After pausing about 24 prediction market ETFs earlier in the month, the U.S Securities and Exchange Commission (SEC) now wants more time to review the implications of the new products.
In a statement on Thursday, SEC chair Paul Atkins said,
“Novel products raise novel questions, and I appreciate the willingness fund sponsors have shown in delaying the effectiveness of a number of novel ETFs, including event contract ETFs, while we consider the implications.”
Atkins added that the agency staff will seek public feedback on the new products and how they should respond to them.
Investor protection and manipulation concerns
Event contracts are derivatives that track the outcome of events. Some of these events have binary options with a Yes-No result and not the typical underlying asset that most users are comfortable with.
For a Spot Bitcoin ETF or a gold ETF, the underlying asset being tracked is just BTC or gold. Most investors understand the market dynamics of these two. Especially how macro and geopolitical factors affect them. Eventually, these factors also affect the ETF wrappers.
However, the mechanics aren’t quite clear for retail inventors to grasp for event contracts that track elections, economic data, sports, and more.
Besides, other sticky issues like investor protection and market manipulation risks remain largely unaddressed.
For perspective, the stalled prediction market ETFs by Bitwise, GraniteShares, and Roundhill Investments would directly track the markets on Kalshi and Polymarket.
However, there have been reports of insider trading and manipulation across these sites. This would ultimately spill over to the ETFs tracking them. How do you prevent this and protect an innocent ETF buyer?
In a recent interview with CNBC, SEC Chair Atkins stressed that,
Investor protection and focusing on market manipulation are very important to me and obviously to the SEC. That is in our DNA.
Beyond consumer protection and market manipulation risks, there is also jurisdictional overlap between the SEC and CFTC (Commodity Futures Trading Commission).
Currently, swaps and event contracts are derivatives that fall under the CFTC’s oversight. However, adding an ETF wrapper to these products and issuing them for investors will also trigger SEC oversight.
Perhaps, after addressing these issues, the products will hit the market. Reacting to Atkins’s call for feedback, Bloomberg ETF analyst Eric Balchunas said,
The commission is clearly wrestling with these and wants more time and input. I get it. These are a whole new thing (kinda like crypto) and want to feel comfortable bf they open the barn door.
Final Summary
- SEC Chair Atkins has called for more time to review the implications of prediction market ETFs
- Investor protections, the ETF structure, market manipulation, and oversight overlap are likely sticky issues that will be addressed.
