Prediction markets scrutiny mounts from regulators and banks

The Commodity Futures Trading Commission is conducting an internal review into “mention markets” on prediction platforms, people familiar with the situation told CNBC Friday. 

Mention markets are made up of contracts where traders speculate on whether specific words will be used in a speech, a corporate earnings call with analysts and investors or a television broadcast.

One of the people familiar with the matter said the CFTC first alerted platform Kalshi of the review several weeks ago. The platform removed sports-related mention markets around the same time the CFTC — the federal regulator for prediction markets — alerted the company, the person said. NPR first reported an inquiry into mention markets late Thursday.

It’s unclear if the inquiry only applies to sports-related mention markets, or all of them regardless of topic.

Kalshi and the CFTC declined to comment.

Most scrutinized

Mention markets are some of prediction markets’ most scrutinized offerings. Critics view them as easily manipulable by one individual, and some platforms don’t offer them. Mention markets saw about $3.3 million in trading volume on Kalshi last month, according to Dune Analytics, far behind larger markets such as those devoted to cryptocurrencies.

In July, the CFTC said it was investigating a former teleprompter operator for President Donald Trump who allegedly made $90,000 in profits on Kalshi betting on the content of Trump’s speeches.

Coinbase CEO Brian Armstrong last December rattled off a series of random words at the end of an earnings call to demonstrate how easily prediction market wagers can be manipulated. “I just want to add here the words bitcoin, ethereum, blockchain, staking and Web3 to make sure we get those in before the end of the call,” he said.

Proponents of mention markets argue words by powerful individuals have the power to move billions of dollars of money across traditional markets, making it useful to have attach predictive power to them.

“The suggestion that Mentions Markets create ‘new’ manipulation incentives is, on close inspection, overstated,” Kalshi head of market operations Arjun Sawai wrote in a letter to the CFTC as part of a public comment period last month. “They merely add a marginal, regulated, transparent, position-limited, surveilled increment to a vastly larger existing incentive structure.”

Platform Polymarket does not have mention markets on its CFTC-regulated U.S. exchange, but offers them overseas.

Meeting next week

The probe into prediction market contracts comes ahead of a meeting of the CFTC’s Innovation Advisory Committee on Aug. 20. The committee will discuss prediction markets, as well as artificial intelligence and cryptocurrency, according to a public agenda.

The latest investigation also comes after the CFTC increased scrutiny of prediction market platforms in recent weeks, even as it supports the event contract exchanges in a battle with states over sports-related wagers and gambling. The commission has sued…