Today, just days from a presidential election, Americans are turning to the polls to assess the state of the race, and many for the first time are also turning to a second source: prediction markets. Since the start of the year, users of these new markets have traded over $2 billion on the election outcome, and the resulting odds have spilled into the mainstream discourse.

Polymarket and Kalshi election odds are now listed on the Bloomberg Terminal, and Polymarket’s mobile app has risen above the New York Times on the App Store charts. Consumers and Wall Street investors alike are drawn to the insights these markets have provided this election season, and if you’re the average citizen political pundit, you likely also view these information aggregators as a clear public service, aimed at separating the truth from the noise. But if you’re the CFTC, you think differently.

The Commodity Futures Trading Commission has waged a years-long war against political prediction markets. In early 2022 the CFTC issued a consent order barring Polymarket, a crypto-based prediction market, from serving U.S. customers. Later that year, the Commission withdrew a permission slip (“No-Action” letter) it had granted to PredictIt in 2014 which allowed the site, run by Victoria University, to exist as a not-for-profit. After removing PredictIt’s protections, the Commission ordered the platform to close all outstanding contracts within six months. In September 2023 they came for Kalshi, blocking it from offering a prediction market on which political party would control Congress after the 2024 election. As if this targeted harassment was insufficient, in June they proposed an outright ban of political event contracts on CFTC-registered exchanges.

Fortunately, federal courts have pushed back on the Commission’s designs. The Fifth Circuit Court of Appeals found the agency’s withdrawal of its No-Action letter likely to be arbitrary and capricious, instructing the lower court to preliminarily block its revocation; the U.S. District Court for D.C. threw out the CFTC’s order blocking Kalshi’s election market, in the process ripping apart the Commission’s arguments at the heart of its proposed ban on political event contracts more broadly. This decision, then, does not portend well for the proposed ban if the D.C. Circuit (which already has ruled in Kalshi’s favor on a CFTC procedural request) ultimately agrees with the district court’s interpretation of the law in the Kalshi case in a final ruling on the case’s merits.

In a dissent against the proposed ban, CFTC Commissioner Summer Mersinger put the question of the agency’s motivation for its crackdown on prediction markets pointedly: “The fact that certain portions of the Proposal are inaccurate, extremely weak, or simply make no sense suggests that it either was hastily prepared, or is motivated primarily by the sheer hatred that the Commission seems to bear towards event contracts.”

Without dismissing bureaucratic incompetence, what could explain the hatred? A closer look reveals that a key reason behind the CFTC’s campaign is not that election markets are broken, but rather that these markets will challenge the gatekeepers that have historically told the official narrative each election season. Let’s dig in.

U.S. election markets have an impressive track record of accuracy dating back at least 150 years. During the first golden years of Wall Street election betting, markets accurately predicted the outcome of all but one presidential election between 1884 and 1940. While not perfect, more recent versions maintain similar performance, too. The Iowa Electronic Market — a small-stakes election market from the University of Iowa founded in 1988 — reliably outperforms major polls. “In every known head-to-head field comparison between speculative markets and other forward-looking institutions, the speculative markets have been at least as accurate” and “more often than not, they prevail,” said economist Robin Hanson.

But it was the federal government’s own foray into prediction markets that ultimately hardened the CFTC’s stance toward the sector. In the early 2000s, the Defense Advanced Research Projects Agency (DARPA) sponsored its own prediction markets — the Policy Analysis Market (PAM) — to forecast military and political instability. But after politicians characterized it as a “‘terror market’ for people to bet on terrorist attacks,” citing a portion of the project’s website featuring possible scenarios including the “assassination of Yasser Arafat,” an outrage cycle ensued, and PAM was shuttered.

Robin Hanson (a PAM system architect) maintained its intended focus was geopolitical trends, not terror prediction, and summarized the political objections to PAM as threefold: (1) amateurs would replace professional experts; (2) bad guys would manipulate markets to cover their tracks; and (3) bad guys would use the markets to make money from their own terrorism.

Two retrospective analyses of PAM — one by Hanson and another by Puong Fei Yeh in the journal Studies in Intelligence, a publication of the Central Intelligence Agency — threw cold water on these objections. First, prediction markets are historically reliable. Second, the feared manipulation was empirically unfounded and theoretically unlikely, as deception requires making lousy trades, which others will pounce on. (Attempted manipulation actually tends to increase such markets’ ultimate accuracy where they’re liquid.) And third, the evidence of saboteurs profiting from advanced knowledge of their own misdeeds is generally weak.

