Scholars at our organization — the Competitive Enterprise Institute (CEI) — have many skills, but predicting the future is not one of them. However, when it comes to prediction markets, based on recent events, we can see less red tape in their future to the benefit of the American public.
Prediction markets enable speculative contracts on political, economic, and, increasingly, sports, and cultural events, while functioning like traditional commodity futures exchanges that match traders speculating that prices of certain goods will go up or down. The solid performance of prediction markets versus the lackluster performance of polls in the presidential election vindicated economists who argue that the most accurate forecasts are those with money riding on them.
Yet despite the bipartisan acclaim for prediction markets, the Biden administration did everything it could to shut these venues down, even attempting to ban an election market exchange that had been approved by the Commodity Futures Trading Commission (CFTC) under the Obama administration back in 2014. Recent events, however, enable a good prediction that these venues will have a smoother ride in the Trump administration.
Last month, Brian Quintenz, President Donald Trump's nominee to serve as chairman of the CFTC, appeared before the Senate Agriculture Committee for his confirmation hearing. During the hearing, Quintenz gave strong signals that he would take an innovation-friendly approach toward these markets, in sharp contrast to the hostility shown toward these markets under the Biden CFTC.
Fielding several questions on the viability and legality of prediction markets, Quintenz implied strongly that he believes prediction markets are permissible under current law, saying, "I believe that the law is very clear about events that have commercial, financial, or economic consequence qualifying as commodities, because the [Commodity Exchange Act] recognizes that, therefore, a viable and valuable futures market can be listed upon them and afford people the opportunity for risk management, price discovery, and price dissemination."
Another positive development for prediction markets is a recent CEI-led coalition letter to the CFTC signed by 16 leaders of conservative and free-market groups. The letter advocates for a "policy of permissionless innovation toward prediction market venues," citing their benefit in allowing ordinary Americans to hedge risks and their ability to forecast information on economic, political, and cultural trends.
We also advocated these markets be subject to the exclusive jurisdiction of the CFTC and that the CFTC police behavior of prediction market venues but not restrict the subject matter of the event contracts offered by the venues.
We argued and Quintenz implied that prediction markets are, under the language of the Commodity Exchange Act, classified properly as events contracts since they are events that pose economic or commercial consequences. However, critics have ignored the law and misclassified prediction markets as casinos or sports betting markets.
At Quintenz's confirmation hearing, Sen. Adam Schiff, D-Calif., expressed concern that event contracts are another form of gaming, and Sen. Cory Booker, D-N.J., alleged that sports contracts offered on the Kalshi prediction markets venue are similar to sports betting.
In response to the coalition letter, a critic wrongly deemed the position that regulation of prediction markets should be under the exclusive jurisdiction of the CFTC as inconsistent with CEI's longtime advocacy of allowing states to legalize sports betting. Dustin Gouker, a sports betting and online gaming consultant who writes about these industries in his Substack newsletters, claims that CEI's "new advocacy for sports betting via prediction markets is hard to square with its past advocacy for states' rights in sports betting."
Gouker was referring to CEI's opposition to a provision of a federal law that banned sports betting in all but three states, even if a state's voters or lawmakers wanted to allow it within state borders.
The Supreme Court struck down the provision in its 2018 ruling in Murphy v. NCAA, freeing states to legalize sports betting. Our CEI colleague Richard Morrison hailed the court's decision as a "big win for consumers, states, and the constitutional principle of federalism."
While CEI still advocates for state and individual freedom in sports betting, the comparisons to prediction markets are unwarranted, as the two markets are fundamentally different. Prediction markets operate as financial futures and derivatives venues with peer to-peer trading and market-based pricing, while sports betting relies on fixed odds set by a bookmaker, where bettors wage directly against the house.
The economic aims of the two markets often differ as well. Because prediction markets match buyers and sellers rather than set odds, these markets lead to valuable price and information discovery and can be used for risk-hedging.
While it's true that some who buy contracts on prediction markets may do so for pure speculation, the same can be said for futures markets in traditional commodities.
Not everyone who buys or sells crop futures is a farmer, but farmers can use the markets to hedge the risks of everything from bad weather to tariffs. Similarly, individuals and businesses can use prediction markets to help protect themselves from the uncertainty of election outcomes; and if an entrepreneur or business is centered around sports merchandise or proximity to sports teams, the uncertainty of sports outcomes as well.
Thus, the two cannot be viewed under the same regulatory light, and prediction markets belong under the CFTC's jurisdiction.
This distinction made by CEI and others is not a "dig at the state-level gambling industry CEI used to champion," as Gouker writes. It is a recognition of the structural and legal differences between these markets and a clear reading of the law.
Allowing states to regulate prediction markets as if they were sports betting venues, or ban them outright, would constitute clear regulatory overreach by state regulators into jurisdiction that Congress has granted to the CFTC.
Two federal courts have already placed injunctions on state attempts to shut down Kalshi, ruling that the firm is likely to prevail in its argument that federal law preempts state regulation of prediction markets. States that ban these markets would also cut off Americans’ access to these innovative venues, which individuals and businesses can use to hedge risks.
Traditionally, as Quintenz mentioned in his hearing, only large Wall Street firms have been able to hedge events using complex and costly products. Prediction markets close this gap, enhance information discovery, and benefit consumers.
With clear legal and structural differences from gambling, prediction markets belong under the CFTC's jurisdiction, under which they can be allowed to grow and serve everyday Americans.
Harrison Cerone, a research associate at the Competitive Enterprise Institute, co-authored this post.
John Berlau is senior fellow at the Competitive Enterprise Institute and author of "George Washington: Entrepreneur: How Our Founding Father's Private Business Pursuits Changed America and the World." Read John Berlau's Reports — More Here.