Prediction Markets ETFs Could Soon Be come to individual investors and even in retirement plans, but perhaps not as quickly as expected.
The Securities and Exchange Commission, under the second Trump administration, has sought to distinguish itself from Biden-era regulators by what it calls a move away from “regulatory drift” which they say has held back markets and innovation. But it caught some in the financial sector off guard on Tuesday when he delayed launch of 24 prediction market ETFs, saying it needed more time to study the products before they were offered to investors.
Roundhill Investments, Bitwise and GraniteShares had all filed with the SEC in February to launch funds linked to prediction markets covering elections, economic data and other real-world events. Under SEC rules, ETFs automatically become effective 75 days after filing unless otherwise terminated by the SEC. That 75-day window was set to expire last week. The SEC’s intervention should come as no surprise, ETF experts say, even though the SEC under the Trump administration is focused on measures to facilitate market accessas well as less aggressive monitoring of new financial products, as in the crypto space.
ETFs in prediction markets represent a new type of regulatory challenge. Unlike traditional ETFs, these investments are tied to event contracts and essentially place bets on real-world events. Some of the most notable, but also controversial, contracts in prediction markets like Kalshi are those related to politics, such as election results, a priority for ETFs.
The delay of ETFs in forecast markets brings back memories of the years it took for spot Bitcoin ETFs to be approved by the SEC. But ETF experts say the delay will likely be temporary as the agency seeks more information from issuers about how the funds work. “Regardless of the type of new exposure within the ETF, there will always be last-minute hiccups,” said Todd Sohn, chief ETF strategist at Strategas Securities. “You could substitute any new type of asset class and ETF. That’s usually the case when things get pushed back a little bit,” he said.
“We recognize that innovative ETF products often require additional review, particularly around liquidity, market structure and investor protection. Our priority is to ensure that investors are comfortable with how these products work and understand the role they can play within a regulated ETF structure,” said Will Rhind, CEO of GraniteShares, in a statement to CNBC.
There are reasons for regulators to move slowly. A new private credit ETF launched by State Street last year faced several obstacles at the SEC after the launch which ETF experts believe should have been part of the pre-approval review process.
But the most obvious comparison is spot Bitcoin ETFs, which have faced years of SEC. resistance before finally winning approval in January 2024. Regulators have spent months battling concerns about market manipulation and whether the underlying crypto markets were mature enough to accept a regulated investment product. Before approving Bitcoin spot ETFs, the SEC repeatedly rejected several applications, arguing that issuers had not demonstrated how they would prevent fraud or crypto manipulation.
“Investor protection and a focus on market manipulation…is very important to me and obviously to the SEC. It’s in our DNA,” SEC Chairman Paul Atkins said recently on CNBC’s “Squawk Box.”
Questions about insider trading prediction markets have intensified recently.
The Commodity Futures Trading Commission provides primary oversight of prediction markets, but Atkins stated in his testimony before the US Senate in February, the SEC must play an active role in regulating this new area of financial activity. “Prediction markets are exactly one thing where there is potentially jurisdictional overlap,” Atkins said. “It’s a huge issue that we’re focused on. … It’s primarily, at least currently, on the CFTC side. But we need to harmonize how we approach these markets.”
“Are prediction markets being manipulated? Is there some sort of inside information circulating within these markets?” » said Sohn. “The ETF wrapper is proven. It works, it’s practical, it’s transparent. It’s more about the markets they’re going to follow,” he added.
Final approval of spot bitcoin ETFs required legal fights and political pressure. Grayscale successfully disputed the agency in federal court in 2023 after judges said the SEC failed to explain why it treated Bitcoin spot futures differently from Bitcoin futures ETFs. Kalshi continued the federal government in an unprecedented deal in which it won the right to initiate contracts for the 2024 presidential election.
According to Anthony Capozzolo, an attorney at Lewis Baach Kaufmann Middlemiss who specializes in business law and regulatory matters, a unique factor in this case is the Trump family’s ties to prediction market operators. Donald Trump Jr. is an advisor to Kalshi and Polymarket, and is affiliated with a company that owns an interest in the latter. “At the very least, they want to better understand what the impact of these ETFs will be. [be] on retail customers,” Capozzolo wrote in an email to CNBC.
Sohn believes that despite the delay, the broader regulatory approach within the Trump administration leads him to the conclusion that the agency’s pause does not reveal deeper opposition to the fundamental concept of ETF market forecasting. “I thought all systems were working, until I saw otherwise on the SEC website,” Sohn said. But he added that there are legitimate questions to be asked about trading primary prediction markets like Kalshi which are relatively young and do not have a long history of testing liquidity or market depth. “Although it’s growing, I don’t know how big of a market it is yet,” he said.
This week, Kalshi announced that it had raised an additional $1 billion from investors at a valuation of $22 billiondoubling its valuation compared to just six months ago. He attributed investor optimism specifically to growth in its institutional trading business. The company said in a statement that over the past six months, institutional trading volume increased 800%, representing an annualized trading volume that increased from $52 billion to $178 billion.
Nate Geraci, an ETF expert and president of NovaDius Wealth Management, wrote in an email that the delay reflects reasonable caution rather than hostility, and that it draws a direct line to how the SEC has handled spot Bitcoin ETFs.
“ETFs have long pushed the boundaries to open access to new investments and asset classes,” Geraci wrote. “Given the newness of ETFs to the prediction market, the SEC clearly wants to ensure that risks are properly disclosed to investors and that these products perform as intended.”
Geraci pointed to unique structural issues, including what happens if there is a dispute over whether an event contract should be settled. “This delay demonstrates that even with a more lenient SEC, it is not simply green-lighting every ETF filing that comes its way,” he wrote.
The SEC is the final arbiter of the length of the deadline and the conditions that will be imposed before approval. From the outside, it is difficult to know what will lead to a resolution and the timetable within which it will occur. “Unless you’re the issuer in discussion with them, it’s pretty hard to know what the issues are,” Sohn said.
Disclosure: CNBC and Kalshi have a business relationship that includes customer acquisition and a minority investment in CNBC.
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