The crypto industry loves to battle the US federal government on in-the-weeds policy issues.
There are fights over the definition of securities, allegations of conspiracy when a crypto bank isn’t able to get a “master account,” and debates over crypto custodial rules.
Now, crypto heavyweights are up in arms over a proposed rule from the Commodity Futures Trading Commission that targets prediction markets, which let people bet on the outcome of events like elections, sports games, or even wars.
Exchanges like Coinbase, Crypto.com, and Gemini have all come out in opposition to the proposal, which would prohibit most “event contracts” — another name for prediction markets — in the US.
Why are crypto luminaries opposed to the rule, why are the CFTC and politicians like Senator Elizabeth Warren in favour, and what do economists say in response?
Pro-crypto, pro-prediction
One answer for why crypto’s biggest companies are against the CFTC rule? Polymarket.
The platform lets users create and bet in decentralised prediction markets, and has become one of crypto’s biggest success stories in recent months.
Monthly trading volume almost quadrupled to $387 million in July, according to Dune Analytics. The company has also partnered with big names like famed pundit Nate Silver and artificial intelligence heavyweight Perplexity AI.
While US residents can’t use Polymarket, per its terms of use, that doesn’t mean the platform hasn’t appeared in US electoral politics.
Even august publications like the Wall Street Journal have cited Polymarket’s election odds while covering the presidential race.
“Decentralised prediction markets are a significant innovation with real public utility,” wrote Cameron Winklevoss, co-founder of Gemini, in a post on X, describing his opposition to the CFTC’s proposed rule.
The CFTC’s take
CFTC regulators, however, say prediction markets open a can of worms.
In its “notice of proposed rulemaking,” the agency argues that the creation of betting markets for events like terrorism, assassination, or war is morally “offensive.”
And these markets could, however minutely, create financial incentives for people to, say, assassinate a president, it argues.
In addition to a series of other concerns in its rulemaking proposal, the regulator asserts that prediction markets are potentially ripe for manipulation.
Participants who have influence over events, like athletes, may be financially incentivised to throw a game if there were a market in which they could easily cash out.
Moreover, the CFTC said that, especially for political contests, markets may incentivise voters to choose candidates that may help them win a bet, rather than vote based on their beliefs.
The regulator said meddlers could either spread misinformation to manipulate prediction markets for electoral races or manipulate prediction markets to shape public perception of political contests.
“Election gambling fundamentally cheapens the sanctity of our democratic process,” wrote Warren, along with a host of other senators and representatives, in a letter of support for the CFTC’s proposed rule.
The only signatories of the letter who responded to a request for comment DL News were Senator Chris Van Hollen and Representative Eleanor Holmes Norton.
Van Hollen’s staff declined an interview but pointed DL News to the CFTC’s rulemaking proposal.
“Her primary reason for opposing those markets is that they provide a powerful incentive for people to interfere in elections,” said a spokesperson for Norton.
Researchers’ take
Economists, however, push back against the CFTC’s claims.
“The economic literature suggests that prediction markets are fairly accurate,” Robert Webb, a professor at the University of Virginia who studies speculative markets, told DL News.
He submitted a letter in opposition to the rule in June.
Robin Hanson, a professor at George Mason University and one of the earliest academic proponents of prediction markets, told DL News concerns of manipulation, or attempts to influence prediction markets through misinformation or vice versa, are overblown.
“It’s a generic feature of having any information source people might rely on that people might want to try to distort it,” he said, giving an example of how sources regularly try to spin news coverage.
Hanson faced previous criticism in 2018 for publicly musing about “sex redistribution” amid broader societal conversations about incels.
“Many felt free to attribute crazy extreme positions to me that I did not say, and have explicitly denied,” he told DL News.
In regards to claims that traders may manipulate prediction markets to influence public opinion, Hanson said that researchers have shown gamblers factor in the chance of market manipulation into their bets.
James Bailey, an economics professor at Providence College, also submitted a comment in opposition to the CFTC’s proposed rule, but he cautioned that prediction markets implemented without any regulatory scrutiny can lead to excesses.
If the amount of money one person can bet on real world events grows large enough, insiders may have more of an incentive to, for example, throw an election, he told DL News.
However, as the current research stands, he said he believes that the pros of legalising prediction markets outweigh the cons.
“These are really accurate ways of summing up people’s best ideas of the future,” Bailey said.
Polymarket did not immediately return a request for comment.
Ben Weiss is a Dubai Correspondent at DL News. Got a tip? Email him at bweiss@dlnews.com.