Georgetown Law
Technology Review

Bet, or be silent.  This was a common phrase used in Britain during the 18^th century, implying that an opinion is more credible when an individual is willing to support it with a wager.  That wisdom can be applied to modern political prediction markets (PPMs).

PPMs are markets that allow their participants to place bets on political outcomes by buying contracts that are tied to the result of an election.  A PPM contract typically has a binary nature in which it provides a fixed payout only if the predicted outcome occurs.  The market price for a contract reflects the market’s level of confidence for that event.

PPMs can be a formidable alternative to opinion polls in predicting political outcomes.  They can serve as effective forecasters because they create predictions based on aggregating individuals’ knowledge to reflect the wisdom of the crowd.  Because real money is at stake, PPMs are generally trusted to represent the true opinions of their participants.

Despite this, the Commodity Futures Trading Commission (CFTC) recently shut down PredictIt, the only active PPM platform operating in the US, and resisted allowing any PPMs on regulated exchanges.  Their position is that PPMs are contrary to the public interest because they do not provide an economic purpose.  I believe the CFTC has relied too heavily on economic purpose in their public interest analysis of PPMs, and that it should broaden its public interest framework to capture the informational value of PPMs.

The Regulatory History of Political Prediction Markets

The CFTC has special rules for event-based contracts, or those which have a payout upon the occurrence of a future event.  In particular, Section 5c(c)(5)(C) of the Commodity Exchange Act gives the CFTC authority to prohibit any event-based contracts that involve unlawful activities, terrorism, assassination, war, gaming, or any similar activity contrary to the public interest.

When a contract for predicting the majority parties in Congress was proposed in 2012, the CFTC ruled that PPMs are contrary to the public interest because they lack an economic purpose.  Although the CFTC has reserved its right to consider other factors in measuring public interest, the CFTC has primarily relied upon the economic purpose test with regard to the legitimacy of event-based contracts.

While the CFTC has not allowed for political prediction contracts on its regulated exchanges, it has allowed research institutions to conduct political betting markets on a smaller scale.  In 2014, the CFTC gave PredictIt—a non-profit research project operated by Victoria University of Wellington, New Zealand—permission to operate under very specific, narrow conditions.

With 110 million betting contracts traded since 2018, the website has gained widespread use. The successful implementation of PredictIt prompted another regulated exchange, KalshiEX LLC (Kalshi), to propose a political event contract virtually identical to the one rejected in 2012.  However, the CFTC staff again recommended to its commissioners that it should be prohibited.  The CFTC then rescinded permission to operate from PredictIt without providing any details as to why.

One theory is that PredictIt’s success caused the CFTC to become flooded with proposals for other PPMs, and that Kalshi’s proposed contract caused the CFTC to reconsider PredictIt.

PredictIt has challenged the CFTC’s decision.  But even if it prevails, the scope of PPMs will remain limited.  The primary hurdle for allowing regulated exchanges to operate PPMs remains the CFTC’s determination of whether PPMs provide a public benefit.

Political Prediction Markets Provide a Non-Economic Public Benefit

Unlike respondents to pollsters, PPM participants put their own money at risk by placing bets on outcomes they expect to occur based on the information available to them.  Due to the financial incentives, PPMs attract full-time traders that voraciously consume political news in search of an edge.  The knowledge from these highly engaged traders is shared with the public when they trade, and that knowledge improves prediction accuracy.  This provides a distinct public benefit.  First, PPMs can serve as an effective tool for policy makers and political leaders because they react to proposals and political events in real-time.  This would allow elected officials to be more responsive to the interests of their constituents.  Second, as suggested by Georgetown Finance Professor James Angel, improved political forecasts optimize candidate coverage by the media and the manner in which candidates and political donors allocate resources.

Some argue that PPMs are susceptible to price manipulation from interested parties seeking to influence public opinion.  However, the perceived risk of manipulation has never been realized in practice.  Academic researchers have stated that the risk of market manipulation is not material because attempts to influence prices levels in these markets are transparent, short-lived, and exploitable by informed traders. There are ways to improve PPMs to circumvent these problems.

Policy Suggestions    

First, the CFTC should allow PPMs to operate on larger, more regulated exchanges. PPMs are less susceptible to manipulation on these types of exchanges because the removal of contract and deposit limitations give informed traders more capacity to correct perceived market inefficiencies.

Second, the CFTC’s heightened standards—which all regulated exchanges are required to comply with—involve twenty-three core principles, including financial resources, system safeguards, and market protection measures.

With the success of the PredictIt platform, and considering these additional protections coupled with the benefits of a more liquid exchange, it is in the public interest for the CFTC to allow PPMs for its fully regulated exchanges.