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Happy Friday, Fintech Takers!

I hope you had a lovely week, and if you have kids, I hope you are prepared for an intensely fun and exhausting summer! My kids are now out of school, so the chaos begins!

Today’s essay is about prediction markets and I apologize in advance for this.

I’d like to ignore prediction markets. I’d like to just laugh at how ridiculous some of the contracts are, marvel at how genuinely interesting others are, and just call it a day.

But I can’t. I care deeply about financial nihilism. It is perhaps the single most important problem in financial services, and the prediction markets (and, in particular, their integration into “investing” platforms like Coinbase and Robinhood) are making the problem worse.

As long as prediction markets are diverting consumers’ savings and investment budgets into bets on basketball games and award shows, I will continue (reluctantly) to learn about them and write about them.

- Alex 

P.S. — The Knicks: Wow! The Spurs: Woof. I had zero rooting interest in that game, and my heart was pounding in the fourth quarter. I felt like I needed a cigarette afterwards.

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Regulation by Vibes

On Wednesday, the Commodity Futures Trading Commission (CFTC) released a 267-page proposed rule for the regulation of prediction markets.

It’s a fairly dry read, as you might imagine, but there are some lively portions. This one is my favorite:

An event contract that settles on whether an individual will murder someone involves an activity that is unlawful under State law, because the settlement-determining occurrence—the murder—is itself within unlawful activity. Such an event contract presents the precise concerns that animate the Special Rule’s inclusion of unlawful activity. By contrast, an event contract that settles on whether Bernard Madoff is convicted of securities fraud by a specified date does not involve activity that is unlawful within the meaning of the Special Rule. The settlement-determining occurrence is the entry of a judgment of conviction by the court, which is a lawful judicial act. Although the underlying conduct alleged in the indictment—the operation of a multi-decade Ponzi scheme that caused tens of billions of dollars in investor loss—would, if proven, constitute unlawful activity, the event contract’s settlement is determined by the court’s judgment rather than by the underlying conduct itself.

If you read that carefully, you’ll notice a few interesting things.

The most obvious is the CFTC’s position that a prediction market event contract on the question of whether a prominent person — say the CEO of a Fortune 500 company — will murder someone would not be permitted, while an event contract on whether a prominent person like Bernie Madoff will be convicted of securities fraud would be allowed.

This feels somewhat reasonable.   

However, there are two things we should note.

First, both of these events have significant commercial and informational utility. Investors, for example, might want to hedge their exposure to a company or fund entangled in securities fraud, and, similarly, investors might want to hedge their exposure to the falling stock price of a company whose CEO murders someone.

Second, observe how the CFTC reasoning in these hypothetical examples hinges on the settlement-determining occurrence, which is the specific event that flips the contract from ‘open’ to ‘paid’. In the murder example, the settlement-determining occurrence that the CFTC chooses is the murder itself. The CFTC argues that this makes the event contract invalid since murder is illegal. In the securities fraud example, the settlement-determining occurrence that the CFTC chooses is the entry of a judgment of conviction for securities fraud by the court. The CFTC argues that this makes this hypothetical event contract valid because a conviction in court is a lawful judicial act.

This is a weird distinction to draw! And it poses an important follow-up question:

Would an event contract on whether a Fortune 500 CEO will murder someone within a specific timeframe be valid if the settlement-determining occurrence for that contract was the entry of a judgment of conviction for murder by the court against that CEO?     

Now, the normative answer that you or I or Mike Selig (the Chair of the CFTC) would give to that question would be, “No. Are you out of your mind? Of course not.”

However, according to the internal logic of the CFTC’s proposed rule on prediction markets, the answer would be, “Yes.”

That is a shocking thing to write. How could the CFTC propose a rule that would allow a prediction market to list a contract for murder, as long as the contract was written to settle on a court conviction rather than the murder itself?

I think the answer to that question is that the CFTC, when it sat down to write this rule, wasn’t trying to articulate a universal set of principles for how prediction markets should operate.

Rather, I think the CFTC was working backwards from a specific set of desired outcomes — save sports betting, kill death markets, ignore anything weird that we don’t want to deal with — and then constructed careful, lawyerly rationalizations for those outcomes and packaged them into something that looks like a rule.

The reason for the CFTC’s different treatment of murder and Madoff has nothing to do with settlement mechanics and everything to do with the fact that a securities-fraud market feels like finance and a market on whether a Fortune 500 CEO will kill someone feels like a Black Mirror episode.

Put simply, it’s regulation by vibes.  

How We Got Here

Quick background for those who haven't been following the prediction markets saga as obsessively as I have.

