CFTC issues no-action letters to Polymarket and PredictIt! No penalties for rule violations

U.S. Commodity Futures Trading Commission (CFTC) issues no-action letters to operators such as prediction market platforms Polymarket, PredictIt, and others on December 12, announcing that as long as certain other requirements are met, these companies are not required to fulfill some recordkeeping obligations and can settle contracts through third-party clearing members. Polymarket is the biggest beneficiary of this regulatory flexibility and is currently restarting its prediction market operations in the United States.

No-Action Letter: CFTC’s Regulatory Olive Branch

(Source: CFTC)

A no-action letter is a special tool used by U.S. regulatory agencies to provide policy guidance in legal gray areas. When a business might violate existing regulations but the regulator believes it has innovative value or enforcement would be against public interest, a no-action letter can be issued, promising not to take enforcement action under certain conditions. This mechanism offers operational space for innovative businesses while retaining ultimate control for the regulator.

The core content of the no-action letters issued by the CFTC to platforms like Polymarket is an exemption from “certain swap-related recordkeeping requirements and reporting of data related to binary options trading to the swap data repository.” These requirements originally applied to all derivatives trading platforms, aiming to enable regulators to track market activity, detect market manipulation, and protect investors. However, for emerging business models like prediction markets, strict compliance with these requirements could impose prohibitively high costs.

In the press release, the CFTC emphasized: “The no-action letter is only applicable in narrow circumstances and is comparable to no-action letters issued to designated contract markets and derivatives clearing organizations for similar situations.” This statement indicates that the regulator is not relaxing oversight across the board but is providing limited flexibility for specific business models. Prediction markets are characterized by small contract sizes, numerous participants, and frequent trading. Requiring platforms to store detailed records of every transaction and report them immediately would be technically and economically burdensome.

According to the no-action letter, issuers must meet four conditions: ensure contracts are always fully collateralized (to prevent counterparty risk); settle contracts only on designated approved platforms (to ensure regulatory visibility); publicly disclose all contract-related data after execution (to provide market transparency); and comply with specific exchange recordkeeping requirements (to maintain basic regulatory capacity). These conditions show that the CFTC is not completely relinquishing oversight but is reducing compliance burdens while retaining core regulatory tools.

Four Additional Conditions of the CFTC No-Action Letter

Full Collateralization Requirement: All prediction market contracts must be fully funded to prevent systemic risk.

Platform Restrictions: Contracts can only be settled on approved designated platforms and must not be transferred to unregulated venues.

Data Disclosure Obligation: Key information after contract execution must be publicly available on the platform to ensure market transparency.

Core Recordkeeping: While some requirements are waived, core trading records designated by the CFTC must still be maintained.

Key Milestone for Polymarket’s Restart in the U.S.

Polymarket is the biggest beneficiary of this regulatory flexibility. During the 2024 U.S. elections, the platform’s popularity surged, becoming the largest decentralized prediction market globally. However, Polymarket was fined $1.4 million in 2022 for violating CFTC rules and was ordered to cease services to U.S. users. The issuance of the no-action letter provides a legal foundation for Polymarket to resume its U.S. operations.

Prediction markets are an increasingly growing sector in the crypto economy, with popularity soaring during the 2024 elections last year. During the election, Polymarket’s trading volume reached billions of dollars, and its predictions were even more accurate than traditional polls, attracting widespread attention from mainstream media and politics. However, high popularity also brought regulatory pressure. After the November election, Polymarket founder Shayne Coplan’s residence was raided by the FBI, sparking criticism of excessive regulation.

The issuance of the no-action letter by the CFTC is seen as a sign of a softened regulatory stance. Against the backdrop of the Trump administration’s friendly approach to cryptocurrencies, the CFTC may also be adjusting its regulatory strategy, shifting from strict enforcement to promoting innovation. Polymarket is restarting its prediction market business in the U.S., and the no-action letter removes the biggest legal obstacle.

However, Polymarket still faces other challenges. How to prevent market manipulation, verify user identities to avoid minors participating, and handle sensitive political predictions (such as assassination markets) are issues that require joint efforts from platforms and regulators. Although the CFTC’s no-action letter provides operational space, it does not mean full exemption from regulation. If Polymarket is found to have serious violations, the CFTC can revoke the no-action letter and take enforcement actions.

Prediction Market’s Golden Age: Increased Competition as U.S. Exchanges Enter

The largest compliant crypto exchange in the U.S. is also launching its own prediction market platform, indicating that mainstream exchanges see strong commercial potential in prediction markets. As the largest compliant crypto exchange in the U.S., its entry will bring a large user base and ample liquidity to prediction markets. However, this also intensifies market competition, requiring Polymarket to excel in user experience, market depth, and product innovation to maintain its market position.

Another prediction market platform, Kalshi, has also received judicial approval to launch election contracts in the U.S. Kalshi differs from Polymarket in adopting a centralized model and being fully registered with the CFTC, giving it an advantage in compliance but weaker in decentralization and censorship resistance. The coexistence of multiple platforms will promote healthy competition and innovation in the prediction market sector.

The commercial value of prediction markets lies not only in trading fees but also in their unique function as information aggregation tools. Through mechanisms like “voting with real money,” prediction markets can convert dispersed information and judgments into price signals, often more accurate than expert opinions or polls. This functionality has broad application prospects in election forecasting, economic indicator predictions, and even corporate decision-making.

The CFTC’s no-action letter provides space for this emerging industry to develop, but in the long term, prediction markets still need a more complete regulatory framework. No-action letters are only temporary regulatory flexibility and cannot replace formal regulations. Congress should consider enacting laws specifically targeting prediction markets to clarify their legal status, regulatory standards, and investor protection mechanisms, enabling the industry to develop healthily under clear rules.