Prediction markets round-up: CFTC investigates Kalshi, Novig faces New York setback

As usual, a lot has happened on the prediction markets front in a short time. From the Commodity Futures Trading Commission (CFTC) investigating Kalshi over what the operator named a minor error in event contract filings, to a federal judge rejecting Novig’s attempt to block New York state enforcement. Drug trial contracts are also increasingly under scrutiny from political figures. A round-up of the latest developments is laid out below.

CFTC investigates Kalshi over event contract filings

The CFTC is investigating Kalshi for failing to properly inform the agency of proposed event contracts. Kalshi has confirmed this to CNBC.

Kalshi described the issue as a minor procedural error involving a handful of contracts, many of which were never launched, and said it is working with the regulator to resolve it. The operator further noted that the CFTC flagged weather-related contracts.

Politico initially reported on the investigation, citing a private notice from the CFTC to Kalshi indicating that it could file charges soon. The latter declined to comment on the possibility of charges.

Possibly under increased pressure from regulators and members of Congress, the CFTC – which has previously taken a largely permissive stance toward the requests of prediction market operators – is now seeking to rein them in regarding certain contracts.

In August, it ordered Kalshi to remove certain sports-related "mention markets" while it looked into the types of these contracts and related concerns.

The CFTC is also probing wether Polymarket violated a 2022 settlement that prohibited US traders from accessing its international trading platform.

At the same time, Washington resident Scott Bright is suing Kalshi after losing more than $308,000 on its platform. He alleges Kalshi violated the state's ban on online gambling and should not have accepted his bets. Bright is seeking more than $580,000 in damages.

Despite regulatory challenges on many fronts, Kalshi continues to work to improve its offering. It has partnered with Artnet, the leading source for art market data and intelligence. Under this deal, Artnet will provide the data used to settle Kalshi’s art markets.

New York retains authority to challenge Novig’s sports markets

A Federal Judge in New York has rejected Novig's attempt to block state gambling enforcement, ruling that its sports contracts do not qualify as federally regulated swaps under the Commodity Exchange Act. This means New York can require Novig to obtain a gambling licence or prohibit it from offering the contracts to its citizens.

The decision denies Novig protection from enforcement but does not order the platform to shut down or finally resolve the lawsuit. Novig has filed a notice of appeal immediately after the decision.

In her opinion, Justice Colleen McMahon wrote: “From the perspective of the customer, there is no qualitative difference between Novig's product and FanDuel's traditional sports bet.”

She also noted that even if the contracts qualified as swaps, federal law would not necessarily override New York’s gambling laws. This means the state could still regulate what she sees as a betting activity on Novig’s platform.

Drug trial contracts draw scrutiny over potential risks to public health

Two Democratic senators have criticised prediction market event contracts on both clinical drug trials and Food and Drug Administration regulatory approvals.

Senators Angela Alsobrooks and Ron Wyden wrote the letter to the Department of Health and Human Services (HHS) Secretary Robert F. Kennedy Jr., asking what measures HHS has taken to mitigate risks that may possibly arise from these markets.

The senators wrote: “Allowing individuals to bet on the success of these trials and drugs undermines the scientific process, creates perverse incentives for researchers, harms trial participants and could lead to dangerous medical outcomes for untold numbers of Americans.”

Senators requested information from HHS, the FDA and the National Institutes of Health regarding risks associated with these markets. They are seeking details on internal assessments of the markets’ potential impact. According to senators, further safeguards are needed to prevent insider trading based on drug success or approval. Multiple healthcare professionals previously raised similar concerns.