Event contracts are simple yes/no derivatives: you buy ‘yes’ on a question (Will the Fed cut in September?), and if the event happens, the contract pays $1. The price — say, 63 cents — doubles as the market's probability estimate. Platforms like Kalshi and Polymarket run these markets under the CFTC’s oversight, and they have gotten enormous, fast. The CFTC's own rule pegs 2025 volume across its registered prediction markets at more than $25 billion; Pew found that Kalshi and Polymarket combined monthly volume hit nearly $24 billion by March 2026, quadrupling in eight months. Roughly 80% of Kalshi's volume is sports.

That last fact is the whole ballgame. Congress gave the CFTC a tool — the "Special Rule" referenced above, which was added to the Commodity Exchange Act by the Dodd-Frank Act in 2010 — that lets it prohibit event contracts that are "contrary to the public interest," but only if they involve one of five enumerated activities: (1) anything unlawful under federal or state law, (2) terrorism, (3) assassination, (4) war, or (5) "gaming," plus a catch-all for "other similar activity" the agency designates later.

In 2023, the CFTC used that tool to block Kalshi's election markets, arguing elections were "gaming." Kalshi sued and won in federal court. Then Kalshi rolled into sports, state gambling regulators sent cease-and-desist letters and sued them, and Kalshi sued them in response. The Third Circuit sided with Kalshi in April, holding that federal law likely preempts New Jersey's gambling laws entirely. A circuit split (based on suits by other states) — and a Supreme Court showdown — is brewing.

Meanwhile, the CFTC itself changed sides. The new chair, Mike Selig — a former crypto lawyer and SEC Crypto Task Force chief counsel, sworn in last December — withdrew the prior administration's proposed ban on sports and political contracts, signed a first-of-its-kind memorandum of understanding with MLB (announced the same day MLB named Polymarket its "Official Prediction Market Exchange"), and has been publicly defending the platforms against the states. President Trump posted that maintaining the CFTC's exclusive authority over prediction markets is "critically important." Donald Trump Jr. is a paid strategic advisor to Kalshi and an advisor to Polymarket, in which his venture firm 1789 Capital is an investor. And, perhaps most notably, Chair Selig is currently the only commissioner on a five-seat commission, because the White House hasn't nominated anyone else.

The CFTC’s proposed rule is built around a structured, three-step framework.

Step one: Is it an event contract? Step two: If yes, does it "involve" one of the five enumerated activities? Step three: If yes, the CFTC weighs a list of public interest factors (information value, manipulation risk, the exchange's ability to police the market, etc.) and decides whether to allow it or kill it.

I want to be fair: This rule is more rigorous than anything the agency has produced on this topic before. In a couple of instances, it gets close to articulating coherent principles for how prediction markets should be regulated.

For example, according to the rule, contracts on aggregate crime rates (regional, over time) are fine, but contracts on specific crimes aren't. The rationale for this makes sense: No individual can move an aggregate statistic by themselves, and aggregate data on economically important events has real insurance and planning value. Same thing for sports. Contracts on final scores are hard for one person to manipulate (and are, therefore, acceptable), while contracts on a single play can be manipulated by a single participant (and are, therefore, not acceptable).

There's a real principle hiding in there. We might call it ‘determinative capacity.’ The ability for one person to control the outcome of an event contract. If you paired a prohibition on such contracts with a requirement that contracts produce genuinely useful information for hedging real-world economic risks, you’d have the foundation for a good rule!

Unfortunately, that’s not what the CFTC did. Its proposed rule is more interested in protecting the prediction markets’ status quo (while sanding off some of the roughest edges) than it is in articulating a set of consistent principles for how these markets should operate.

There are four tells.

Tell #1: Circumvention is OK … Sometimes

The rule includes anti-circumvention guardrails that would prevent a prediction market from offering a contract that does not, on its face, involve one of the five enumerated activities (unlawful activities, terrorism, assassination, war, gaming) if the event can be settled by one of those activities. The example that the CFTC gives is a contract that settles on whether Nicolás Maduro will be out of office by a specific date. If that contract can be settled if Maduro is assassinated (which technically is a way that he could leave office!) then the contract would be disallowed.

This is essentially the CFTC saying, “we will not let clever contract drafting defeat the point of the statute.”

That’s great!

But here’s the part that’s weird: These guardrails only cover three of the five enumerated activities: terrorism, assassination, and war. They don’t apply to contracts involving unlawful activities or gaming. What that means is that the prediction markets can design event contracts that don’t, on their face, involve unlawful activities or prohibited gaming activities, but that can still settle on unlawful activities or prohibited gaming activities.

