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

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

The U.S. Securities and Exchange Commission (SEC) has abruptly postponed its decision on approving related Exchange Traded Funds (ETFs), citing concerns over the price discovery mechanism and potential for market manipulation in prediction markets.

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 is how prediction markets determine outcomes, and the risk of price manipulation that could arise in a thin liquidity environment, as the main reasons for the delay. In particular, it warned that the settlement system for prediction contracts, whose value is determined by whether a specific event occurs, differs from traditional financial products and could be vulnerable to investor protection issues.

The SEC stated that it needs additional time to verify the integrity of the underlying markets that these ETFs track. It is also closely examining whether contracts traded within prediction markets comply with federal derivatives laws and whether 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 to a maximum of 90 days.

The industry views this delay as growing pains in the process of integrating prediction markets into the institutional framework. Platforms like Polymarket and Kalshi have gained widespread popularity, leading to a surge in demand for related financial products, but regulators are still applying conservative standards. Despite the precedent of Bitcoin (BTC) and Ethereum (ETH) spot ETFs being approved, prediction markets carry unique risk factors such as the subjectivity of outcomes and the potential for manipulation, leading to a higher bar for review.

Virtual asset industry officials predict that ensuring the transparency of the mechanisms required by the SEC will be key to future approvals. The price formation process of prediction markets must be demonstrably clear and mechanical, supported by a robust monitoring system that can prevent undue external intervention. As operators become busy responding to the concerns raised by the regulatory body, 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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