SEC holds back prediction market ETFs pending public feedback

The U.S. Securities and Exchange Commission has delayed several proposed prediction market exchange-traded funds as regulators weigh how event-based contracts should fit within the existing ETF framework.

Summary

• SEC has delayed several prediction market ETF applications while seeking public feedback on how event-based funds should be regulated.
• Bitwise, Roundhill Investments, and GraniteShares had filed products tied to election and event contracts earlier this year.
• The review comes as Kalshi and Polymarket continue facing legal challenges over prediction markets in multiple U.S. states.

According to a statement released Wednesday, SEC Chair Paul Atkins said the agency plans to seek public input on what he described as “novel products,” arguing that the filings raise regulatory questions that require further review before approval decisions are made.

Among the affected applications are a group of PredictionShares ETFs filed by Bitwise Asset Management in February. The products were designed to track outcomes tied to U.S. elections and other event contracts. During the same month, Roundhill Investments and GraniteShares also submitted filings tied to prediction market strategies.

Interest in prediction markets has grown rapidly across the crypto sector over the last 18 months. Data from industry platforms shows monthly trading volume across sports, elections, economic releases, and cultural events now regularly exceeds $15 billion.

A prediction market ETF would allow traditional investors to access event-based contracts through standard brokerage accounts instead of using crypto-native platforms directly. The structure has drawn comparisons to the path taken by spot crypto ETFs, which opened regulated access to Bitcoin and Ether exposure for institutional and retail investors.

SEC reviews prediction market ETF structure amid legal disputes

Speaking about the delay, Eric Balchunas told Bloomberg that the SEC appears to be carefully evaluating how these products should operate before allowing them onto public markets. Balchunas compared the situation to the agency’s lengthy review process before spot Bitcoin ETFs received approval in January 2024.

Balchunas also said regulators likely want clearer guardrails in place before approving products tied to binary event outcomes.

The SEC’s caution comes while prediction market firms continue facing legal pressure in multiple U.S. states. Earlier this week, the Commodity Futures Trading Commission sued the state of Minnesota after Governor Tim Walz signed legislation that would ban prediction markets starting Aug. 1.

Court filings from the CFTC argued that Minnesota’s law conflicts with federal oversight of derivatives markets and could criminalize activity tied to federally regulated event contracts, including weather-related markets.

Reuters reported that Minnesota Attorney General Keith Ellison said the state was reviewing the lawsuit and would respond in court.

At the same time, prediction market operators Kalshi and Polymarket remain under scrutiny from several state regulators over whether event contracts resemble unlawful gambling products. Reuters previously reported that Kalshi has challenged state-level restrictions in court, while Polymarket has argued that federally supervised prediction markets should not fall under state wagering laws.

Alongside the ETF review, Atkins said ETFs themselves have become a significant source of product development in U.S. capital markets. SEC data cited by Atkins showed ETF assets have tripled since 2019, while procedural changes introduced last year have allowed some products to move through a streamlined listing process instead of undergoing lengthy individual reviews.

Separately, multiple reports have indicated that the SEC is also exploring a possible “innovation exemption” framework tied to tokenized securities. The proposal under discussion could eventually allow blockchain-based trading versions of stocks such as AAPL, NVDA, and TSLA to operate on crypto infrastructure under adjusted regulatory conditions.