Paradigm Supports Kalshi in Legal Battle Against CFTC

Venture capital firm, co-founded by Fred Ehrsham of Coinbase, submitted a friend-of-the-court brief in the case of Kalshi versus the CFTC.

Prediction markets can hedge the regulatory risk of crypto startups, according to Paradigm.

Paradigm, the venture capital firm led by Coinbase co-founder Fred Ehrsam, has filed a legal brief supporting prediction market platform Kalshi in its ongoing suit against the Commodity Futures Trading Commission (CFTC). The case, filed in November, revolves around the CFTC’s denial of Kalshi’s request to list contracts regarding the control of each house of the U.S. Congress after an election. The regulator claimed that Kalshi was engaging in unlawful gambling contrary to the public interest.

In its brief, Paradigm argues that such contracts have the potential to benefit businesses, including crypto startups, by allowing them to hedge their risks while also producing positive spillover effects for the general public. While Paradigm is not an investor in Kalshi, they believe that these contracts could be valuable and impactful use cases for cryptocurrencies and related technologies, which they invest in.

The Rise of Prediction Markets

Prediction markets have garnered increased attention, particularly those that operate on blockchain-powered platforms. Unlike Kalshi, which settles bets in U.S. dollars and falls under CFTC regulation, many prediction markets leverage cryptocurrency rails. These platforms enable participants to bet on real-world events, ranging from weather patterns to military maneuvers.

Bitwise Asset Management predicts that prediction markets will become a “killer app” for crypto, with more than $100 million staked in such markets, representing a doubling of the previous peak in late 2021. Polymarket, the leading crypto-based prediction market platform, has already experienced significant growth, logging its highest volume month in January.

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Hedging Risks and Gaining Real-Time Information

Paradigm’s support for Kalshi stems from their belief that prediction markets offer real value and potential for crypto and related technologies. They offer a hypothetical example of an entrepreneur building a crypto startup in the U.S. The success of the startup may be influenced by Congressional legislation, making the entrepreneur interested in the party in control of Congress. To mitigate this risk, the entrepreneur may want to purchase an event contract that pays out depending on which party takes control.

Paradigm emphasizes a longstanding argument in favor of prediction markets – when participants hedge substantial sums on event contracts, it provides valuable real-time information to the general public, even those who are not directly involved in the market. They assert that prediction markets may even be better predictors of election outcomes than public opinion polls since participants have a financial stake in the outcome.

The Public Good and Objective Indicators

A prominent legal scholar, Joseph A. Grundfest from Stanford Law School, filed a separate friend-of-the-court brief in support of Kalshi. He highlights that in a world filled with low poll response rates, high polarization, and fake news, prediction markets offer an objective indicator of the probability of specific election outcomes.

It is worth noting that the CFTC has about a month to respond to Kalshi’s motion for summary judgment and present its own friend-of-the-court briefs. The legal process is expected to conclude in early April after Kalshi responds to the filings in March.

Q&A: Addressing Readers’ Additional Questions

1. What is the significance of Paradigm’s support for Kalshi?
   • Paradigm’s support is valuable because it comes from a venture capital firm led by one of Coinbase’s co-founders. This backing highlights the potential importance of prediction markets for the cryptocurrency and fintech industries.
2. Why are prediction markets gaining popularity?
   • Prediction markets offer participants the ability to bet on real-world events, providing an additional way to engage with financial markets. The potential for high returns and the ability to hedge risks make prediction markets attractive to investors. Additionally, their decentralized nature and use of blockchain technology provide transparency and security.
3. How do prediction markets work on blockchain platforms?
   • Prediction markets on blockchain platforms leverage smart contracts and cryptocurrency rails to facilitate bets and contract settlements. These platforms operate with greater efficiency, transparency, and accessibility compared to traditional prediction markets.
4. How do prediction markets benefit the general public?
   • Prediction markets generate valuable real-time information that can serve as an objective indicator of election outcomes and other events. The involvement of participants who have a financial stake in the outcome can yield more accurate predictions than traditional polling methods.

Future Outlook and Recommendation

The rise of prediction markets and their potential as a “killer app” for crypto is an exciting trend. As more participants engage in these markets and the volume of bets increases, the accuracy of predictions is likely to improve further. Prediction markets offer individuals and businesses avenues to hedge risks and make informed decisions based on real-time market data.

Investors interested in the crypto space should consider exploring prediction markets as a means of diversifying their portfolios and taking advantage of the potential lucrative returns they offer. However, it is crucial to thoroughly research and select reliable platforms that adhere to regulatory standards to mitigate risk.

References

1. Bitcoin ETF Application in Hong Kong Filed by Banking Giant
2. Bitcoin’s Biggest Public Holder Overvalued by 26%, Analyst Predicted BTC Rally, Says
3. The Year Ahead: 10 Crypto Predictions for 2024
4. Dune Analytics – Crypto-based Prediction Market Platform Volume

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