Dragonfly, Crypto.com Weigh in on CFTC’s Proposed Prediction Market Rules

The CFTC’s announcement of its proposed rulemaking on prediction markets has received mixed comments from the public, including those in the cryptocurrency industry.

Crypto industry stakeholders say the rules are too broad and overreaching, given the recent Chevron court ruling.

Dragonfly Digital Management and Crypto.com have joined cryptocurrency exchange Coinbase (COIN) in criticizing the Commodity Futures Trading Commission’s (CFTC) proposed rules regarding prediction markets.

Critics say the CFTC’s proposed rules broadly categorize and prohibit certain types of activity contracts, including gaming-related ones. Coinbase calls the CFTC’s proposed definition of gaming too vague, raising concerns that this overreach oversteps regulatory authority, stifles innovation, and neglects the economic benefits these contracts provide.

“Political event contracts should not be equated with betting on games of chance like the Super Bowl. On the contrary, elections have significant economic impacts,” Dragonfly’s Jessica Furr and her attorney Bryan Edelman wrote in a letter to the CFTC. “These contracts are designed to serve important hedging functions consistent with the requirements of the Commodity Exchange Act (CEA) and to provide valuable insightful data to the public.”

Dragonfly also argues that the CFTC’s proposed rule goes overboard by generally banning prediction markets without proper due diligence, especially given the Supreme Court’s recent ‘Chevron’ decision that limited the agency’s interpretive authority without Congressional authority.

Steve Humenik, Crypto.com’s Special Vice President of Capital Markets, argues that the CFTC’s attempt to ban prediction markets violates the rulemaking process dictated by the CEA, which involves a three-step approach.

Under the CEA, the CFTC is required to consider in a three-step process whether a contract involves an excluded commodity, engages in specified activities, and is contrary to the public interest before it can be prohibited.

“The CFTC should explain its reasoning for determining that a particular contract is an underlying excluded commodity. This should not be a foregone conclusion,” Humenik wrote. “We urge the CFTC not to shirk its obligations to undergo a three-step review process with respect to such event contracts and to eliminate this aspect of the Event Contracts NOPR.” [notice of proposed rulemaking]”

Other names not directly related to the cryptocurrency industry also expressed their views on the subject.

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Joseph Fishkin, a professor of law at UCLA, wrote that prediction markets provide valuable insights into public opinion and political events and should not be regulated in a way that would shut them down in the U.S.

“I think they enrich our understanding of politics, the news media, political ‘conventional wisdom,’ and how crowds consistently get certain kinds of political predictions wrong,” Fishkin wrote. “I hope you don’t edit them out of this country.”