When the Commodity Futures Trading Division (CFTC) withdrew PredictIt’s no-action letter in August, PredictIt users were upset. The prediction market, which is operated out of Victoria University of Wellington in New Zealand and has been active in the U.S. since receiving the no-action letter in 2014, has a loyal community. The government agency that regulates derivative markets told PredictIt to shut down by Feb. 15, 2023, with minimal explanation, which confused and irked users.
Oh my god, the CFTC just killed PredictIt after 8 years of precedent. This is unbelievable.https://t.co/mMpb0gaThj
— William Eden (@WilliamAEden) August 5, 2022
In the immediate aftermath of the August decision, plenty of theories were floated as to why PredictIt’s no-action letter was being withdrawn seemingly out of the blue. Among the theories: Fellow prediction market Kalshi killed PredictIt.
“Killed” is a strong word to describe what some believe Kalshi did, although it’s not completely outlandish to suggest that the rival prediction market played a role in PredictIt’s current predicament.
“I mean, is it plausible that influence by Kalshi might have influenced in turn the CFTC’s decision? Sure, that’s possible,” Pratik Chougule, a co-host of the Star Spangled Gamblers podcast and author of the 2016 book How to Make Money from Political Predictions: A Guide to Generating High, Steady Returns on PredictIt, told US Bets in an interview.
Breaking down the theory
The theory behind Kalshi playing a role in taking down PredictIt revolves largely around two factors.
First, some believe Kalshi was behind Polymarket, another prediction market, running into regulatory issues with the CFTC and having to pay a $1.4 million fine in early 2022. Some suggest Kalshi has a history of going after competitors through regulatory influence.
The reason is likely that Kalshi paid a lot of money to corporate lawyers with a good relationship with CFTC commissioners to get approval after nearly 3 years!, and these same corporate lawyers likely used their influence to then enforce their monopoly vs. polymarket.
— Doug Campbell (@TradeandMoney) January 4, 2022
The other reason often cited to support the theory is Kalshi’s letter to the CFTC in July requesting the ability to offer an election contract — the CFTC will issue a decision on this Friday — on which political party will win control of Congress.
“Contracts on political control of Congress available to US participants have been trading for nearly a decade,” the letter said. “Since 2014, a similar contract has been available for trading on an unregistered trading venue that purports to operate under a No-Action Letter that was issued by the Division of Market Oversight in 2014 and granted relief to operate without complying with a number of aspects of the Commodity Exchange Act and Commission Regulations.”
The final sentence stands out. While Kalshi might not be directly reporting PredictIt to the CFTC, the language clearly calls out PredictIt for failing to comply with regulations.
“The theory here, my theory and I think the theory of many others, by Kalshi doing this they force the hand of the CFTC,” said Chougule, who is also a consultant for Insight Prediction. “Now basically the CFTC probably feels, ‘Well how can we say no to Kalshi when PredictIt is offering all kinds of election markets on the basis of this no-action letter that we gave them?’ By the way, one that PredictIt arguably kind of abused the original terms of.”
There’s certainly a case PredictIt violated the terms of its no-action letter, which states in part that PredictIt needs to be a small scale, nonprofit entity designed for academic and research purposes. Given its rise in popularity, it can be debated whether PredictIt is a small-scale operation. It’s also debatable whether PredictIt’s current purpose is purely academic, as intended.
Still, PredictIt denied those claims to Bloomberg, saying that it was operating under the terms of the letter.
Eric Zitzewitz, a professor of economics at Dartmouth who has researched prediction markets, says some of PredictIt’s contracts likely weren’t loved by the CFTC. For example, PredictIt previously listed contracts on how many times former President Donald Trump would tweet. There was a specific contract allowing people to put money on how many times Trump would tweet the phrase “Sleepy Joe” over a given timeframe. Those popular contracts were abruptly stopped, likely due to regulatory pressure.
Still, Zitzewitz expressed some surprise that potential disagreements between PredictIt and the CFTC about contracts being offered would lead to the withdrawal of the no-action letter.
“If they didn’t like the markets on the polling averages, maybe just tell them to stop running those markets,” Zitzewitz said. “But definitely PredictIt is running some markets that are clearly within the scope of the no-action letter, so why they’re not being allowed to continue running those markets, it’s puzzling, and I think a bit of a shame.”
Zitzewitz didn’t speculate on theories as to why PredictIt’s no-action letter was withdrawn, but he does want to see election-related prediction markets available to the public, given their potential value in society.
“I’m a big fan,” Zitzewitz said. “Just because there’s a lot of commentary in politics, where nobody puts any money where their mouth is, so it’s nice to have an alternative.”
