US SEC 'Stops' Prediction Market ETF Approval at the Threshold... "Wait 90 More Days"

▲ Virtual assets, prediction markets, cryptocurrency regulation/AI generated image

The U.S. Securities and Exchange Commission (SEC) abruptly postponed its decision on approving exchange-traded funds (ETFs) related to prediction markets, citing concerns about their price discovery mechanisms and potential for market manipulation.

According to a CoinTelegraph report on May 4 (local time), the SEC decided to delay its decision on whether to approve ETF products that use prediction market data or contracts as underlying assets. The regulatory body cited the reliability of the oracle system, which determines the outcomes in prediction markets, and the risk of market manipulation that can arise in environments with thin liquidity, as the main reasons for the delay. It specifically warned that the settlement system, which differs from traditional financial products due to the nature of prediction contracts whose value is determined by the occurrence of specific events, could be vulnerable to investor protection issues.

The SEC stated that it needs additional time to verify the integrity of the underlying markets tracked by these ETFs. It is also closely examining whether contracts traded within prediction markets comply with federal derivatives laws and if the anonymity of market participants conflicts with anti-money laundering regulations. As a result of this decision, the final approval deadline, originally scheduled for early May, is expected to be extended by a minimum of 45 days and a maximum of 90 days.

Industry experts view this delay as a growing pain experienced during the process of integrating prediction markets into the institutional framework. While platforms like Polymarket and Kalshi have gained widespread popularity, leading to a surge in demand for related financial products, regulators are still applying conservative standards. Despite precedents such as the approval of spot Bitcoin (BTC) and Ethereum (ETH) ETFs, analysis suggests that prediction markets face a higher scrutiny threshold due to unique risk factors like the subjectivity of outcomes and the potential for manipulation.

Virtual asset industry officials anticipate that ensuring the transparency of mechanisms required by the SEC will be key to future approvals. The price formation process in prediction markets must be mechanically and clearly demonstrable, and a robust surveillance system capable of blocking undue external intervention must be in place. As fund operators scramble to address the concerns raised by regulators, the listing of prediction market ETFs is expected to be a significant variable in the virtual asset market in the second half of the year.

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