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CFTC Fights States Over Prediction Markets; Federal Regulators Propose Major Banking Reforms
• The CFTC is aggressively asserting federal jurisdiction over prediction markets, intervening in Rhode Island and facing a lawsuit from KalshiEX in Minnesota.
• State and federal governments are enacting new laws targeting prediction markets, including felony penalties in Tennessee and a transaction tax in Illinois.
• Federal banking regulators have proposed the first major overhaul to the CAMELS supervisory system since 1996, aiming to shift focus toward material financial risk.
• The Federal Reserve has proposed a new "payment account" for non-traditional financial institutions and sworn in Kevin Warsh as its new Chairman.
A significant regulatory clash is unfolding as the Commodity Futures Trading Commission (CFTC) moves to cement federal control over the burgeoning prediction market industry. The agency recently intervened in a U.S. District Court in Rhode Island to block the state’s attempt to apply its gambling laws against CFTC-registered contract markets. This action directly counters a demand from Rhode Island’s attorney general for such markets to “stand down.” Simultaneously, market operator KalshiEX LLC has sued Minnesota officials, alleging a new state law unlawfully usurps the CFTC’s exclusive jurisdiction. The CFTC has also recalibrated its enforcement stance, joining Gemini Trust Company in a motion to vacate provisions of a 2025 consent order, stating the original complaint "should not have been filed" under current standards. In a parallel development, the agency is formalizing integrity partnerships, signing memoranda of understanding with Major League Baseball and the National Hockey League to coordinate on sports-related event contracts.
This federal assertion of authority comes amid a wave of new state and federal restrictions targeting prediction markets. North Carolina has barred executive-branch employees from trading using nonpublic information, while Tennessee has enacted a law, effective July 1, creating a Class E felony for manipulating events linked to prediction-market contracts. Illinois has adopted a fiscal approach, imposing a transaction tax of up to 3.5% on "exchange wagers" tied to sporting events. On the federal level, a provision in the House's draft National Defense Authorization Act would prohibit Department of Defense personnel from trading based on material nonpublic information. Internationally, regulators in Spain and Indonesia have moved to block platforms like Polymarket and Kalshi, categorizing their offerings as unauthorized gambling.
Concurrently, federal banking regulators are advancing significant supervisory reforms. The Federal Financial Institutions Examination Council has proposed the first major revisions to the CAMELS rating system since 1996. FDIC Chairman Travis Hill stated the changes would shift emphasis "away from a bank’s process for managing risks and towards factors and risks that materially impact a bank’s financial condition." This regulatory evolution occurs as fintech banking platforms attract intense capital and scrutiny. Mercury recently closed a $300 million Series C round at a $3.5 billion valuation, while Senators Elizabeth Warren and Chris Van Hollen have urged regulators to deny Enova International’s application to become a national bank holding company, citing concerns over "predatory lending."
In other financial policy developments, Tennessee has enacted a new tax on international money transmissions, setting a rate of $10 per transaction plus 2% on amounts over $500, effective January 2027. At the Federal Reserve, newly installed Chairman Kevin Warsh presided over a board proposal for a novel "payment account." This special-purpose account would allow eligible, but often non-federally insured, financial institutions direct access to Fed payment services to reduce costs and increase speed, though without access to intraday credit or interest on balances. These sweeping actions across multiple agencies signal a period of profound regulatory transformation for financial technology and markets.