- The financial regulator fears market manipulation.
- Economists say these concerns are exaggerated.
The crypto industry loves to argue with the U.S. federal government on sensitive policy issues.
There are disputes over the definition of securities, conspiracy allegations when a crypto bank cannot open a “master account,” and debates over crypto custody rules.
Now cryptocurrency heavyweights are outraged by a proposed rule from the U.S. Commodity Futures Trading Commission that targets prediction markets where people can bet on the outcome of events such as elections, sporting events or even wars.
Exchanges such as Coinbase, Crypto.com and Gemini have all spoken out against the proposal, which would ban most “event contracts” – another name for prediction markets – in the US.
Why are crypto luminaries against the regulation, why are the CFTC and politicians like Senator Elizabeth Warren in favor of it, and what do economists say about it?
Pro-crypto, pro-forecast
An answer to why the largest crypto companies are against the CFTC rule? Polymarket.
The platform allows users to create and bet on decentralized prediction markets and has become one of the biggest success stories in the crypto world in recent months.
According to Dune Analytics, monthly trading volume nearly quadrupled in July to $387 million. The company has also partnered with big names like famed expert Nate Silver and artificial intelligence heavyweight Perplexity AI.
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Although US residents cannot use Polymarket under its terms of service, that does not mean the platform does not play a role in US electoral politics.
Even lofty publications such as the Wall Street Journal have cited Polymarket’s electoral chances in their coverage of the presidential election campaign.
“Decentralized prediction markets are a significant innovation with real public benefit,” wrote Gemini co-founder Cameron Winklevoss in a post on X describing his opposition to the CFTC’s proposed rule.
The CFTC’s opinion
However, CFTC regulators believe that prediction markets are a major nuisance.
In its “Notice of Proposed Rulemaking,” the agency argues that creating betting markets for events such as terrorism, assassinations, or war is morally “objectionable.”
And these markets could, however small, create financial incentives for people to do things like assassinate a president, the statement said.
Among a number of other concerns in its proposed rulemaking, the regulator claims that prediction markets are potentially vulnerable to manipulation.
Participants with influence over the game, such as athletes, might have a financial incentive to fix a game if there were a market in which they could easily bail out.
In addition, the CFTC stated that, particularly in political elections, markets may encourage voters to vote for candidates who could help them win a bet rather than voting based on their beliefs.
The regulator said the whistleblowers could either spread misinformation to manipulate election prediction markets or they could manipulate prediction markets to influence public perceptions of political campaigns.
“Election fraud fundamentally undermines the sanctity of our democratic process,” Warren wrote along with a number of other senators and representatives in a letter supporting 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 out DL News on the CFTC’s proposed rulemaking.
“Their main reason for opposing these markets is that they provide a strong incentive for people to interfere in elections,” a Norton spokesman said.
Researchers’ opinion
However, economists reject the CFTC’s allegations.
“The economic literature suggests that prediction markets are quite accurate,” said Robert Webb, a professor at the University of Virginia who studies speculative markets, DL News.
In June, he submitted a letter protesting against this rule.
Robin Hanson, a professor at George Mason University and one of the first academic proponents of prediction markets, said DL News Concerns about manipulation or attempts to influence prediction markets through misinformation or vice versa are exaggerated.
“It’s a general characteristic of any source of information that people rely on that they might try to distort it,” he said, giving an example of how sources regularly try to manipulate reporting.
Hanson had already come under criticism in 2018 for publicly pondering a “gender redistribution” in the course of a broader social debate about incels.
“Many have accused me of having crazy, extreme views that I have not expressed and have explicitly denied,” he said DL News.
Regarding claims that traders could manipulate prediction markets to influence public opinion, Hanson said researchers have shown that gamblers take the possibility of market manipulation into account when placing their bets.
James Bailey, an economics professor at Providence College, also submitted a comment opposing the CFTC’s proposed rule, but warned that prediction markets implemented without any regulatory oversight could lead to excesses.
If the amount a person can bet on real events becomes large enough, insiders may have a greater incentive to manipulate an election, for example, he said DL News.
However, he said that based on the current state of research, the benefits of legalizing prediction markets outweigh the disadvantages.
“These are really effective ways to summarize people’s best ideas for the future,” Bailey said.
Polymarket did not immediately respond to a request for comment.
Ben Weiss is Dubai correspondent for DL News. Do you have a tip? Send him an email to [email protected].
