The U.S. Commodity Futures Trading Commission has unveiled its first proposed framework for deciding which prediction-market event contracts serve the public interest and which violate federal law, setting out a three-step test focused on whether a contract references a real or potential event, falls into a restricted category, and is contrary to the public interest. The proposal, grounded in Section 5c(c)(5)(C) of the Commodity Exchange Act, keeps a case-by-case approach rather than imposing rigid category-wide bans and remains broadly supportive of most sports-related markets. The draft would bar contracts tied to terrorism, assassination, war, gaming or unlawful conduct, while using a flexible balancing test that weighs factors such as hedging utility, price-discovery benefits and the risk of encouraging illegal activity. The CFTC said a contract based on crude oil transport through the Strait of Hormuz would not automatically be treated as a war or terrorism contract because its settlement is tied to commercial activity rather than the conflict itself. The commission said it would open a 45-day public-comment period after the proposal is finalized, with the rule taking effect 60 days after final adoption. The move lands in a widening fight over whether Washington or the states should control fast-growing prediction markets. President Donald Trump recently said it is “critically important” that the CFTC retain exclusive oversight, while a coalition of 39 attorneys general has backed state efforts to challenge platforms such as Kalshi. The broader debate has also drawn scrutiny over enforcement, governance and insider-trading risks as the sector expands rapidly.