SEC delay on prediction markets ETFs has echoes of bitcoin fund battle

Prediction markets ETFs may soon be coming to retail investors and even retirement plans, but it may not be as fast as expected.

During the second Trump administration, the Securities and Exchange Commission sought to differentiate itself from Biden-era regulators by trying to distance themselves from Biden-era regulators. “regulatory creep” he says this hinders markets and innovation. But it caught some in the financial industry off guard on Tuesday. delayed the launch One of the 24 prediction market ETFs said more time was needed to review products before they were made available to investors.

Roundhill Investments, Bitwise and GraniteShares filed with the SEC in February to launch funds tied 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 suspended by the SEC. This 75-day period was supposed to expire last week. The SEC’s intervention should not be surprising, even as the SEC under the Trump administration has focused on steps to ease market access and less aggressive oversight of new financial products such as the crypto space, according to ETF experts.

Prediction markets ETFs represent a new kind of regulatory challenge. Unlike traditional ETFs, these investments are tied to event contracts and essentially bet 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, which are the focus of ETFs.

Prediction markets’ ETF lag is reminiscent 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 gets more information from issuers about how the funds will work. “With any new development in the ETF, there will always be last-minute disruptions,” said Todd Sohn, chief ETF strategist at Strategas Securities. “You can introduce any new asset classes and types of ETFs. That’s often the case where things get pushed back a little bit,” he said.

“We recognize that innovative ETF products often require additional scrutiny, particularly around liquidity, market structure and investor protections. Our priority is to ensure investors are comfortable with how these products work and understand the role they can play within a regulated ETF structure,” GraniteShares CEO Will Rhind said in a statement to CNBC.

There are reasons why regulators are slowing this down. A new private credit ETF that State Street launched last year faced multiple SEC hurdles post-launch, and ETF experts say it should have been part of the pre-approval review process.

But the most obvious comparison is spot Bitcoin ETFs, which faced years of SEC resistance before finally gaining approval in January 2024. Regulators have grappled for months with concerns about market manipulation and whether the underlying crypto markets are mature enough to undertake a regulated investment product. Before approving spot bitcoin ETFs, the SEC repeatedly rejected multiple applications, arguing that issuers had failed to demonstrate how they would prevent fraud or crypto manipulation.

“Focusing on investor protection and market manipulation… is very important to me and, of course, to the SEC. It’s in our DNA,” SEC Chairman Paul Atkins said recently on CNBC’s “Squawk Box.”

Questions about insider trading in prediction markets have intensified recently.

The Commodity Futures Trading Commission has primary oversight over prediction markets, but Atkins said in his statement: In February, the US Senate was told that the SEC should play an active role regulating this new area of ​​financial activity. “Prediction markets are something where there is potentially overlapping jurisdiction,” Atkins said. “This is a huge issue that we’re focusing on. … Mostly, at least right now, on the CFTC side. But we need to align the way we address these markets.”

“Are the prediction markets being manipulated? Is there any inside information in these markets?” said Sohn. “The ETF wrapper is proven. It works, it’s useful and it’s transparent. It’s more about the markets they’re going to follow,” he added.

Final approval of spot bitcoin ETFs required legal battles and political pressure. Grayscale successfully challenged the agency in federal court in 2023 after judges said the SEC failed to explain why it treated spot bitcoin futures differently than bitcoin futures ETFs. Kalshi filed a lawsuit The federal government is in a precedent-setting case in which it won the right to initiate contracts in the 2024 presidential election.

A unique factor in this case is the Trump family’s ties to prediction market operators, according to Anthony Capozzolo, an attorney with Lewis Baach Kaufmann Middlemiss who specializes in white collar law and regulatory matters. Donald Trump Jr. He is an advisor to both Kalshi and Polymarket and is associated with a firm that has an investment stake in the latter. “They want to at least better understand what the impact of these ETFs might be.” [be] “It’s about retail customers,” Capozzolo wrote in an email to CNBC.

Despite the delay, Sohn believes the broader regulatory approach within the Trump administration has led him to conclude that the agency’s pause does not reveal deeper opposition to the basic concept of prediction markets ETFs. “I think it will be all systems go until we see otherwise on the SEC website,” Sohn said. But he added that there are fair questions to ask about primary prediction markets: Kalshi Those that are relatively young and do not have a long history of liquidity tests or market depth. “As we’re growing, I don’t know how deep of a market it is yet,” he said.

Kalshi announced this week that it has raised another $1 billion from investors. $22 billion valuationIt has doubled its valuation from just six months ago. He specifically attributed investor optimism to the growth of the institutional trading business. In its statement, the company said that corporate trade volume increased by 800% in the last six months, meaning that the annual trade volume 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, which draws a direct line from how the SEC handles spot bitcoin ETFs.

“ETFs have a long history of pushing boundaries to provide access to new investments and asset classes,” Geraci wrote. “Given the novelty of prediction market ETFs, the SEC clearly wants to ensure that risks are properly disclosed to investors and that these products work as intended.”

Geraci noted unique structural issues, including what happens when there is a dispute over whether an event contract should be awarded. “This delay shows that even with a more lenient SEC, not every ETF filing that lands on his desk gets the green light,” he wrote.

The SEC has the final say on how long the delay will last and what conditions will apply prior to approval. From an outside perspective, it is difficult to know what will lead to a solution and when it will happen. “Unless you’re the issuer talking to them, it’s kind of hard to know what the issues are,” Sohn said.

Explanation: CNBC and Kalshi have a business relationship that includes customer acquisition and a minority investment in CNBC.

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