Former CFTC Regulator Carl Kennedy on Prediction Markets, Insider Trading & Federal Oversight

With cease-and-desist orders flying, lawsuits piling up, state regulators and tribal gaming leaders pushing back, and a public still trying to figure out what exactly the fight is all about, prediction markets are now front and center in one of the most contentious legal battles over jurisdiction in recent years.

Watching it all unfold, it’s hard not to reach the conclusion that prediction markets currently sit in a legal no-man’s-land. To some, they’re nothing more than gambling. To others, they’re legitimate financial contracts. 

That was the backdrop when CasinoBeats spoke with Carl Kennedy about the legal tug-of-war over prediction markets and what comes next. Kennedy is a partner and co-chair of Financial Markets and Regulation at Katten and a former regulator at the U.S. Commodity Futures Trading Commission (CFTC) who was a primary drafter of several rules implementing the Dodd-Frank Act.

Kennedy explained that the current moment reflects the CFTC more directly asserting authority over contracts it has long believed fall under its jurisdiction. However, the position the agency has taken puts it in direct conflict with state regulators, who view the same products as illegal gambling. And that has created the tension we’ve seen play out in courtrooms, regulatory filings, and public debates over what prediction markets really are. 

New CFTC Leadership Resets Debate

When the CFTC formally withdrew its 2024 event-contracts proposal and 2025 sports advisory on February 4, it was the clearest sign yet that the agency was preparing to assert its authority over prediction markets more directly. 

Much of the current fight over prediction markets comes down to a basic question: Is the CFTC breaking new ground, or more directly asserting authority it believes it already has?

Kennedy divides the last two years of CFTC actions on event contracts into two phases: an earlier proposal that never became final under one leadership team and a reset under another. 

He traced the current fight back to the agency’s earlier attempts to reshape the rules. “There was a 2024 proposal where the CFTC sought to further amend its rulemaking dealing with event contracts generally,” he said.

If that notice of proposed rulemaking had been adopted, we’d be looking at a very different playing field because it would have narrowed the path for political and sports-related event contracts on CFTC-regulated markets by treating broad categories of “gaming” as contrary to public interest. 

In 2025, as litigation piled up and the government was on the brink of a shutdown, CFTC staff issued an advisory that focused on sports-related event contracts. 

To Kennedy, it read less like a shot across the bow and more like a risk-management memo for exchanges and intermediaries that might find themselves without active guidance if parts of the federal government went dark. 

“It was sort of a cautionary note” that market participants should consider the ongoing litigation around certain prediction market contracts and “make plans regarding risk management as it relates to the litigation… and perhaps consider whether they should make certain disclosures to their customers,” he said. 

It’s that context that makes the early decisions of the new CFTC chair, Michael Selig, stand out. Within weeks of taking over, he moved to withdraw the 2024 proposal, withdraw the 2025 sports advisory, direct staff to work on a new event-contracts rule, and prepare the commission to step into federal court fights over prediction markets.

“I think what he’s done is kind of set the table for himself,” Kennedy said. “Now that I’m in charge … these are specific acts that I’m taking in furtherance of my view that … we believe that we have exclusive jurisdiction over these contracts. And here is the pathway: withdrawing things, joining in litigation, and now letting you know that our focus is on issuing proposed rules.”

From Kennedy’s perspective, the CFTC isn’t staking out a new position with its recent moves. Instead, it’s aligning its rulebook with a jurisdictional view it already held: that event contracts fall squarely within the CFTC’s authority.

Inside the CFTC’s Quiet Insider Trading Powers

If jurisdiction is one side of the prediction market debate, then enforcement is the other. On February 25, the CFTC’s Division of Enforcement issued an advisory based on two Kalshi cases involving the misuse of non-public information in event contracts.

While insider trading on prediction markets has gotten a lot of press in recent months, for many, it still sounds more at home in the securities world than in derivatives markets. 

“We’re used to being aware of this happening in securities markets,” he said. “Not as much so in derivatives markets, but notwithstanding that, the CFTC has consistently had the authority to go after… bad actors dealing with trading on material non-public information.”

He said that authority was reinforced after the 2008 financial crisis, when Congress passed the Dodd-Frank Act.

“In 2010, in the Dodd-Frank Act, when Congress passed it to address the financial crisis and establish derivatives regulatory reform … they gave the CFTC new authorities to make it even clearer that it could go after insider trading,” he said. “Since 2010, the CFTC … adopted a guidance document that basically says we can go after insider trading in our markets.”

In Kennedy’s telling, that is what makes the recent advisory more of a reminder than a turning point. The underlying authority predates prediction markets; the difference now is that a much bigger audience is paying attention.

So what, in his view, turns a sharp prediction-market trade into an enforcement case?

“Having information … relating to some financial contract or some financial instrument, and knowing how it’s going to perform based on that event or information, and how it will trade in financial markets,” he said. Simply having that information is not enough. “In the CFTC markets, you need two other things.”

Those additional requirements are a trade based on that information and some duty not to disclose or misuse it. And that’s exactly what makes the two Kalshi cases highlighted in the CFTC’s enforcement advisory such straightforward examples. 

Kennedy was just as careful to spell out what doesn’t qualify.

​“There’s a lot of confusion out there,” he said. “Just because someone makes money doesn’t mean that they’re necessarily engaging in insider trading… You may need to see a pattern. You may need to see three [trades] in order to see a pattern.”

And even then, enforcement is not immediate.

