Navigating Jurisdictional Uncertainty

Compliance Lessons from Emerging Prediction Markets 

As prediction markets gain mainstream traction, regulators and compliance professionals alike are grappling with a fundamental question: who has jurisdiction? The rise of event-based contracts, especially those referencing financial or corporate outcomes, is testing the boundaries of existing securities, commodities, and gambling frameworks.  

What Is A Prediction Market?

A prediction market is an exchange where people trade outcome-based contracts whose prices reflect the collective probability of future events. 

In a recent discussion with Troy A. Paredes, former Commissioner of the U.S. Securities and Exchange Commission (SEC), he highlighted several key regulatory and compliance implications that organizations should consider as these markets evolve.  

1. Jurisdictional Uncertainty: Where Oversight Begins and Ends

The current U.S. regulatory landscape remains fragmented. Oversight responsibilities among the CFTC, SEC, and state regulators often depend on the nature of the underlying product—whether it functions more like a security, security-based swap, future, or commodity interest.  

As prediction markets develop more sophisticated “event contracts,” particularly those referencing financial instruments or corporate events, regulators are expected to sharpen their focus. The question of who regulates what may hinge on the specific characteristics of these contracts, creating new gray areas for firms to navigate.  

“Regulatory lines may remain blurred, but compliance responsibilities are anything but.”  – Troy A. Paredes 

2. Regulatory Hooks and Expanding Oversight

Regulators may rely on a broad range of regulatory “hooks” to capture prediction market activity. These could include identifiers or linkages between prediction market transactions and traditional securities markets.  

Compliance officers should not lose focus on how “in connection with the purchase or sale” could be interpreted expansively, especially if algorithmic trading or data correlations start linking prediction markets with securities trading activity. Such linkages could effectively create a regulatory “highway” connecting the two realms, triggering enhanced scrutiny and oversight.  

3. Potential Enforcement Pathways: Beyond Classification

Even where jurisdiction remains murky, enforcement actions are still possible. The Department of Justice (DOJ) retains the ability to pursue cases under mail or wire fraud statutes, regardless of whether an asset falls clearly within the SEC or CFTC’s purview.  

Looking at U.S. v. Chastain (2nd Cir.), where NFT-related insider trading was prosecuted under wire fraud, demonstrating how courts may apply traditional misappropriation and property concepts to novel digital assets.  

The broader lesson: anti-fraud and anti-manipulation provisions apply universally, even without formal classification.  

Survey Says… 

A recent market study by StarCompliance (Star) asked –  Does your firm permit employees to participate in prediction markets? 

The overwhelming response was ”No.”   

Most respondents explicitly prohibit participation, especially in markets tied to financial instruments or securities. This does not necessarily mean that formal policies and procedures have been drafted.  

There is a trend of respondents reviewing the best approaches, stating that regulatory expectation is still unclear.   

Compliance and Risk Management: A Proactive Approach

Firms should not wait for regulatory clarity before taking action. Compliance and risk management programs must evolve alongside the markets themselves.  

Key steps include:  

• Updating policies and procedures to address event contracts referencing specific companies or securities.  
• Requiring employee attestations or disclosures for participation in such markets.  
• Balancing privacy protections with effective monitoring and oversight obligations.  

By anticipating potential regulatory interpretations, firms can minimize both regulatory and reputational risk.  

Market Developments: A Rapidly Evolving Landscape

As the market expands, real-world examples are already highlighting the tension between innovation and oversight. DraftKings’ recent launch of a prediction market app in the U.S. without legalized sports betting underscores the fragmented, fast-moving nature of this space.  

This divergence between federal and state-level rules mirrors broader challenges across digital assets, where technology often advances faster than regulation.  

The Bottom Line  

Prediction markets are pushing the limits of current regulatory definitions. For compliance teams, the path forward requires vigilance, adaptability, and a willingness to engage early with new risk models.  

To learn more about Star’s employee and firm compliance solutions, schedule a personalized demo here.

Steve Brown

As Head of Business Development, Steve Brown is responsible for helping drive growth at Star, with a focus on go-to-market planning, data and vendor partnerships, channel sales, new markets, and mergers and acquisitions. Steve joined Star in April 2021, and brings with him 25 years of experience advising financial firms on regulatory compliance. Prior to joining Star, Steve was Director of Broker-Dealer Client Services at Compliance Risk Concepts LLC, a senior director at PwC, and Head of Fixed Income and Capital Markets Compliance at U.S. Bancorp Investments, Inc. Steve began his career at Wachovia, where he was Head of Global Investment Banking Compliance and Control Group, and is considered a pioneer in the control room space—having established the bank’s first formal control room function.

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