This isn’t me theorizing. The CFTC’s Bernie Madoff securities fraud example that we already discussed proves the point. An event contract on the underlying activity — securities fraud — is unlikely to be permitted because it’s a crime, but the CFTC is saying that it’s fine if the prediction markets circumvent that restriction by settling the contract on a securities fraud conviction.

The only way to explain the discrepancy between the CFTC’s Maduro example and its Madoff example is that one of those theoretical markets makes them queasy and the other doesn't.

Tell #2: Economic Utility is a Valid Test … Sometimes

We knew, going into this exercise, that the CFTC was going to have to find a way to allow a majority of the event contracts that the prediction markets currently offer on sports. After all, 80% of the volume on Kalshi is sports betting, and sports is (I’m guessing) the gateway drug that brings retail into adjacent markets (culture, politics, business, etc.), which is where Kalshi’s market makers want to make money.

Still, the way that the CFTC justifies allowing event contracts on sports — which do count as 'gaming' under the rule, and therefore have to survive the public interest review — caught me by surprise.

It starts by talking about corn futures, a form of derivatives contract that has been around for a long time:

Prices in the corn futures market, which represent a collective assessment of future price trends, can be one input (along with others such as interest rate futures as an indicator of future interest rates) to guide a farm equipment manufacturer in planning its production of corn harvesters. At the next level of removal from the corn market, an investor could use the prices of corn futures, interest rate futures and certain securities in deciding whether to invest in farm equipment manufacturers. This is a simple example. But it illustrates how the prices in a derivatives market should not be viewed in isolation but rather as one thread in a fabric of information. The corn futures market is about more than just corn.

Keeping with this “one thread in a fabric of information” framing, it then transitions to talking about sports:

Event contracts that involve sporting events can be used for price discovery in a variety of ways. Sports teams are economic enterprises and sports stadiums are regional economic anchors that generate economic activity and materially affect both regional and national markets. For these reasons, it is economically useful to know not only how a sports team is likely to perform in upcoming games, but also how the public believes that the sports team will perform in upcoming games. Thus, the price discovery utility of an event contract on whether a team will win a game this weekend arises not simply from whether the information about that particular game can be directly tied to a specific economic decision.

And it finishes with this gem:

Just as the corn futures market is about more than just corn, a prediction market about one sporting event is about more than just that sporting event.

This is a breathtakingly expansive argument for why sports betting through prediction markets should be allowed, rather than banned as a prohibited “gaming” activity that is contrary to public interest.

There are a couple of problems with it.

First, the corn analogy fails because retail bettors don’t bet for fun on the price of corn.

I felt very stupid typing something so obvious, but apparently this is an important point to make. The corn futures market exists because farmers and ethanol producers have actual price risk to transfer; speculators show up to take the other side of their hedges. The sports contract market is the inverse. It exists, principally, because betting on sports is fun. The vast majority of activity comes from speculation. The rule even quietly concedes this by explicitly rejecting the requirement that contracts demonstrate utility for hedging or price discovery, the "economic purpose test" that the agency has applied for decades.  

Second, the rule argues that event contracts on sports should be allowed, not just to understand how a sports team will perform in upcoming games, but also to understand “how the public believes that the sports team will perform in upcoming games.” This standard — anything the public is paying attention to is economically significant — is so broad that it would allow the CFTC to approve virtually any event contract. And yet, watch what happens when the CFTC encounters a category of event contracts it wants to ban. Contracts on war, terrorism, and assassination, the rule declares, have "very little informational value."

Are you kidding me? The rule's own examples say a contract on Brent crude closing above $120 is fine "even though oil prices are sensitive to military and geopolitical conditions," but a contract on a Russian missile strike on Kyiv that would move Brent to $120 is banned?!?

Airlines, shippers, insurers, and sovereign debt desks have more genuine, dollars-at-risk hedging demand for geopolitical event risk than anyone, anywhere, has ever had for the Kansas City Chiefs -3.5.

If economic utility were the organizing principle, sports betting would be mostly banned and war markets would be mostly permitted. They aren't, because the actual organizing principle is that war markets feel ghoulish and sports markets feel like DraftKings, and DraftKings is normal now.

Tell #3: Mentions Markets Aren’t Mentioned At All

Now for the category that the rule handles by not handling it.

"Mentions markets" are contracts on whether a specific person will say a specific word. When Jerome Powell held a press conference, Kalshi would list dozens of these. Bloomberg counted 44 on a single Powell appearance, including "good afternoon," "shutdown," and "egg." They are the purest expression of prediction-markets-as-casinos: no hedging use, no information value, instant resolution, maximum dopamine.

