Paradigm Files Comment on the CFTC’s Overbroad Proposed Rule on Political Event Contracts and Prediction Markets

America is electing a president this year, and the results of November’s election will have profound consequences for the world, the country – and especially for crypto. Everywhere we look, the press, business executives, and professional prognosticators are making predictions about November’s potential outcomes. But too often, these myriad predictions feel more like noise than signal.

Prediction markets have recently emerged as a focal point and predictor of potential electoral outcomes. In fact, amid the churn of an especially chaotic election year, these predictions have been a rare light in the dark.

Presidential candidates even showcase prediction market readouts alongside traditional polling data. Prediction markets are clearly capturing some market wisdom; Nate Silver’s recently-released model for the Presidential Election closely tracked the outcome likelihood shown at the time (June 26, 2024) on prediction market Polymarket. (Last week, Polymarket announced that Nate Silver was joining the company as an advisor.) In the electoral rollercoaster of the last two weeks, 1) there was an assassination attempt on former President Trump, 2) Trump selected Senator JD Vance as his Vice Presidential nominee, 3) President Biden decided against running for reelection, and 4) Vice President Kamala Harris presumptively secured the Democratic nomination.

The impact of each event is material to the trajectory of the race for the White House. Yet these events were too staccato to poll in real time. After all, when it comes to polling, we still are limited by time, resources, and sample size.

To make sense of each event, average Americans, businesses, candidates, and the press have turned to prediction markets to separate the electoral signal from the noise. Clearly, there is value and public interest in these markets. When there is no other way to discern what is truly going on, markets are our last, best guardian of truth.

Despite these benefits, the CFTC has decided to move forward with a proposed rulemaking that would ban political event contracts altogether – while also significantly limiting potential implementations of prediction markets more broadly. In February 2024, Paradigm filed an amicus curiae in support of KalshiEx’s lawsuit against the CFTC, which was an innovative company’s appeal to legalize political event contracts for all US participants. The CFTC, circumventing the ongoing legal process, decided to preemptively issue a rule effectively banning the practice entirely. This would be a loss not just for those who seek to use these markets, but it would reduce information available to voters and reporters about the crux of a functioning democracy: our elections.

Prediction markets are an important nascent financial primitive, potentially forming the basis for new systems of governance, hedging risk, gauging public sentiment, and forming political analyses. Regulators should be merit neutral in their approach to all new technology (such as crypto). If there are risks, regulators should write appropriately-tailored rules. Otherwise, policymakers shouldn’t regulate something out of existence just for committing the “sin” of being new and unfamiliar.

As enumerated in our comment letter, Paradigm has significant concerns that the Event Contracts NPRM suggests a broad and untethered ban on a wide variety of products – prediction markets – that could otherwise further the goals of the Commodity Exchange Act to promote responsible innovation. We urge the CFTC to materially alter, or scrap altogether, this ill-considered and technology-prejudiced rule. Our elections and very democracy depend on accurate, real-time info; our regulations should not lose sight of our democratic forest for a regulatory shrub.