The US Commodity Futures Trading Commission (CFTC) has shut down Kalshi’s predictions market that enabled wagers on whether Republicans or Democrats would win a majority of Congressional seats, reasoning that such a predictions market would operate “contrary to the public interest.”
This order continues a pattern of regulatory pressure on prediction markets. Throughout US history, almost all prediction markets that wade too far into the waters of politics or gambling ended up shuttering or fading into obscurity amid government intervention.
In their new order, commissioners explained that the platform operated by KalshiEx LLC would permit unlawful betting. They also cast a dim view on many predictions markets based on election outcomes.
The US Commodities Exchange Act (CEA) section 5c(c)(5)(C)(i) empowers the CFTC to determine that contracts in certain commodities “are contrary to the public interest if the contracts involve: (1) activity that is unlawful under any Federal or State law; (2) terrorism; (3) assassination; (4) war; (5) gaming; or (6) other similar activity determined by the Commission, by rule or regulation, to be contrary to the public interest.”
Although the logic sounds circular — contrary to the public interest because the Commission determines it to be contrary to the public interest — commissioners explained why their reasoning was not circular in a 23-page court filing plus accompanying statements from three of the five commissioners.
The shady history of prediction markets
Prediction markets have a long history, dating back to the earliest era of cryptography and cypherpunk.
As early as 1991, HedgeStreet enabled traders to speculate on economic events over the then-brand-new internet. A few years later, the first mainstream prediction market captured the attention of Wall Street, The Hollywood Stock Exchange. The Cantor-Fitzgerald creation focused on film-related options contracts, especially bets on Oscar Award winners.
By the early 2000s, the US government began to take notice of prediction markets and squash them before they could grow too large. In 2003, for example, US senators condemned Policy Analysis Market as an assassination and terrorism marketplace.
Another major prediction market, InTrade, succumbed to regulatory pressure and ceased trading in 2013. Augur, a California-based and Bay Area-funded project by Pantera Capital, has mostly abandoned development. Its founder, Joey Krug, hinted that someone might try to create illegal wagers, requiring extensive moderation — somewhat antithetical to the permissionless ideals of crypto.
Of course, there are still prediction markets that operate today, as well as many examples from recent history. Crypto waging platform Polymarket, for example, has come under fire for hosting controversial bets over the missing Titan submersible, which was later found to have imploded.
Sniffing a consistent opportunity for profit, prediction markets are a perennial business idea from finance entrepreneurs. Eventually, however, most founders discover regulations after building their technologies. They quickly choose to comply, move offshore, or succumb to regulatory consequences.
PredictIt is one of the largest prediction marketplaces in operation today. Due to its size, it already attracted regulatory scrutiny.
Currently, PredictIt is fighting in court after the CFTC rescinded permission to operate several of its betting lines. A judge ruled that PredictIt can continue operating until a final decision is made in that case, despite the CFTC’s efforts to shut it down.
That legal matter involves a No Action letter that the CFTC issued then withdrew in 2022. A No Action Letter is a promise by a regulator not to sue nor intervene as long as the recipient follows the terms of the letter.
The CFTC says it rescinded its assurance of No Action because PredictIt allegedly violated its terms by offering politics-related predictions.
Augur once promised to become the future of betting. Its initial focus was sports wagering but, as a blockchain-based platform, soon expanded into dubious types of wagers. Users created an assassination market on the sitting US president.
It closed up shop quickly. Three years after its August 2015 launch, it disclosed just 37 daily average users as of August 2018. Eventually, it abandoned its original vision entirely and launched a new system called Augur V2 which focused on stablecoins and pedestrian outcomes like the weather. Augur V2 also excluded US and UK residents.
It conducted an ICO for its proprietary token, REP, to raise funds for development. This also raised some eyebrows at the Securities and Exchange Commission (SEC). During its ascent to brief prominence, the Peter Thiel Foundation named Augur co-founder Joey Krug as one of its 2016 Fellows.
Since then, Krug admitted that Augur might be unwelcome in the State of California and quietly abandoned the project. Its official website now says only that its predictions market is inaccessible to residents of the US, UK, Belarus, Cuba, Iran, Iraq, Côte d’Ivoire, Liberia, North Korea, Sudan, Syria, and Zimbabwe.
Augur’s REP token has declined 99.8% from its all-time high.
Stox once described itself as a “blockchain prediction markets platform powered by the STX token.” (Disambiguation: Stox’s STX token is entirely distinct from Stacks’ STX token.)
However, Stox’s blog was last active in November 2018. The project appears abandoned.
Its founder, Moshe Hogeg, was sued for alleged fraud, though the presiding judge dismissed that case in 2021. More recently, Israeli police are investigating Hogeg’s potential involvement in another $300 million fraud.
Stox STX’s token has declined 99.6% from its all-time high.
Truthcoin or Hivemind
Paul Sztorc has been trying to launch a BTC-pegged sidechain prediction marketplace, Truthcoin (now renamed Hivemind), since 2015. Peter Todd called the eight-year-old idea “clever crazy instead of stupid crazy,” although he still thought it was crazy enough to have a “low chance of success.”
Truthcoin/Hivemind has never launched a mainnet.
Its founder, Sztorc, continues to promote two Bitcoin Improvement Proposals (BIPs), 300 and 301, which would allow him to launch the prediction market sidechain on the Bitcoin network. He recently raised $3 million for his company, LayerTwoLabs, to champion BIPs 300 and 301.
Freedom maximalists versus public servants
Like many fans of prediction markets, Paul Sztorc believes they could help solve issues like housing problems. Sztorc, like many believers in the benefits of prediction markets, is a fan of Robin Hanson’s futarchy: a governance system that uses prediction markets to affect societal outcomes.
Regulators, on the other hand, have generally reigned in the proliferation of unregulated prediction markets. History is replete with examples of shuttered operations, as demonstrated above. The CFTC’s recent denial of Kalshi’s application for Congressional wagering is just the latest example.