“You have to give that person due process,” he added. “If they don’t respond to that first request, send them a second one. You have to follow a process… You just can’t immediately go after someone and charge them. You need to know all the facts, if you’re a regulator, before you can take an enforcement action.”

For Kennedy, the advisory is best read as the CFTC letting everyone know that its existing anti-fraud and anti-manipulation toolkit already extends to prediction markets, not as the agency claiming new ground.

How Self-Regulated Exchanges Act as Cops

If the CFTC issued the recent insider-trading advisory to remind the public that it already has the authority to police misconduct, Kennedy pointed out that it also served another purpose: making clear who does that policing day to day. 

In CFTC markets, exchanges are not just venues; they are also regulators deputized by the agency to police their own markets.

“The CFTC is a mighty strong agency, but it’s a few people,” Kennedy said. Congress, he explained, gave the commission authority to empower its exchanges “to essentially help the agency to regulate these markets.”

That’s the logic behind the self-regulatory model. “In the CFTC markets, each exchange is its own regulator,” Kennedy said. “If you are a registered exchange … one of your roles is also to be a regulator deputized by the CFTC to police your own market.”

And, as he put it more plainly, the exchange is also “a cop on the beat,” responsible for ensuring there is no fraud or manipulation on its platform. This isn’t a special workaround for prediction markets. Kennedy explained that traditional derivatives exchanges police misconduct every day, using large teams and technology to detect fraud, manipulation, and other violations that disrupt trading.

What made the recent advisory unique, in his view, was not the underlying enforcement activity but the fact that the CFTC chose to spotlight it publicly. “The agency doesn’t usually put out a press release” to announce that an exchange is policing misconduct on its own platform, he said. This time, though, the commission wanted to send a broader message: “… these exchanges are deputized. They’re cops.”

The advisory was less about two isolated insider-trading matters than a public reminder that this kind of policing is built into the structure of derivatives markets. Or, as Kennedy put it, it was “more of a signal” that this is already happening and “will continue to happen in our markets.”

Why Prediction Markets Don’t Fit Neatly Into Gambling Laws

Outside of Washington is where you’ll hear the loudest criticisms of prediction markets, especially from state regulators and tribal gaming advocates who argue that these platforms are offering illegal sports betting under a different name. 

Kennedy said he understands those concerns, but he also argues that how these contracts may look is not the same as how they actually operate. 

“Derivatives markets generally provide market participants with opportunities to hedge their exposures to a wide variety of things,” he said. Sometimes those contracts may resemble other products, he added, “but that doesn’t mean they are those things under the law.”

He used flood risk as an example to illustrate this point. A homeowner can buy an insurance policy that pays out if a river overflows. A trader can buy an event contract that pays out if a certain region experiences a flood by a given date.

“Functionally, from a hedge perspective, [those contracts] do the same thing,” he said. “So all of a sudden, are these contracts insurance?”

“That structure has existed for decades,” Kennedy said. “It’s just that now that these contracts relate to sporting events is the new wrinkle.”

Sports-related contracts fit the same pattern. “You can have … sports betting that you can do on a sports book,” Kennedy said. “And you can have a contract that is event-driven that is on a derivatives exchange that is referencing a sports event, and functionally they may do the same thing, but they are not the same thing under the law.”

That structure is the key difference, according to Kennedy. Traditional gambling is a bet against the house, while event contracts are standardized instruments traded between participants on an exchange and routed through a clearinghouse. “Functionally, that is very different than you just betting with the house,” he said.

What New CFTC Rules May Address

Kennedy expects the next round of CFTC rulemaking to focus on clarifying how the agency exercises its existing authority, not on expanding its powers. In his view, the most immediate need is clearer standards for what kinds of event contracts exchanges should be allowed to list in the first place.

Laying out clear standards will let prediction markets know which event contracts are plainly acceptable and which could come under closer scrutiny. “There are all sorts of categories of contracts … but there aren’t specific rules,” Kennedy said. 

“So I think where this commission can go is they can go a little step further.” He said the agency could create “listing standards on a categorical basis” that identify which contracts are “A-OK” and which ones should trigger a conversation with the commission before they go live.

Consumer protection is another issue the agency may need to think more carefully about, even if it’s not part of its core mandate. “There are limits to what the agency can do,” Kennedy said. “They’re not a consumer-protection agency … but maybe, with thinking about what’s within CFTC authority, they could say something about consumer protections.”

He also believes it would help if the agency addressed how these products are marketed to the public. “There’s a whole lot of criticism about how the industry markets itself to the public,” he said, and that can create confusion.

In his view, the CFTC “could say something about promotions and marketing” to make sure those efforts are “consistent,” follow certain standards, or are subject to review before the marketing begins.

Where This Could End Up

We asked Kennedy about a February 19 ruling in Tennessee, one of the first favorable federal decisions for a prediction-market exchange, where a judge granted Kalshi a preliminary injunction and found that the company was likely to succeed on its argument that its sports event contracts are swaps subject to the CFTC’s exclusive jurisdiction.

Kennedy called the ruling “a significant data point,” but said the more important question is what happens if other courts disagree. “What it would set us up for is a circuit-by-circuit sort of view, where we may have different circuits reaching different conclusions, which then sets us up for a Supreme Court decision.”

Ultimately, Kennedy believes the choice between trading on a prediction market and wagering through a sportsbook should be left to the individual. “You can leave it to that person to decide whether they want to gamble for entertainment or if they want to choose these contracts that provide other benefits outside of entertainment,” he added. “I think they both coexist.”