PREDICTION MARKETS
Have a little faith in markets ARRON BROGAN ARGUES PREDICTION MARKETS ARE NOT ONLY LEGAL BUT A DESIRABLE ALTERNATIVE TO STATE-RUN SPORTS BOOKS
Introduction Prediction markets have exploded in popularity over the past twelve months. The function of these markets is relatively simple: users are able to purchase binary contracts which will resolve at some future time to pay either a fixed amount of money or nothing. Generally, these contracts are denominated in either one dollar or one-hundred-dollar increments. Mechanically, the function of a market is to establish a “market price” between the limits of zero and the contract price. Academics theorize that this contract price represents a prediction as to the likelihood of an event occurring through price discovery. 1 As this segment has increased in popularity, two flavors have emerged. The first, which most notably includes Polymarket, operates on cryptocurrency rails without regulatory licensure, and generally prohibits individuals in the United States from participating through a variety of strategies. The second,
spearheaded by KalshiEX LLC (Kalshi) and North American Derivatives Exchange, Inc. (Crypto.com), offers these contracts as derivatives through Commodities Futures Trading Commission (CFTC)-registered designated contract markets (DCMs). It is this second group that has generated significant legal intrigue over the last year, and which we will discuss here. While event contracts are not new — Kalshi has offered essentially the same core product since 2020 — a series of legal events have conspired to broaden their scope dramatically. Registered derivatives are regulated according to the Commodities Exchange Act, and work basically like this. The DCM is permitted to self-certify a market, and after doing so may list the market publicly the next business day. 2 Since Dodd- Frank in 2010, the CFTC may then review the market according to Section 5c(c)(5)(C) of the CEA and CFTC regulation 17 CFR § 40.11.
1 See e.g . Robin Hanson, Shall We Vote on Values, But Bet on Beliefs? at 1 (George Mason Univ. Dep’t of Econ., Working Paper, Oct. 2007; rev. Aug. 2013), https://mason.gmu.edu/~rhanson/futarchy2013.pdf 2 17 C.F.R. § 40.2 (2024)
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IMGL MAGAZINE | JUNE 2025
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