Prediction markets are facing a key test
Photo illustration: Getty Images; Protocol

Prediction markets are facing a key test

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Friday: prediction markets face a key regulatory test, Rohit Chopra’s not here to make friends, and the OCC’s new plan for fintech scrutiny.

Off the chain

Death to fiat! Except those Treasury bond yields are looking pretty good right now. Financial logic, not degen bravado, seems to underlie MakerDAO’s decision to invest a half-billion dollars of treasury reserves into treasuries and corporate bonds. Sure, it’s centralized, but MakerDAO wasn’t making anything on its USDC holdings, and members were alarmed by Circle’s move to freeze USDC associated with wallets affected by Tornado Cash sanctions. If you can’t beat them, invest in them?

— Owen Thomas (email | twitter)

Far from a sure bet

Crypto isn’t the only emerging issue on the CFTC’s plate. The futures regulator is also weighing a fintech sector that has similarly tricky political implications: election bets. The agency has set Oct. 28 as a date by which it hopes to decide whether the New York-based startup Kalshi can offer a form of wagering on the outcome of the midterms. The recently closed public comment period on Kalshi's proposal brought letters from a range of big names in tech, finance, and academia.

Gambling on elections is a fraught topic. It’s generally outlawed in the U.S., though it wasn’t always that way, and is allowed in other countries, including the U.K. But Kalshi, which has raised $30 million from top-tier investors, is trying to redefine the market.

  • Kalshi says it’s not Las Vegas-style gambling, but a prediction market where users buy and sell contracts on events based on their perceived probability. The company registered with the CFTC in 2020 as a designated contract market.
  • On its service, users can trade contracts on everything from the size of the Fed’s next rate hike to the high temperature in Chicago to the next moon landing. In July, Kalshi asked for permission to launch two events contracts on the outcome of this fall’s midterms. Such contracts, CEO and co-founder Tarek Mansour said, can help people hedge against election risk and paint a more accurate picture of the race.

The CFTC has in the past denied similar applications. It has ruled that election prediction markets are gaming and do not serve the public interest.

  • The CFTC declined a proposal from Nadex in 2012.
  • It has also taken action against international companies that allow Americans access to election trading. It has only allowed election contract trading on a smaller scale through limited approvals for PredictIt and Iowa Electronic Markets, which are both affiliated with universities.

The key question: Does election betting create risks or help hedge against them? That’s one of the key issues the CFTC said it is weighing in its review.

  • “When we think about what happened in 2020, do we really want another excuse for the American people to question the integrity of our elections?” former CFTC commissioner Jill Sommers told POLITICO.
  • Mansour argued that the differing risks Americans face with each election gives prediction markets a different value and purpose than gaming.
  • The CFTC is facing a lawsuit over its decision to revoke the no-action letter that PredictIt has used to offer political event contracts in the U.S. since 2014. The CFTC in August ordered PredictIt, which is run by a university in New Zealand, to wind down by next February.

The CFTC’s next moves will be closely watched. Kalshi is not the only firm building an events-contract marketplace. Polymarket, for instance, offers blockchain-based event contracts trading, but only to users outside the U.S. The firm was ordered to close to Americans following a CFTC fine earlier this year. One of its contracts asks whether the CFTC will approve Kalshi’s proposal. So far, its users are leaning toward no.

— Ryan Deffenbaugh (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.

A MESSAGE FROM ALIBABA

Alibaba — a leading global ecommerce company — is a particularly powerful engine in helping American businesses of every size sell goods to more than 1 billion consumers on its digital marketplaces in China. In 2020, U.S. companies completed more than $54 billion of sales to consumers in China through Alibaba’s online platforms.

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On the money

Binance is estimating that $100 million was stolen in a bridge hack. The Binance Smart Chain temporarily suspended transactions and fund transfers after detecting what it said was an exploit on a bridge between two blockchains.

A Celsius bankruptcy filing appears to have listed transactions for thousands of customers, as well as their names. The list also revealed big withdrawals by former CEO Alex Mashinsky.

Visa and FTX are teaming up on a debit card. The payments giant and the crypto exchange will offer cards linked to FTX accounts in 40 countries, with a focus on Latin America, Asia, and Europe.

Crypto firms are rolling back fees. Binance is among several crypto exchanges that have adopted the Wall Street strategy of cutting back on fees to gain market share.

Attention finreg wonks: The OCC fiscal year bank supervision operating plan is out. The Office of the Comptroller of the Currency’s annual plan includes a note that examiners "should determine whether banks are providing proper risk management governance of their third-party relationships ... (including) relationships with financial technology companies.” Acting comptroller Michael Hsu has raised these concerns before.

Shopify has settled a lawsuit from textbook publishers. The publishers said Shopify turned a "blind eye" to intellectual property violations.

Compass is denying reports of a go-private deal. The SoftBank-backed proptech firm's shares jumped after Business Insider reported a private equity firm was exploring a deal, which Compass said is not the case.

Overheard

Picture CFPB chief Rohit Chopra on a reality TV show with, say, Jamie Dimon, Chuck Scharf, and Jane Fraser. “I am not spending my time trying to make friends with every Wall Street CEO,” he told Bloomberg. “They just want us to be a dead fish — we are not going to do that,” he added.

The chart

The war in Ukraine hasn’t been going well for Russia — or for pro-Russia social media groups. While the Russian military has recently been taking a beating in the battlefield, pro-Russia social media organizations have seen cryptocurrency donations fall sharply recently.

A MESSAGE FROM ALIBABA

Using economic multipliers published by the U.S. Bureau of Economic Analysis, NDP estimates that the ripple effect of this Alibaba-fueled consumption in 2020 supported more than 256,000 U.S. jobs and $21 billion in wages. These American sales to Chinese consumers also added $39 billion to U.S. GDP.

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Thanks for reading — see you Tuesday (we’re off Monday)!

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