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Outside the Box: Why are government regulators targeting PredictIt and other political betting markets now?

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The Commodity Futures Trading Commission has ordered that PredictIt, a popular political betting site, shut down by mid-February 2023. The CFTC has also recommended rejecting the request by Kalshi, a new event market exchange, to enter the U.S. election prediction marketplace. 

Both of these moves are head scratchers — solutions no one wants to problems that don’t exist. The CFTC is supposed to protect the integrity of derivatives markets — not to shut down useful and popular markets.

Importantly, the CFTC has identified no harms from either site’s operations nor any benefits from restricting political prediction markets. Prediction markets are used to forecast a wide variety of events ranging from Federal Reserve decisions to the number of passengers flying in a given week to the number of new covid cases, to name just a few. Many companies operate internal prediction markets to help them forecast sales and other trends of importance to the company.

Perhaps the most controversial prediction markets are those concerning elections, but these have shown themselves to be a useful source of information. They are regularly cited in the media and referenced by political commentators, and they are often more reliable indicators of election outcomes than polls and pundits.

Participants in event markets put their own money at risk betting on an outcome, and so they take more care with their forecasts than a pundit might in expressing an opinion, or what a respondent might say in answering a poll question. A PredictIt mistake has consequences; an incorrect sound bite on Fox or MSNBC has little cost.  

Additionally, these prediction markets attract participants who may have relevant expertise and information, but who do not have a public platform to share it. This is why prediction markets are considered by economists, among others, as an efficient way of amalgamating and distilling information.

This isn’t the first time the CFTC has come down on markets like PredictIt. The agency rejected a 2012 proposal by the North American Derivatives Exchange (NADE) on the basis that the proposed contract had no “economic purpose” and was “contrary to the public interest.” This despite the fact that the NADE was a CFTC-approved contract market for derivative financial instruments. 

“ Multi-billion dollar arcane Wall Street financial instruments are acceptable while low-dollar, low-stakes public prediction markets are not.   ”

To put it another way: Multi-billion dollar arcane Wall Street financial instruments are acceptable while low-dollar, low-stakes public prediction markets are not.  

The capriciousness of CFTC decision-making is of particular concern. In its recent decision to shutter PredictIt, the CFTC offered no context or explanation. The CFTC has simply said that PredictIt is not adhering to the agency’s terms, and it must shut down — this despite PredictIt operating without issues for eight years. 

The CFTC staff hasn’t given any explanation for its recommendation that Kalshi not be allowed to participate in U.S. election betting markets. Those recommendations will influence the CFTC commissioners, who are likely to prohibit Kalshi in the same way they’ve thwarted PredictIt. Which is to say: A ban on operations without a reason and without a cause.

The public must demand answers to questions of the CFTC. Namely, why would an accurate source of information on election trends undermine election integrity and serve no economic purpose? Why is there danger in these markets even starting up in the United States, in the case of Kalshi? And what threat does low-dollar betting on political events pose to the economic order? 

This would be an appropriate time to reexamine the CFTC’s role more generally. A key prerequisite for encouraging innovation is the ability to introduce new products without unnecessary regulatory hurdles. Entrepreneurs should not have to prove to the government that their new product or company is “in the public interest” or is an improvement on something that exists, yet that is precisely what the CFTC is doing in this area. 

Requiring innovators to navigate a regulatory gauntlet results in slower introduction of fewer new goods and services and less competition. Kalshi worked for 18 months to get the CFTC’s permission to operate a prediction market exchange, but still must get the CFTC’s permission for each new contract it introduces. Other firms that try to enter this market will face similar barriers, making it difficult for competition to develop.

After years of opportunity, the CFTC has collected little if any evidence of harms from election markets or other prediction markets. The burden of proof should be on the agency to demonstrate that its approach can pass a benefit-cost test.

Thomas Lenard is president emeritus and a senior fellow at the Technology Policy Institute.

More: Trump vs. DeSantis: Midterm election results shake up the Republican 2024 field

Also read: Trump 2024? Republicans cheer and jeer as Donald Trump says he’s again running for president.

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