Comment Text:
I am writing to express my concern regarding the recent CFTC proposal to ban “gaming” derivatives, including event contracts for political elections and award contests.
As a researcher and proponent of “prediction markets”, I believe this proposal undermines the societal benefits these contracts offer. Below, I outline three key points for CFTC Commissioners to consider: the dangers of overregulation leading to a rise in black markets, the public’s right to innovative risk management instruments, and the critical role of prediction markets in information discovery. I also address concerns about the CFTC’s expansion of scope and the financial motives behind these contracts.
Necessity for reasonable government regulation
Balanced regulation is crucial to ensure financial markets protect public interests and consumers. In consumer-facing industries, overregulation can create black markets that lead to the harmful consequences feared of certain instruments coming to fruition (in the case of prediction markets this includes excessive risk taking, perverse incentives, skirting of payout clauses). The CFTC is successfully prohibiting these outcomes today, as they have been cooperative with innovators of this space to this point.
The CFTC’s concerns about investigating manipulation can be mitigated by creating a framework that distinguishes between contract manipulation and event manipulation, similar to the SEC’s approach distinguishing between regulating investor and investor relation practices and business practices.
Public's right to innovative risk management instruments
Insurance products, once met with skepticism, are now crucial for managing various risks – not all of which are ostensibly financial risks at first glance. The innovation of prediction markets offers financial instruments to insure against the volatility of outcomes. Creating a legal barrier to purchasing these instruments that have historically been accessible to large financial institutions forces individuals and small businesses to manage risks they are uncomfortable with that could otherwise be diversified away. Specific to elections, the financial case for these contracts is increasingly clear given the separation between the two major political parties on tax law, climate regulation, and social issues. Furthermore, large financial institutions serviced significant “wagers” on election for years, proving a financial use case for these instruments.
Amplifying truth in discourse
In the age of viral misinformation, news sources prioritize sensationalism over facts. Event contracts incentivize buyers to seek the truth, as their success depends on accurate predictions. Prices as signaling mechanisms can significantly enhance the quality and speed of information available to reporters, academics, and policymakers.
Recommendation
Given these reasons, I urge you to join other members of Congress in asking the CFTC to reconsider the decision to ban these event contracts. Instead, I advocate for collaboration with innovators in this space to create a robust framework, enhancing transparency, protecting consumers, and fostering a more informed society.