They are also a manipulation machine, because the settlement-determining occurrence is whatever comes out of one specific person's mouth. The CFTC’s rule expresses significant concern about such manipulation when it comes to sports; single-play sports contracts (e.g., will the first pitch in the third inning be a strike?) are suspect because "a single player or team coaching staff member can determine the settlement outcome." That sentence describes a mentions market perfectly, except worse, because the person who controls settlement can also legally trade, or be fed words by people who do. This isn't hypothetical. Someone reportedly affiliated with the Kalshi ecosystem was caught shouting mention-market words at a Trump rally. South Park built an entire episode around the absurdity, and Kalshi and Polymarket responded by listing mention markets on what the South Park characters would say.

So how does the new rule handle the contract category that flunks every single one of its stated public interest factors harder than anything the rule actually bans?

It doesn't. The phrase “mentions markets” appears nowhere in 267 pages.

Could the CFTC fix this?

Yes. Congress gave it explicit authority to designate "other similar activity." The CFTC’s proposed rule acknowledged that this authority exists, but declined to use it "at this time."

Tell #4: Moral Reasoning vs. Structural Reasoning

If you need more evidence that the CFTC crafted this rule with the intention of codifying the status quo for industry participants, take a look at the specific sports contracts that the rule blesses and those that it condemns.

The green list — "final scores, point differentials, win-loss results, tournament advancement, individual or team statistical performance, season-long performance metrics" — reads like a description of Kalshi's current product catalog, because it is. The rule nearly admits it, saying its conclusions "rest on relevant prior experience with how similar event contract types have operated." Translation: it's fine because it's already happening.

The red list — player injuries, officiating calls, single plays and pitches, on-field fights — maps almost one-to-one onto the comment letters from the NBA, the NFL, and the players' unions, which is not an accident. In the rule, the CFTC echoes the concerns that have been shared by the players and the leagues regarding such contracts, including the perverse incentives to hurt athletes or leak medical records.

Those feel like good reasons to ban those specific contracts, but it’s important to point out that they are moral reasons, not economic ones. If we accept the CFTC’s framing that sports betting has significant informational utility for hedging real-world economic risks, then bets on player injuries and on-field fights would certainly contribute to that utility. However, the CFTC wants to ban them because the leagues have asked them to and it feels like the right thing to do.

Now, let’s flip it around, and look at a category of sports activities that Kalshi and Polymarket have no current vested interest in and, thus, requires no careful policy crafting from the CFTC: youth sports.

The rule disfavors all contracts on pre-collegiate sports. No green list/red list. Just a blanket presumption against. And the stated reason in the rule is entirely based on infrastructure: youth sports have weak governing bodies, no integrity units, unreliable and decentralized data, and lots of unsupervised insiders.

However, as all parents in 2026 know, youth sports is big business. In the U.S., the youth sports industry generates $40 billion in annual revenue, which is greater than any individual professional sports league. Around 60 million children participate in organized sports in the U.S. The average U.S. sports family spends over $1,016 on a child's primary sport in 2024, a 46% increase since 2019. This has caught the attention of institutional investors, which are attracted to the industry’s 8% to 10% annual growth rate and recession-proof consumer demand. Private equity firms have spent the last several years rolling up youth sports — buying tournament operators, building national leagues, professionalizing the data feeds — in order to build (and monetize) the centralized infrastructure that it has historically lacked.

So, imagine this (not very hypothetical) hypothetical: A PE-owned national youth league stands up an integrity unit, publishes league-verified official data, restricts insider access, and signs an information-sharing agreement with a prediction market. Every factor in the rule's stated analysis is satisfied. Every box is checked. And there is a clear economic purpose given the size and scale of the youth sports industry.

Would the CFTC approve betting markets on 16-year-olds' games?

No. Obviously not.

And it would be right not to, because betting on children is repugnant. But this is the essential problem that prediction markets’ success (which hinges on sports betting) has forced upon this CFTC. It cannot allow unfettered betting on sports because that is obviously not in the public interest. But it can’t just say that because doing so would invite an endless number of impossible-to-win public interest arguments over the sports betting contracts that the CFTC already allows.

So, instead, the rule crafts highly tailored moral restrictions around the sports bets that are already happening, and broad-based structural restrictions around sports bets that are not yet happening.

Regulation by Vibes

Assemble these four tells and the picture becomes quite clear. This rule was drafted backward from a settled set of answers: the sports outcome markets that are ~80% of the industry's volume must survive; the death and terror markets that would generate congressional hearings must die; and the strange new stuff — mentions markets and whatever the platforms invent next quarter — must be ignored. It is a framework rigorous enough to feel like regulation and flexible enough to never produce an inconvenient result.

