Cryptocurrency Venture Capital Paradigm Supports Prediction Market Kalshi: Predictive Platform Helps Companies Hedge Risks

Coindesk reported that cryptocurrency venture capital firm Paradigm filed court documents yesterday (1) in support of prediction market platform Kalshi’s lawsuit against the Commodity Futures Trading Commission (CFTC). Paradigm claims that the existence of prediction contracts can help startups hedge risks while generating positive external effects on the general public.

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Paradigm Supports Prediction Market Kalshi
Paradigm Co-founder: Prediction Contracts Can Hedge Risks
Legal Scholars Also Support Kalshi
Bitwise: Prediction Market Has Growth Potential
Legal Risks Still Exist

According to documents filed by cryptocurrency venture capital firm Paradigm to the District Court of Columbia on Thursday, the company expressed support for Kalshi’s lawsuit against the CFTC.

Previously, in September last year, the CFTC banned the listing of prediction contracts related to the US elections on Kalshi, claiming that these contracts involved illegal gambling and were not in the public interest.

In response, Kalshi and its CEO Tarek Mansour filed a complaint with the CFTC, alleging that it violated the Administrative Procedure Act and that the contract was not within the CFTC’s regulatory purview.

Paradigm wrote in the document:
Prediction market contracts can help businesses, including cryptocurrency startups, hedge risks and have positive external effects on the public.

It also emphasized, “Although Paradigm is not an investor in Kalshi, we believe that the existence of prediction platforms could become a killer application in the cryptocurrency field and therefore are interested in this case.”

Paradigm co-founder Fred Ehrsham explained through an example:
Suppose Congress is about to pass a bill that will directly affect US cryptocurrency startups, and this bill will be influenced by a specific party in Congress. In this case, entrepreneurs can hedge risks by purchasing a prediction contract related to party control within Congress, which allows entrepreneurs to avoid potential risks based on changes in the political situation.

He added, “When users participate in prediction markets, those who are not involved in the market can also obtain valuable real-time information, such as election positions, which may be more efficient and accurate in evaluating current election conditions and future results than traditional polls.”

A similar view was presented in another court document supporting Kalshi, where Joseph A. Grundfest, a professor at Stanford Law School, stated:
In a reality filled with low response rates in public opinion polls, biased and extreme opinions, and rampant misinformation, prediction markets provide an objective probability or indicator for specific election outcomes.

It is reported that the CFTC will need to respond to Kalshi’s motion for summary judgment by February 26, 2024.

As a side note, Paradigm’s optimistic view of prediction markets can be seen from both their involvement in the field and the data.

Cryptocurrency asset management company Bitwise previously stated in a report that prediction markets will attract over $100 million in total value locked (TVL) by 2025, nearly three times the current scale.

DefiLlama: Prediction Market TVL

In September last year, exchange BitMEX also launched new prediction market derivative services, allowing users to predict trending crypto events.

However, despite being called prediction markets, they are essentially still considered gambling platforms and may be legally questionable in various countries.

For example, the largest online prediction platform Polymarket was fined $1.4 million by the CFTC in January 2022 for violating the Commodity Exchange Act (CEA).

At the same time, participating in political election betting through prediction platforms in Taiwan would violate election laws and could result in a maximum sentence of 6 months’ imprisonment.

(Polymarket Election Gambling Controversy: How I Got Caught?)

Bitwise
CFTC
Kalshi
Paradigm
Polymarket
Prediction market

Further reading:
Blue and White’s Big Breakthrough, Did Lai Ching-te Choose to Lie Down? “Online Prediction Platform Polymarket” Odds 1.5
Which Hamster Runs Faster? The New Wave of Cryptocurrency Prediction Markets Attracting Thousands of Gamblers to Participate