The timing of Kalshi writing to the CFTC about offering election contracts (late July) and the CFTC withdrawing PredictIt’s no-action letter (early August) is noteworthy, but it’s not necessarily a smoking gun.
Harry Crane, a professor of statistics at Rutgers who has studied prediction markets, says PredictIt’s loyal and engaged user base offers a case study in why Kalshi offering regulated political prediction markets is of public interest. That could be viewed as a positive by Kalshi as it looks for approval to offer political markets.
“If not for PredictIt, there would be really no evidence that these things are of public interest and do have any value,” Crane said.
On the flip side, one could argue Kalshi would prefer PredictIt being out of the picture to push PredictIt users onto its site.
What does Kalshi say?
Fueling the speculation of Kalshi’s involvement, however, is Kalshi’s failure to directly deny that it influenced PredictIt’s no-action letter being withdrawn. US Bets reached out to Kalshi for comment, but a PR team representing the company didn’t reply after being asked about the accusations.
Tarek Mansour, the founder of Kalshi, tweeted after PredictIt’s no-action letter was withdrawn that PredictIt served as his introduction to prediction markets. He said he was “forever grateful” to the platform. He also vaguely addressed the idea that Kalshi played a part in the CFTC’s decision.
PredictIt was Luana’s and my first introduction to prediction markets. I remember being completely fascinated by the markets in 2018.
PredictIt changed our lives, and we’ll be forever grateful.
Even after today’s news, we’re still very hopeful for the future of the industry.
— Tarek Mansour (@mansourtarek_) August 5, 2022
“Needless to say: we are not regulators and do not control the actions they take,” Mansour tweeted. “We are working hard on what we can control: bringing regulated prediction markets to all people.”
PredictIt didn’t accuse Kalshi of any foul play when reached for comment, but it also didn’t provide much clarity into the no-action letter being withdrawn. A spokesperson for PredictIt told US Bets, “We don’t know why the CFTC took the action they did when they did.”
The lack of transparency and detail provided by the CFTC, Kalshi, and PredictIt makes it easy for people to speculate about the causes of the no-action letter being withdrawn.
The CFTC is expected to render a decision Friday on whether or not Kalshi can offer election-based prediction contracts. CFTC Chairman Rostin Behnam shared insights on the future of regulated prediction markets like Kalshi during a recent panel discussion.
“It’s not the platforms that are the policy issue,” he said. “It’s the contracts that are being listed.”
Behnam says the CFTC needs to be more prescriptive in the future about the types of contracts platforms can list.
Crane, like Zitzewitz, isn’t overly attached to Kalshi or PredictIt. He just wants to see political prediction markets remain available. Many others hope for the same. Crane believes political prediction markets often cut through polling bias, providing a more accurate picture of political races.
“I do think it serves as kind of a voice of reason at a time when we don’t really have that at any other outlet,” Crane said.
Kalshi and others also stress the potential economic value of hedging for users. For example, if a business owner is worried about a Democratic-controlled Congress raising taxes, the business owner could use a political prediction platform and place money on the Democrats winning control of Congress. If the Democrats gain control, while the business might suffer due to tax increases, the money won from the prediction contract could offset some of the financial burden.
As for PredictIt, the platform and its market technology provider Aristotle filed a federal lawsuit against the CFTC in September, hoping to keep the platform alive beyond February 2023.
Damning assertions by @PredictIt in lawsuit of the @CFTC. PredictIt says ZERO warning or rationale was given for the No Action Letter withdrawal, a clear violation of the Administrative Procedures Act pic.twitter.com/9Cv9rzjTPz
— DrCruse (@predoctit) September 10, 2022
We’ll all learn more about the CFTC’s current stance on political prediction contracts with Friday’s decision regarding Kalshi.
“This is an important policy question for the country. … A lot of people will say, ‘This is going to be better than polling,’ but you can imagine a lot of people would have strong opposition to political outcomes and elections being driven or being predicted in a federally regulated financial market,” Behnam said.
As for the likelihood of the CFTC approving Kalshi’s request to offer political prediction contracts, Polymarket and Insight Prediction are actually offering prediction contracts on that question.
The “yes” option that Kalshi will be given regulatory approval was listed as low as $0.39 on Polymarket within the last week, but it was closer to $0.50 as of Wednesday morning. Over $100,000 has been “wagered” on the market’s result. At Insight Prediction, “yes” was listed Wednesday morning at $0.57, suggesting there’s a 57% chance Kalshi is granted approval.
Kalshi emailed users Tuesday with a subject line that read “Election contracts are almost here.”
“Election markets are squarely legal, in the public interest and adamantly wanted by said public,” the body of the email said. “Friday, the CFTC will decide not just our fate but also the state of American innovation moving forward.”