The objections to DARPA’s research play a central role in the CFTC’s crackdown on prediction markets, inspiring the 2010 congressional amendments to the Commodity Exchange Act (CEA) that put guardrails on certain controversial event contracts. These guardrails empowered the CFTC to stop exchanges from listing markets involving illegal activity, terrorism, assassination, war, gaming, or similar activities (following additional rulemaking), if the CFTC also determined those markets were against the public interest.

The agency’s proposed ban on political event prediction markets boils down to two claims: (1) election contracts are a form of gaming, and (2) they are not in the public interest.

The CFTC is wrong about both.

For one, Congress didn’t mention elections in its list of controversial events in its 2010 amendments to the CEA. If any organization has elections top of mind, it’s Congress — the omission speaks volumes. And the CFTC gets around Congress’s conspicuous silence by categorizing elections as “gaming.” It does so by conflating what it views as the game-like nature of trading an event contract with the subject of the event contract. The federal district court in the Kalshi case, however, expressly rejected the Commission’s attempt to conflate the two concepts. As the court rightly observed, all event contracts would involve gaming under the CFTC’s logic, so following the agency’s interpretation would undermine the whole point of Congress giving the CFTC the power to prohibit specific types of markets. Indeed, the D.C. District Court found in the Kalshi case that “gaming requires a game,” and an election isn’t one. Accordingly, the court concluded the CFTC’s Kalshi order “exceeded its statutory authority” — bad news for the proposed broader ban.

The Commission’s second claim — election markets are contrary to the public interest — is no stronger: according to CFTC’s logic, trading political event contracts cheapens democracy, forces the agency to become an “election cop,” and risks manipulation of election markets and elections themselves.

That political event contracts “commoditize and degrade the integrity” of elections, as CFTC Chairman Rostin Behnam asserted, is unpersuasive. Election markets have been part of the American experiment going back over a century and are accepted as part of life in democracies like the United Kingdom, Ireland, and Australia.

Allowing political event contracts on CFTC-supervised exchanges also would not turn the CFTC into an “election cop.” For example, as CFTC Commissioner Caroline Pham notes, the CFTC “is not the crop yield police and hasn’t displaced the role of the USDA” because we have agricultural event contracts. The D.C. Circuit made a similar point in its Kalshi procedural opinion.

The Commission’s arguments that these markets risk interfering with consequential events are as flawed now as they were in the DARPA context. One trader’s feint is another’s profit opportunity, and data from existing election markets don’t back up the agency’s manipulation claims. The D.C. Circuit embraced both of these counterpoints in the Kalshi opinion.

And fears of Bond villain-esque plots to profit from distorted elections notwithstanding, it’s unlikely that election markets could materially change the outcome of elections already involving billion-dollar adversarial campaigns, rigorous polling, strict campaign finance laws, and multi-billion-dollar stakes.

The CFTC’s rationale for prohibiting political event contracts — the need to defend democracy from money and manipulation — parallels that offered by progressive groups and elected officials. But the ‘defending democracy’ argument is nonetheless confused about, well, democracy. As Kalshi’s CEO Tarek Mansour explains, prediction markets are “unbiased aggregators of individual convictions” — their inputs are highly democratic. So are their outputs, which provide key feedback to researchers, operatives, leaders, and voters. In a primary campaign, for example, ultimate electability is a key issue pertinent to voters. Given these markets’ utility as a public information source for the electorate, and as John Phillips (a co-founder of PredictIt) observes, it’s therefore ironic that unelected bureaucrats claim to be “defending democracy by stifling and trying to destroy” election markets during an election cycle.

One can make sense of these contradictions by understanding the Commission’s manipulation concerns as a species of anti-“misinformation” campaign. Indeed, explicit fears about election markets incentivizing misinformation — e.g., tricking the public to swing the race to win a buck, or tricking the market to sway the public to win a race — are littered throughout the CFTC’s order blocking Kalshi’s election market, arguments to the D.C. Circuit and District Court, and proposed ban on political event contracts.

The fear that prediction markets will encourage misinformation is nevertheless perplexing, given their relative accuracy and resistance to manipulation. But one of the concerns animating the backlash to DARPA’s prediction market was that amateurs would replace professionals. One reason Robin Hanson originally was attracted to prediction markets was the hope that through them, “established insiders could no longer suppress contrarian outsiders merely by silence or ridicule.”

As is often the case, campaigns against misinformation, while ostensibly concerned with whether the truth will win out, are also animated by concern over whose truth will win out. Far from threatening democracy, election markets may be offering too much of it in the view of certain regulators. To their consternation, though, federal courts may just end up saving a democratic information source from the regulators themselves.

— Jack Solowey