Criticism of CFTC’s Proposed Rules on Prediction Markets

Dragonfly Digital Management and Crypto.com have joined Coinbase in voicing their concerns regarding the Commodity Futures Trading Commission’s (CFTC) recently proposed regulations concerning prediction markets. Industry experts argue that the CFTC’s rules broadly categorize and effectively ban certain event contracts, which notably include those related to gaming and elections. Coinbase has specifically criticized the CFTC’s definition of gaming as overly vague, raising alarm that such an overreach not only exceeds the agency’s statutory authority but also stifles innovation and overlooks the economic advantages these contracts can provide.

Jessica Furr and Bryan Edelman from Dragonfly articulated their position in a letter to the CFTC, stating, “Political event contracts should not be conflated with gambling on games of chance like the Super Bowl. Elections carry significant economic implications.” They emphasized that these contracts are designed to fulfill essential risk-hedging functions, aligning with the mandates of the Commodity Exchange Act (CEA) and providing valuable predictive insights to the public.

Furthermore, Dragonfly argues that the CFTC’s proposed regulations excessively overreach by broadly prohibiting prediction markets without thorough evaluation. This concern is particularly pertinent in light of the recent Supreme Court ‘Chevron’ decision, which restricts the agency’s interpretive authority without a clear congressional mandate.

In a similar vein, Steve Humenik, the Special Vice President overseeing Capital Markets at Crypto.com, contends that the CFTC’s move to ban prediction markets contravenes the structured rulemaking process outlined in the CEA. This process entails a diligent three-step approach that the CFTC must follow.

• Assess whether a contract involves an excluded commodity.
• Determine if it engages in specified activities.
• Evaluate whether it is contrary to the public interest before imposing a ban.

Humenik stressed, “The CFTC must clearly articulate its rationale for categorizing a particular contract as having an underlying excluded commodity. This determination should not be a foregone conclusion.” He urged the CFTC to adhere to its obligations for a comprehensive three-step review process concerning these event contracts and to reconsider the implications of the Event Contracts Notice of Proposed Rulemaking (NOPR).

Additionally, voices from beyond the crypto sector have also weighed in on this contentious issue. Joseph Fishkin, a Law Professor at UCLA, remarked that prediction markets provide invaluable insights into public opinion and political dynamics. He cautioned against regulating these markets in a manner that could lead to their extinction within the United States.

Fishkin elaborated, “I believe they enhance our understanding of politics, the news media, political ‘conventional wisdom,’ and the ways in which crowds can misjudge certain political predictions.” He expressed hope that regulators would not drive these markets out of existence in the country.