A new proposal from the Commodity Futures Trading Commission (CFTC) is setting the stage for what could become one of the prediction market industry’s favorite recurring traditions, i.e., arguing with regulators.

The agency has released a 267-page notice of proposed rulemaking, Prediction Markets; Public Interest Determinations, outlining how it intends to decide whether certain event contracts should be prohibited for conflicting with the public interest—a phrase that, as always, promises lively debate over what exactly the public’s interests happen to be.

In response to the plans, CFTC Chairman Michael S. Selig stated: “The CFTC will protect the integrity of our regulated markets without standing in the way of responsible innovation.

“This proposal gives the Commission a durable, transparent framework to identify the contracts Congress directed us to scrutinize while letting legitimate markets move forward.”

It arrives as prediction markets continue their steady extension into sports, politics, and other areas guaranteed to attract attention, controversy, and lengthy legal briefs. It also follows several years of litigation, hearings, and regulatory soul-searching over the CFTC’s authority to oversee event contracts, with virtually every stakeholder insisting that the future of the industry depends on getting the answer right.

The commission is proposing a more flexible framework. Instead of deciding that certain subjects are off-limits on sight, regulators would evaluate contracts based on a variety of factors when determining whether they involve unlawful activity, terrorism, assassination, war, gaming, or any future cate...