Canada’s new prediction market rules leave key questions unresolved, Wealthsimple CEO says

Wealthsimple chief executive officer Mike Katchen says Canadian regulators’ decision to keep sports and entertainment bets outside of securities regulation creates new challenges for the country’s emerging prediction market industry.

“We work closely with regulators and want to work in lockstep with them,” Mr. Katchen told The Globe and Mail’s editorial board last week. But the recent joint statement from Canadian securities and investment industry regulators that keeps sports and entertainment contracts off regulated prediction market platforms “did not address how the mechanics are going to work,” he said.

In a white paper published in August, before the regulators’ decision, Wealthsimple argued that putting certain contracts, such as those tied to sports outcomes, under gaming regulation while others remain under securities regulation would be “unworkable.”

A sports contract and an inflation contract “are, mechanically, the same instrument,” wrote authors Blair Wiley, chief legal officer at Wealthsimple, and Catherine De Giusti, vice-president of product legal and deputy general counsel at Wealthsimple.

Now that regulators have drawn a line between the two, “it’s a mechanic argument that’s going to present a number of challenges that I’m not sure is fully thought through yet,” Mr. Katchen told The Globe’s editorial board.

Canadian securities regulators decline to oversee sports, entertainment contracts for prediction markets

The decision puts Canada’s nascent prediction-market industry on a different path than its U.S. counterpart, shutting financial services companies out of categories that have fuelled much of the industry’s explosive growth across the border.

Two companies have received approval from the Canadian Investment Regulatory Organization, or CIRO, to provide Canadians with access to certain event contracts: Wealthsimple, which partnered with U.S. prediction-market platform Kalshi, and Interactive Brokers Canada. CIRO is a self-regulatory organization that oversees all investment dealers and mutual fund dealers, as well as all trading activity on Canada’s debt and equity marketplaces.

Currently, CIRO-approved dealers are only permitted to offer contracts tied to economic indicators, financial markets and climate trends.

Jean-François Bernier, managing director of Interactive Brokers Canada, said in a statement in late August that its prediction-market product for Canadian clients offers contracts approved by regulators, “which has been our focus from the outset.”

“IBKR’s current suite of prediction markets was built around serious categories precisely because those are the areas where probability-based trading has genuine relevance to investors’ financial decision-making,” he said.

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Other investment platforms are still seeking to enter the market despite the restrictions. Questrade previously told The Globe that it has applied for regulatory approval to offer prediction trading.

Salim Naran, president of Questrade’s growth portfolio, said in a statement that while contracts tied to economic data represent “legitimate financial hedging needs that belong on a regulated investment platform,” sports and entertainment contracts “serve an entirely different purpose.”

“As a result, we support the CSA and CIRO’s current guidance that distinguishes between legitimate financial products and those that aren’t.”

The regulatory restrictions could limit the growth potential of prediction markets offered through Canadian investment platforms. Sports contracts accounted for 80 per cent of total trading volume on Kalshi between July, 2024, and this past May, according to the Pew Research Center.

But there are signs currently approved categories can attract significant trading activity.

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Kalshi said volume in its climate and weather category has grown 500 per cent year over year and is approaching US$1.1-billion in annualized volume. Climate-related contracts are among those permitted on Canadian investment platforms.

“There was no regulated, responsible, trustworthy” platform for Canadians to participate in prediction markets, “so Canadians were being forced to do it in an unregulated environment,” Mr. Katchen said.

“Our priority, as we’ve done with other markets like cryptocurrencies, was working with regulators to bring a reliable, trustworthy platform to that category”

Prediction markets remain a small, new part of Wealthsimple’s business, he said, after Wealthsimple Predict launched this summer, representing less than 1 per cent of the company’s business.

“With any new product, it’s easy to dismiss it as it’s gambling,” Mr. Katchen said. “It’s too early to say that in this category. I think there are emerging use cases that are actually very interesting to the future of financial services broadly. But it’s early. It’s messy. I don’t want to diminish how messy it is and complicated.”