Outgoing Commodity Futures Trading Commission (CFTC) Commissioner Kristin N. Johnson has issued a warning, predicting that the risks posed to retail investors by the market are increasingly growing. She pointed out that the lack of regulation and unclear regulatory frameworks are major concerns.
In her farewell public speech on Wednesday, Johnson expressed her worries that certain market participants are offering leveraged prediction market contracts to retail investors in the absence of clear regulatory boundaries.
"To date, we have too few safeguards for prediction markets and too little visibility," she noted in her farewell speech at the Brookings Institution. "The Commission urgently needs to clearly articulate our regulatory expectations for such contracts," she further added.
Johnson, who was appointed as a CFTC commissioner in 2022, expressed her "deep disappointment" at the agency's failure to implement rules for political event contracts. These contracts, which allow users to bet on the outcomes of elections or sports events, have rapidly gained popularity and trading volume.
Johnson also criticized the growing trend of "leasing or selling licenses" in the derivatives market. She pointed out that some companies first apply for licenses for traditional products, but after approval, quickly shift to self-certified prediction market contracts.
"In other cases, licensed companies quickly auction their newly acquired licenses to others," she emphasized.
Her views reflect broader concerns about consumer protection and market stability. Johnson compared the collapse of crypto firms like FTX to the 2008 financial crisis, noting that failures in governance and risk management often follow predictable patterns.
"If we fail to properly prioritize consumer protection or market stability in our pursuit of innovation or growth benefits, the consequences could be catastrophic," Johnson warned.
She also reminded that inadequate internal controls and weak compliance systems remain prevalent among emerging market participants, especially in the cryptocurrency space and now in prediction markets. "Innovation and market stability should complement each other, allowing one to promote the other," she stated.
Johnson's warning about prediction markets comes as the CFTC issued a no-action letter to QCX LLC and QC Clearing LLC, two entities closely associated with the prediction market platform Polymarket.
Although the decision does not exempt these entities from future compliance obligations, it allows Polymarket to operate an event-driven market in the U.S. without immediate regulatory penalties. In July, Polymarket acquired the CFTC-licensed exchange and clearinghouse QCEX for $112 million.
Related: Wintermute urges the U.S. Securities and Exchange Commission (SEC) to exclude network tokens from securities rules
Original: “CFTC's Johnson warns of insufficient regulatory measures for prediction market risks”
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