The Commodity Futures Trading Commission (CFTC) reached a settlement with Polymarket today regarding its regulatory standing in the prediction market space.
Here are some immediate thoughts on what this means for the evolution of the industry:
Political Gambling Has a Political Problem:
Political gambling companies have a regulatory problem, but their problem is not fundamentally regulatory. The issue, at its core, is political and cultural. Regulations stem from a broader climate in which politicians, regulators, and their constituents do not appreciate the value of prediction markets to society.
Building a culture around political gambling is as important to growing this space as building durable businesses themselves. Creating a high-trust community that can advocate for the value of prediction markets is essential to their longterm growth.
Lawyers Are Necessary but not Sufficient:
Sophisticated lawyers and compliance teams are necessary, but not sufficient, to address U.S. government concerns. Changing perceptions of political gambling is ultimately a challenge for the forecasting community, including retail traders, content creators, and media. Lawyers alone cannot solve this problem for political gambling companies.
DeFi Innovation Carries Regulatory Risk.
Entrepreneurs and innovators often make the mistake of thinking that awareness and education will make others appreciate their vision. This may not be true with the government.
It is in the nature of bureaucrats to see threats in innovation they do not understand and cannot control. When it comes to dealing with politicians and regulators, lobbying and activism present the most feasible paths to deregulation.
My own prediction is that the more that American government agencies learn about innovation and disruption in the deFi space, the more they will be inclined to regulate, not deregulate it. This is unless political gambling companies can change the incentives for legislators and regulators through lobbying, campaign donations, and agency capture.
Global Companies Will Win:
The big winners in the political gambling space will build genuinely global companies. The United States is a minefield of regulatory uncertainty. Its hostility toward political gambling is longstanding, cultural, and may not change for the foreseeable future.
Norms around political gambling are more reasonable in other countries. And as companies in this space develop, growth-minded countries will see an opportunity to recruit them with favorable incentives. The more political gambling grows abroad, the easier it will ultimately be to fight back against regulations in the United States.
Competition Is In Everyone’s Interest:
Polymarket’s rivals may benefit in the short-term from the CFTC’s crackdown. But it would be a mistake for competitors in the political gambling space to celebrate regulatory admonishments against their rivals. Successful regulatory crackdowns against one company put everyone else at the mercy of regulators. Competition and the growth of the industry provides the surest path to rolling back regulation that is stifling the entire community.
The 2022 and 2024 Elections Are an Opportunity:
The 2022 and 2024 U.S. elections present an opportunity. My view is that it would not take much for the political gambling community to build a lobbying and PR presence strong enough to elect friendly members of Congress, win over the next president, and fill a presidential administration with appointees ready to push the CFTC in a more favorable direction.
Polymarket Will Survive and Thrive:
It would be a mistake for traders and investors to lose confidence in Polymarket. They have a young, talented and committed team backed by seasoned investors. They will use this as an opportunity to learn and grow.
But this is a call to action for all of us. As long as traders treat their activity in political prediction markets as something to hide behind anonymous Twitter accounts, then government regulators will view it that way too.
Here at Star Spangled Gamblers we will continue to invest in this community one blog, one pod, and one Tweet at a time.
Pratik Chougule is a contributor to Star Spangled Gamblers. Follow him on Twitter at @pjchougule.