listed activities, the Commission can begin a review. During this review, it must ask the exchange to temporarily stop trading the product and may ask for public feedback. The Commission must then approve or reject the proposal within 90 days, or within any agreed-upon extension period. If a decision isn’t made within that timeframe, the review ends and trading can resume.
Why is the wording of the rule such a problem?
The law and its related rules didn’t clearly define key terms like “involve,” “gaming,” or “public interest,” giving the Commission a lot of freedom but without clear guidelines. This led to fifteen years of inconsistent decisions, handled through withdrawn approvals, court cases, and a scrapped plan for 2024, instead of consistent, predictable rules.
What happened with Kalshi’s congressional contracts?
The Commission examined contracts related to predicting which party would control Congress. In 2023, they issued a ruling against these contracts, determining they were a form of illegal gambling under state laws and harmful to the public. Kalshi, the company involved, fought this decision in federal court, and the legal battle eventually paved the way for legally regulated election prediction markets.
What does the June 2026 proposal change?
As a crypto investor, I’m reading that they’ve come up with a way to decide if a smart contract is dealing with things that need regulation. It looks like they’ll be checking if a contract actually *settles* on a regulated activity to determine if it’s involved. They’ve also clearly defined what they consider ‘gaming’ and laid out a three-step process for deciding if something is in the public interest. The exchange will have a formal process for raising concerns, and if those aren’t addressed within 90 days, they automatically side with the exchange. Good news is, they’re keeping the fast-track self-certification process open, which is a big relief – they aren’t making it harder to launch new projects.
Is this the same as self-certification in crypto market-structure legislation?
That idea, found in proposed laws about digital assets, determines if a blockchain network is decentralized enough to avoid being regulated as a security – which falls under different rules overseen by a separate agency. While both concepts share some common ground, they are distinct processes and shouldn’t be mixed up. Please remember this information is for educational purposes only and isn’t financial or legal advice.
2026-07-27 12:23