Former SEC Chair Jay Clayton Raises Key Questions on Regulating Prediction Markets
Former SEC Chair Jay Clayton has expressed his thoughts on the rapidly growing prediction markets, highlighting the need to determine their function and whether they should be regulated as investments or gambling. Clayton, who served as the chair of the SEC from 2017 to 2020, is known for his tough stance on cryptocurrencies and protecting retail investors. In an interview at the New York Stock Exchange on December 2, 2025, Clayton emphasized the importance of understanding the purpose of prediction markets, which are increasingly blurring the line between investing and gambling.
Semafor business and finance editor Liz Hoffman interviews Jay Clayton at the New York Stock Exchange on Dec. 2, 2025. Semafor/Kevin Dale
Prediction Markets and Regulatory Challenges
Clayton’s comments come as prediction markets, such as Polymarket and Kalshi, are gaining popularity and facing regulatory challenges. These platforms allow users to bet on the outcome of events, ranging from sports to economic indicators. However, the line between investing and gambling is often blurred, making it difficult for regulators to determine how to oversee these markets. According to Clayton, “The real question is what function are prediction markets providing?” He added, “When does it look just like a cash-settled option on a stock? And when does it look like a bet on a football game? Those are two different functions… If I go into the betting shop and buy a cash-settled option on American Express, should it just be regulated as a bet or should it be regulated as a cash-settled option?”
Both Polymarket and Kalshi operate under special CFTC licenses as regulated exchanges under U.S. derivatives law. However, some types of event contracts, particularly those tied to sports or gaming outcomes, may face additional restrictions under state-level gambling laws. Clayton noted that “people look for regulatory relief by providing a close enough function to something that’s highly regulated, and then they can operate under less regulation…But you have to ask yourself, is it far enough away from a current function that’s finally regulated that it should be regulated differently?”
Regulatory Developments and Market Growth
Prediction markets are breaking into the mainstream, with the young founders of both Polymarket and Kalshi recently becoming billionaires as their companies’ valuations soared. Last month, the NYSE’s parent company, Intercontinental Exchange Inc. (ICE), announced plans to invest $2 billion in Polymarket and distribute its data to institutions worldwide. Polymarket is reportedly nearing a valuation between $12 billion and $15 billion as it pursues a new funding round. Clayton, now the U.S. attorney for the Southern District of New York, emphasized the need for regulators to carefully consider the function and purpose of prediction markets to ensure that they are regulated effectively and do not pose a risk to investors.
Image Source: observer.com
