Prediction Markets Can Hedge Crypto Startups’ Regulatory Risk, Paradigm Says

Paradigm,
the
venture
capital
firm
led
by
Coinbase
co-founder
Fred
Ehrsam,
filed
a
legal
brief
supporting
prediction
market
platform
Kalshi
in
its
suit
against
the
Commodity
Futures
Trading
Commission
(CFTC).

In
the
case,

filed
in
November,
Kalshi
asked
the
court
to
vacate
the
CFTC’s
denial
of
its
bid
to
list
contracts
on
which
party
will
control
each
house
of
the
U.S.
Congress
after
an
election.
The
regulator
concluded
that
Kalshi,
based
in
New
York,
was
pursuing
unlawful
gambling
“contrary
to
the
public
interest.”

In
a
friend-of-the-court
brief
filed
Thursday,
Paradigm,
which
is
not
an
investor
in
Kalshi,
argued
that
such
contracts
could
help
businesses,
including
cryptocurrency
startups,
hedge
their
risks
while
producing
positive
spillover
effects
for
the
general
public.

Paradigm
is
weighing
in
at
a
time
of
optimistic
forecasts
for

long–languishing
prediction
markets,
particularly
those
that
run
on
crypto
rails
(unlike
the
CFTC-regulated
Kalshi,
which
settles
bets
in
U.S.
dollars).
In
such
markets,
participants
bet
on
the
outcomes
of
real-world
events,
from

the
weather
to

military
maneuvers.

Bitwise
Asset
Management,
for
example,
forecasted
in
a
December

report
that
“more
than
$100
million
will
be
staked
in
prediction
markets,
which
will
emerge
as
a
new
‘killer
app’
for
crypto.”
That
figure
would
represent
double
the
peak
reached
in
late
2021,
according
to
Bitwise’s
analysis
of
data
from
The
Block
and
DefiLlama.

Polymarket,
the
leading
crypto-based
prediction
market
platform,
logged
its
biggest
volume
month
in
January,
according
to
Dune
Analytics
data

shared
on
X
(formerly
Twitter)
by
Rob
Hadick,
a
general
partner
at
Dragonfly,
another
VC
firm.

“Paradigm
has
an
interest
in
this
case
because
prediction
markets
could
be
an
impactful
use
case
for
crypto
and
related
technologies
in
which
Paradigm
invests,”
the
firm
said
in
the
filing
with
the
U.S.
District
Court
for
the
District
of
Columbia.

For
example,
the
brief
described
a
hypothetical
“entrepreneur
who
is
building
a
crypto
startup
in
the
U.S.
The
likelihood
that
Congress
will
pass
legislation
that
will
impact
the
viability
of
U.S.-based
crypto
startups
is
directly
affected
by
which
party
is
in
control
of
Congress.
…
The
entrepreneur
may
therefore
want
to
buy
an
event
contract
that
pays
out
depending
on
which
party
takes
control.”

Echoing
a
longstanding
argument
in
favor
of
prediction
markets,
the
brief
went
on,
“when
market
participants
hedge
substantial
sums
on
a
particular
event
contract,
members
of
the
general
public—even
those
who
never
join
the
market—get
valuable
real-time
information.”

Such
markets
“might
even
be
better
predictors
of
electoral
outcomes
than
public
opinion
polling—precisely
because
they
require
participants
to
put
their
own
skin
in
the
game,”
Paradigm
said.

Another
friend-of-the-court
brief
filed
Thursday
supported
Kalshi,
this
one
by
a
prominent
legal
scholar.

Joseph
A.
Grundfest,
a
professor
at
Stanford
Law
School,
made
a
similar
appeal
to
the
public
good.

“In
a
world
with
miniscule
poll
response
rates,
sky-high
polarization,
and
rampant
fake
news,
prediction
markets
offer
an
objective
indicator
of
the
probability
of
particular
election
outcomes,”
he
wrote.

The
CFTC
has
about
a
month
to
respond
to
Kalshi’s
motion
for
summary
judgment
and
present
its
own
friend-of-the-court
briefs.
Kalshi
would
respond
to
those
filings
in
March
and
arguments
in
the
case
may
conclude
in
early
April.