From Wild Growth to Regulatory Competition: How the "CLARITY Act" Is Reshaping the Prediction Market Landscape?

By early March 2026, the U.S. digital asset regulatory framework reaches a critical milestone. The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have simultaneously submitted related regulatory plans to the White House Office of Management and Budget, marking a transition from “verbal” to “rulemaking” in crypto regulation under the new Trump administration.

CFTC Chairman Michael Selig publicly urged Congress to pass the CLARITY Act as soon as possible and revealed that the agency will set clearer review standards for prediction markets. These developments indicate that prediction markets, once operating in a gray area, are now facing a pivotal shift from “protocol logic” to “compliance logic.”

Background and Legislative Timeline

The CLARITY Act aims to end years of jurisdictional disputes over digital asset regulation in the U.S. and establish federal market structure laws. Its core principle is to clearly categorize tokens as either “digital commodities” under CFTC regulation or “digital securities” under SEC regulation, with “grandfather clauses” for existing projects to provide a path to compliance.

However, the legislative process has faced obstacles. Since 2026, the bill has encountered two major disputes in the Senate:

• Stablecoin Yield Rights: The crypto industry advocates for allowing stablecoins to distribute underlying U.S. Treasury yields to holders, but traditional financial institutions like the American Bankers Association strongly oppose, viewing it as a diversion of bank deposits and a contest over “deposit pricing rights.”
• Conflict of Interest Restrictions: Democratic lawmakers demand stricter limits on government officials and their families holding and trading digital assets.

Although there were reports that negotiations were close to breaking down and the early March deadline has passed, recent statements from the CFTC chair and active coordination with the White House suggest that parties are still seeking a compromise.

Data and Structural Analysis: The Scale and Controversy of Prediction Markets

Prediction markets are evolving from niche experiments to significant financial phenomena. Decentralized prediction platforms like Polymarket saw exponential trading volume growth from 2025 to early 2026, with contract trading related to U.S. college sports alone exceeding $320 million.

This explosive growth has attracted regulatory scrutiny. Selig explicitly stated that clearer boundaries will be set for “self-certified” prediction markets. Meanwhile, conflicts between state regulators and federal authorities are intensifying:

• Massachusetts: A court ruling required Kalshi to cease its sports betting operations in the state, rejecting its defense that CFTC regulation supersedes state law.
• Tennessee: Kalshi obtained a temporary restraining order, temporarily halting enforcement by the state sports betting commission, exemplifying the tug-of-war between federal and state authority.

Public Opinion and Perspectives

There are notable bullish and bearish views regarding the CLARITY Act and its impact on prediction markets:

Mainstream Optimists (Institutional Perspective)

JPMorgan analysts believe that if the bill passes by mid-year, it will be the ultimate remedy to regulatory uncertainty. Clear rules will remove barriers for institutions like pension funds and insurance companies to enter and will pave the way for RWA tokenization. Selig emphasizes that this is crucial for maintaining U.S. leadership in global innovation.

Critics and Industry Skeptics

Charles Hoskinson, founder of Cardano, criticizes the draft for potentially overcorrecting, pushing most digital assets into securities regulation and leaving room for expanded oversight. Previously, Coinbase withdrew support over concerns that the bill’s restrictions on DeFi could hinder innovation, causing legislative delays.

Prediction Market Operators’ Dilemmas

Faced with fragmented state bans and lawsuits from organizations like NCAA, prediction platforms are experiencing rising compliance costs. European countries such as Portugal and France have already implemented internet blocks, viewing decentralized prediction platforms as gambling tools rather than informational resources.

Reality Check on the Narrative

Current market narratives tend to oversimplify two key points:

First, “regulatory clarity equals absolute benefit.” In reality, clear rules also mean clear costs. For prediction markets, if ultimately classified as “event contracts” under strict derivatives regulation, their permissionless and global nature will be constrained. Massachusetts’ ban demonstrates that federal CFTC licensing does not fully exempt platforms from state-level gambling accusations.

Second, the assumption that “power transfer will proceed smoothly.” While the CFTC and SEC have expressed willingness to push reforms, the disputes over stablecoin yields reveal deeper conflicts—these are not just crypto versus banking but also a fundamental clash between “decentralized finance” and traditional deposit systems. Resolving this issue involves more than token classification; it’s a structural challenge.

Industry Impact Analysis

If the CLARITY Act is enacted, it will reshape the industry at least in three ways:

1. Institutionalization of Compliance Thresholds: The bill proposes restricting regulators from requiring financial institutions to treat customer digital assets as on-balance-sheet liabilities. This effectively overturns SEC’s prior SAB 121 guidance, significantly reducing banks’ capital burdens for custody of digital assets and attracting traditional institutions.

2. Divergence in Prediction Markets: The proposed rules (ANPRM) will distinguish between “information-based predictions” and “gambling contracts.” High compliance thresholds may lead to the exit of smaller projects, while platforms backed by compliant entities and willing to undergo audits will develop a “regulatory moat.”

3. Developer Protections and Innovation Incentives: The bill offers exemptions for projects with annual funding under $75 million and for early-stage teams, protecting grassroots innovation and avoiding the “illegal from birth” dilemma.

Scenario Evolution and Forecasts

Based on current dynamics, the next 3-6 months could see three main scenarios:

Scenario 1: Passage via Compromise (Higher Probability)

Parties reach a middle ground on stablecoin yield issues, such as allowing yields with strict restrictions. The CLARITY Act takes effect by mid-2026. The market experiences a gradual, compliant “slow bull,” with traditional funds slowly entering through compliant channels, and prediction markets entering a licensing phase.

Scenario 2: Further Stalemate (Medium Probability)

Banking interests succeed in lobbying to remove stablecoin yield provisions, provoking strong backlash from crypto advocates. The bill stalls again in the Senate until after mid-term elections. Regulatory enforcement remains ambiguous, and offshore prediction markets continue to siphon U.S. users.

Scenario 3: Administrative Action (Lower Probability)

If legislative deadlock persists, CFTC and SEC may jointly issue guidance within their regulatory authority, clarifying token classifications and prediction market standards through “soft law,” partially achieving the bill’s goals.

Conclusion

The progress of the CLARITY Act signifies that the crypto industry is moving away from the “power of computing” in the wild west era toward a landscape where “compliance equals cost.” For prediction markets, this regulatory storm is not the end but a beginning of segmentation: projects attempting to evade financial regulation under the guise of “prediction” will be phased out, while infrastructure that combines transparency, censorship resistance, and compliance will have the opportunity to enter a new “regulatory dividend” cycle in the second half of 2026.