It’s important to remember that this is not a final rule. It’s a proposed rule, and it may change in meaningful ways. The comment window runs for 45 days, and the comments will be a show: the sports leagues (who got most of what they asked for), the American Gaming Association (which called the proposal "a remarkable attempt to redefine what constitutes sports betting"), consumer groups (Better Markets' day-one verdict: "the fix is in"), and the prediction market platforms themselves.

We will also need to keep watching the courts, because a one-commissioner agency issuing a major rule is an Administrative Procedure Act challenge waiting for a plaintiff, and the current state lawsuits may push this federal preemption fight all the way to the Supreme Court.

But most of all, the lesson this proposed rule has impressed upon me, and this extends far beyond my personal obsession with prediction markets, is that we are now firmly in the era of financial services regulation by vibes. And while that might feel like a win for the market participants that are currently benefiting from it, we will all suffer, over the long term, from the inconsistencies, uncertainty, and endless legal challenges that will result from it.

MORE QUESTIONS TO PONDER TOGETHER

Big news for the endlessly curious (yes, you): I’m collecting your fintech questions on a rolling basis. 

What’s keeping you up at night? What great mysteries in financial services beg to be unraveled? Think of it this way, if a stranger is a friend you just haven't met yet, your question is a Fintech Takes conversation waiting to happen. 

One that could headline a Friday newsletter or be answered in an upcoming Fintech Office Hours event.

Drop your question here, whenever inspiration strikes!

WHERE I'LL BE

There are some great virtual events coming up soon, and planning for the fall fintech season is well underway. Here's where I'm planning to be this summer (virtually) and in September (in person).

💻 Fintech Office Hours | June 25 | Virtual

Fintech Office Hours are now open to everyone! Come hang out with us, hear about what's new in fintech (and what I'm cooking up for the newsletter), and ask questions!

💻 Stablecoins as Payments Infrastructure (A Conversation for Skeptics) | June 30 | Virtual

Western Union is leaning all the way in on stablecoins, and the more you learn about what its doing, the more it makes sense. We'll be talking about it in this virtual event, sponsored by Rain.

✈️ FinovateFall | September 9-11 | New York City

My can't miss fall conference! September in New York is glorious and the fintech conversations will be too.

✈️ Cash Flow Intelligence Summit | September 10 | New York City

Nova Credit has rebranded this from the "Cash Flow Underwriting Summit" to the "Cash Flow Intelligence Summit." Come find out why.

✈️ FDATA Global Open Finance Summit | September 17 | Toronto

This will be my first time at an FDATA event and my first time back to Toronto in a long time. If you work in open banking in Canada and want to yell at me for my bad takes in the past, this is your chance!

✈️ AI-Native Banking & Fintech Conference | September 29 | Salt Lake City

The name of this event is a mouthful, but the content and networking are both A+.

💻 *Bonus: What’s Next for the ACH Network: Risk Ops Under Nacha’s New Fraud Rules | On-demand

The first Nacha fraud rule deadline passed. The second is close. Jordan Bennett of Nacha and Saurabh Bajaj of Oscilar cover what phase one revealed: implementation gaps, AI-enabled fraud patterns to watch, and what ACH risk readiness looks like as an ongoing program rather than a one-time push. Replay is on-demand; watch it here.

*this rec is brought to you by one of our fantastic brand partners

CORRECTING THE RECORD

My wife — Mrs. Fintech Takes — subscribes to this newsletter. While she doesn’t care about fintech, she does enjoy reading the personal anecdotes, observations, and bits of trivia that I routinely sprinkle throughout. She has requested a space within the newsletter for her to correct the record when she feels that I have shared something that is false or misleadingly characterized. I am not happy about this arrangement, but marriage is about compromise.

Another of her corrections is below.

Dear Readers,

I am once again compelled to issue a correction. I did not simply “inform” my husband about the origins of the idiom “elbow grease,” as he suggested in his Wednesday newsletter. While cleaning the dishes, Alex was scrubbing a particularly dirty pot and said “this needs elbow grease! I wonder where that word comes from?” To which I looked up from shopping for Frozen dress-up clothes for our daughter and shrugged. Then Alex insisted (insisted I say!) that we live in a world of infinite knowledge at our fingertips and that I needed to immediately find the history of the term for him. To which I reluctantly complied, even though the knowledge discovered was a bit interesting.

Yours in truth,

Mrs. Fintech Takes

P. S. — Look up the equivalent idioms for elbow grease in French and Dutch. Hilarious.

Thanks for the read! Let me know what you thought by replying back to this email.

— Alex