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In their letters, Dragonfly and Crypto.com argued that prediction markets play a vital role in providing valuable insights and fostering a more informed and engaged public.
Dragonfly Digital Management, a California-based financial advisory firm, and Crypto.com, a leading digital asset trading platform, have joined Coinbase in challenging the Commodities Futures Trading Commission’s (CFTC) newly proposed rules on prediction markets.
In separate letters to the commodities watchdog, both Dragonfly and Crypto.com criticized the proposed rule change that seeks to ban prediction markets in the United States, labeling it an “overreach”. They referenced the recent Supreme Court ‘Chevron’ decision, which limits the agency’s ability to interpret regulations without clear authorization from Congress.
CFTC’s Proposed Rule Change
Earlier this month, the CFTC, under the influence of anti-crypto Senator Elizabeth Warren, introduced a proposed rule change to ban prediction markets – platforms where participants can bet on the outcomes of future events, such as elections or economic indicators.
The proposed rule aims to halt “event contracts”, which include “staking or risking something of value on the outcome of a political contest, an awards contest, or a game in which one or more athletes compete, or an occurrence or non-occurrence in connection with such a contest or game”.
The market watchdog justified the proposed rules by citing concerns over the “threat of violence and extremism,” particularly in the context of elections. The regulator warned that the US remains a target for foreign actors who have attempted to interfere in elections and argued that allowing bets on electoral outcomes could exacerbate these risks.
Industry Pushback
Despite these concerns, the proposed rule has faced significant opposition from the crypto industry, including Dragonfly and Crypto.com, who recently joined Coinbase in challenging the law. The two companies believe that while regulatory oversight is essential, the CFTC’s approach could stifle innovation and limit the growth of a key segment of the crypto industry.
In their letters, Dragonfly and Crypto.com argued that prediction markets play a vital role in providing valuable insights and fostering a more informed and engaged public. They warned that the proposed rules could have unintended consequences for the broader crypto ecosystem.
Jessica Furr and Bryan Edelman, legal counsel for Dragonfly, stated in their letter that “political event contracts should not be equated with gambling on games of chance like the Super Bowl. Rather, elections have significant economic implications.”
According to the lawyers, “these contracts were designed to serve crucial risk hedging functions, aligning with the requirements of the Commodity Exchange Act (CEA), and offer valuable predictive data to the public”.
A Three-Step Approach
Steve Humenik, the Special Vice President in charge of Capital Markets for Crypto.com, argued in his letter that the regulator’s attempt to completely ban the trading of “event contracts” on licensed entities is a violation of the rulemaking process dictated by the Commodities Exchange Act (CEA), which involves a three-step approach.
Under the law, the regulator must review a contract to assess whether it engages in specified activities and whether it is contrary to the public interest before banning it.
Humenik urged the CFTC to follow the three-step approach as stated by the CEA before making a decision to remove event contracts from trading.
