Outgoing Commodity Futures Trading Commission (CFTC) Commissioner Kristin N. Johnson warned that prediction markets pose increasing risks to retail investors. She cited a lack of oversight and regulatory clarity as primary concerns.
In her farewell public address on Wednesday, Johnson voiced concern that some market participants are offering leveraged prediction market contracts to retail investors without clear regulatory boundaries.
“As of today, we have too few guardrails and too little visibility into the prediction market landscape,” she said in a farewell speech at the Brookings Institution. “There is an urgent need for the commission to express in a clear voice our expectations related to these contracts,” she added.
Johnson, appointed to the CFTC in 2022, said she was “deeply disappointed” the agency had failed to implement a rule addressing political event contracts. These contracts, which allow users to bet on outcomes of elections or sports events, have rapidly expanded in popularity and volume.
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Johnson slams license flipping loophole
Johnson also criticized the growing “rent or buy my license” trend in derivatives markets. She said some firms seek licenses for traditional products, then pivot to self-certifying prediction market contracts once approved.
“In other contexts, firms that have received a license quickly auction their newly minted license to others,” she said.
Her remarks echoed broader concerns about consumer protection and market stability. Drawing parallels between the collapse of crypto firms like FTX and the 2008 financial crisis, she argued that governance and risk management failures often follow predictable patterns.
“If we fail to rightly prioritize consumer protection or market stability on the road to capturing the benefits of innovation or growth, the results can be devastating,” Johnson said.
She also warned that poor internal controls and compliance systems remain widespread across newer market entrants, particularly in crypto and now prediction markets. “Innovation and market stability should work together, enabling one to foster the other,” she said.
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CFTC grants regulatory relief to Polymarket
Johnson’s warning against prediction markets came as the CFTC issued a no-action letter to QCX LLC and QC Clearing LLC, two entities connected to the prediction market platform Polymarket.
While the decision does not exempt the entities from future compliance, it allows Polymarket to operate event-based markets in the US without immediate regulatory penalties. In July, Polymarket acquired QCEX, a CFTC-licensed exchange and clearinghouse, for $112 million.
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