Currently, there are no legal risks associated with trading on PredictIt, but there might be in the future.
The relatively benign legal environment surrounded PredictIt is related, in large part, to the site’s history. PredictIt originates out of the interest of two brothers John and Dean Aristotle, who became interested in political prediction markets through their work in political technology. Intrigued by political prediction markets, John and Dean Aristotle connected with Victoria University in Wellington, New Zealand, which, at the time had its own prediction market called iPredict. Aristotle began to collaborate with Victoria University to bring political prediction markets to the United States as part of an expanded academic project.
Despite the U.S. prohibition on online gambling, PredictIt secured a no-action letter from the Division of Market Oversight of the Commodity Futures Trading Commission (CFTC). Although the founders of PredictIt operate the site’s software through their for-profit firm Aristotle, PredictIt agreed to remain a nonprofit research project owned and operated by Victoria University.
PredictIt is also required to limit each contract to 5,000 total traders, and no single participant can invest more than $850 per contract.[1]
My understanding based on multiple off-the-record conversations is that PredictIt and the CFTC have reached a workable agreement. This has allowed PredictIt to become by far the leading political prediction market in the world in terms of U.S. politics.
Still, neither side is entirely satisfied with the status quo. At the CFTC, opinion on PredictIt is mixed. Some officials at the agency see its promise and favor greater deregulation, while others liken it to the types of online gambling that, in their view, are appropriately regulated. PredictIt is in “regular” communication with the CFTC and is confident enough in the agreement that they do not employ any lobbyists. I have reason to believe, however, that PredictIt might invest in a lobbying and public relations effort to lower their regulatory risk and renegotiate current restrictions.
The U.S. government’s historic approach to political prediction markets paints a mixed picture for PredictIt’s legal status. Vibrant political prediction markets have accompanied U.S. presidential elections since the late 19th century. Particularly after the 1930s, however, American norms around political gambling departed from other countries in the Anglosphere. Whereas betting parlors in the United Kingdom and Ireland remained common and “cultural accepted”, political gambling acquired a social stigma in the United States. Newspapers stopped quoting market prices and experts in the field began to put more stock in polling than prediction markets. The work of Department of Agriculture economist Louis Bean in particular created a sensation when, in his 1948 book How to Predict Elections, Bean correctly forecasted Harry Truman’s upset victory using statistics on traits of various groups of voters as well as long-term voting trends. Federal and state government, in turn, began to regulate political prediction markets more aggressively.[2]
The stigma against political prediction markets survivedeven the most dire national security crisis in U.S. history. After 9/11, the Pentagon’s Defense Advanced Research Projects Agency (DARPA) commissioned a group of experts to develop a prediction market on geopolitical events. The idea engendered a backlash on Capitol Hill, culminating in the resignation ofDARPA head John Poindexter.
Regulatory zeal against political prediction markets culminated in the passage of the Unlawful Internet Gambling Act of 2006, forbidding transactions between U.S. financial institutions and online gambling entities. The Dodd Frank Act of 2010 added to the regulatory hurdle, prohibiting futures on anything “contrary to the public interest” including terrorism, gaming, and assassination. Abramowicz argues that the dearth of prediction markets in the private sector today can be attributed, above all, to regulatory impediments.[3]
Today’s conservative cultural and legal norms around political gambling—particularly online gambling[4]—create risk for PredictIt. These sentiments can be seen even in the relatively friendly if curious media coverage PredictIt has received so far, which typically feature sympathetic investors losing money in large casino-style swings and volatile markets. A WashingtonPost report on PredictIt, for instance, called it “troubling to see the fate of the nation treated like a cheap round of poker.”
Particularly concerning is the way the CFTC cracked down on the Ireland-based online prediction market Intrade.com in 2012. After a successful eight-year run, the CFTC ordered Intrade to cease offering contracts on gold, oil, and other goods under the CFTC’s oversight.[5] In December 2012, Intrade shut down the accounts of U.S. residents in response to a CFTC suit alleging that Intrade “solicited and permitted” U.S. persons to trade commodity options without being a registered exchange. Intrade CEO John Delaney was so concerned he stopped visiting the United States, even for academic and think-tank conference, quipping, “I’ve been told I don’t look good in an orange jumpsuit.” Lacking sufficient business without American traders on the site—who comprised some 75 percent of users—the company shut down soon thereafter. Erik Snowberg, an academic authority on the matter, assessed at the time that “the moment of prediction market vogue has passed” and at least one journalist predicted that “the chances of another Intrade’s coming into existence are slim.”
