Please see below for this week’s Financial Markets & Innovation Weekly Update from Morrison Foerster, tracking how emerging technologies are reshaping financial markets and how U.S. and global regulators are responding. Covering developments across digital assets, prediction markets, artificial intelligence, and next-generation trading infrastructure, this update highlights key regulatory actions, enforcement activity, policy signals, and related market structure implications.
In light of the new advanced AI models capable of breaching security systems and recent conflicts that could affect cybersecurity, the New York Department of Financial Services issued advisories recommending best practices to reduce the impact of these threats. The recommendations are in addition to October 2024 guidance on AI cybersecurity, which was also issued under its Cybersecurity Regulation. Specifically, the new guidance generally advises regulated entities to expeditiously identify and manage vulnerabilities, address vulnerabilities from third-party service providers, strengthen security and validation of programming, and speed up processes for suspicious activity monitoring and reporting. Heightened risk environments caused by AI or other geopolitical events can increase the risk of cyberattacks and expand their impacts, which can be mitigated by quick response times and advanced risk management.
The NY Department of Financial Services has approved Mastercard’s BitLicense, which complements Mastercard’s recent partnerships with digital asset infrastructure providers, coin issuers, and digital wallet companies. The BitLicense allows Mastercard to engage in digital asset activity in New York state, specifically in digital asset payment and settlement infrastructure, stablecoins, and tokenized deposits.
In response to suits from prediction markets in Washington and Nevada state gambling enforcement actions, a Ninth Circuit of Appeals panel ruled that the lawsuits can remain in state court. The panel found that the gambling issues raised by states did not rise to a federal issue and found that the gambling-related enforcement actions did not touch the Commodity Exchange Act or the Commodity Futures Trading Commission’s authority. Additionally, the panel denied the prediction markets’ requests for emergency stays of remand orders, finding that the platforms are not irreparably harmed by a case in state instead of federal court. In response to state scrutiny, President Trump posted on social media in support of CFTC exclusive authority and criticized state officials seeking to regulate prediction markets. He stated that prediction markets are a “major [i]ndustry” that “we must protect” to retain American dominance.
In Congress, prediction markets have seen similar scrutiny. On May 20, the Senate Commerce Committee held a hearing titled “No Sure Bets: Protecting Sports Integrity in America,” where they discussed the balance of risks posed by prediction markets and the financial innovation they represent. Senator Ted Cruz (R-Texas) stated that, unless Congress provides clarity, the Supreme Court is likely going to rule on federal preemption of events contracts. In the House, the Committee on Oversight and Government Reform opened an investigation into potential insider trading in prediction markets. In letters sent to prediction market owners, the Committee requested expansive internal records on high profile trades, identity verification procedures, data privacy, applicability of CFTC requirements to global trades, and more.
On Tuesday, May 26, the CFTC submitted a proposed rule on prediction markets to the White House Office of Information and Regulatory Affairs (OIRA) for review. While the filing does not include text of the rule, the CFTC is expected to release a federal framework for prediction markets and events contracts to counteract state action in the industry. Submission to OIRA is a standard part of the regulatory process and follows the CFTC’s March request for information on events contracts.
On Wednesday, May 27, the CFTC and a prominent crypto exchange requested relief from a January 2025 consent order that alleged misrepresentation of digital asset futures contracts. The CFTC stated that, after a review of the action, they determined the complaint “should not have been filed,” as it was a product of “inappropriate tactics” by the Division of Enforcement. The motion pointed to the shift in President Trump’s digital asset policy and false evidence provided by the whistleblower to explain the shift in stance. The CFTC had initiated the enforcement action in 2022, with the consent order approved by a judge in January 2025.
If you have any questions about these developments or would like to discuss how they may affect your business, please contact any of the partners listed.