The precise reasons why the CFTC moved against Intrade remains unclear. Fox Business columnist John Stossel, citing the more favorable regulatory environment he encountered while exploring online prediction markets in an earlier venture, attributed the decision to the Obama administration’s penchant for regulating industries and companies they “don’t like” such as coal. University of Kansas economist Koleman Strumpf blamed regulators’ perception of Intrade as “socially unseemly” and their inability to recognize the promise of prediction markets. These accusatory explanations, however, are belied to some extent by the testimony of former CFTC official Michael Gorham who later claimed that he “looked in vain” for ways to legalize Intrade and other similar exchanges while heading the agency’s market oversight division but couldn’t find a way to “get around the fact that these things are gambling.”
At the same time, the CFTC has permitted the Iowa Electronic Market to operate legally since 1998 without much regulatory flux.
Taking to heart, perhaps, the counsel of former Intrade CEO Ron Bernstein that “regulatory avoidance isn’t a good business model,” PredictIt explicitly disassociates itself with for-profit betting parlors and likens itself instead to the Iowa Electronic Market.
PredictIt is not a gambling site like overseas sports betting parlors Paddy Power and Betfair, which offer some betting on elections. Unlike those betting sites, PredictIt operates in a similar manner to the Iowa Electronic Markets (IEM), offering investors the opportunity to trade predictions on the outcomes of a wide variety of political events.
Assuming that PredictIt retains its academic purpose rather than trying to grow into a profitable venture a la European sites like BetFair, regulators are more likely to treat PredictIt like the Iowa markets than Intrade.
A recent Supreme Court decision, moreover, may create a friendlier regulatory environment for PredictIt. On May 14, 2018 in the case of Murphy v. National Collegiate Athletic Association, the Supreme Court ruled in favor of New Jersey in deciding that the Professional and Amateur Sports Protection Act, which effectively prohibited state-sponsored sports betting, violated the anticommandeering principle. Though the ruling doesn’t directly relate to PredictIt, Justice Ginsburg wrote in her dissenting opinion, joined by Justice Sotomayor (and in part by Justice Breyer) that the decision to overturn all of PASPA was largely based on the other justices’ desire to legalize sports betting.
The proliferation of industries with a financial interest in state-sponsored sports betting could produce a powerful lobby to roll back federal regulations on online gambling. Both regulators and online gambling lobbies have ample incentive to compromise—regulators because online gambling sites are becoming increasingly harder to regulate; online gambling sites because regulatory certainty will draw more volume to their operations.
These lobbies will operate against the backdrop of renewed interest in political prediction markets. PredictIt is currently sharing its data with 85 universities and 120 professors for research purposes. Hanson among other experts have concluded that anti-gambling laws explicitly discourage respect for forecast accuracy throughout our society because they remove mechanisms in which bet payoffs create clear records of who is right and wrong. Hanson notes that political prediction markets could follow a historic trend in which financial instruments like life insurance, once deemed illegal and immoral, gradually found acceptance as their value became critical in increasingly complex societies. Personally, I have enough confidence in PredictIt and its leadership to invest a sizable percentage of my personal wealth on the site. Much more so than Intrade, PredictIt is taking proactive measures to avoid not only legal but also public relations blowback. PredictIt, for example, enforces an internal policy of eschewing markets that are in “poor taste” even beyond the explicit ban on assassination, terrorism etc., which decreases the likelihood of a political backlash against the site. It also safeguards user privacy by refusing to share data down to the trader level with its academic partners.
My view, however, is by no means unanimous. Before trading on PredictIt, you’ll need to make your own judgment on the regulatory environment.
A member of my PredictIt
mastermind group, for example, who is a
successful PredictIt investor, is concerned that some of PredictIt’s markets,
especially the markets for approval ratings and individual polling levels over
short time periods, could draw unfavorable attention from regulators. The
margins, he believes are so small that they are hardly different from a classic
numbers game and generate little information that is obviously useful for
public policy purposes. This point is supported by the traditional
distinction in American law between hedging risk
for economic purposes like life insurance and playing games of chance, which
have tended to invite regulation.
[1] “CFTC Staff Provides No-Action Relief for Victoria University of Wellington, New Zealand, to Operate a Not-For-Proft Market for Event Contracts and to Offer Event Contracts to U.S. Persons,” U.S. Commodity Futures Trading Commission, PR7047-14, 29 October 2014, http://www.cftc.gov/PressRoom/PressReleases/pr7047-14; see also terms at PredictIt.org, https://www.predictit.org/home/termsandconditions
[2] Rhode, Paul W. and Koleman S. Strumpf. 2004. “Historical Presidential Betting Markets.” Journal of Economic Perspectives, 18(2): 127-141.
[3] Abramowicz, Predictocracy, 49
[4] For a discussion of whether prediction markets constitute gambling, see Tom Bell, Gambling for the Good, Trading for the Future: The Legality of Markets in Science Claims, 5 Chap. L. Rev. 159, 165-66 (2002).
[5] “Prediction 2016; Election forecasting,” The Economist, 2 January 2016, 22