A group of Democratic US Congress and Senate members have penned a letter to CFTC Chairman Rostin Behnam endorsing a proposed rule from May 10 that would exclude election bets from being listed on CFTC-regulated markets.
The CFTC seeks to amend Regulation 40.11 to specify events contracts that are “gaming” and therefore against the public interest under Commodity Exchange Act (CEA) section 5c(c)(5)(C). Notably, the updated definition of gaming will prohibit events contracts based on “political contests,” along with more traditional forms such as sports betting.
The letter states that such political bets are corrosive to democracy because they cultivate ulterior financial motives.
CFTC commissioner Caroline Pham’s dissenting opinion on the proposed rule criticized regulatory overreach, stressing the importance of federalism. Instead, she stated that betting market regulation should be left to the states.
Political betting markets such as Polymarket allow users to bet on the outcomes of elections by buying shares in candidates they believe will win. Betting volume on that market alone skyrocketed to $387m in July.
Comments criticizing the proposed rule have stressed the public-interest predictive value of election betting markets. Betting industry advocates claim that public enthusiasm for candidates can be better gauged when people are willing to put their money behind their political convictions.
Predictive tool or casino?
The ultimate predictive value of betting markets might be tarnished by the volume of sheer speculation that they host.
Some might prioritize supporting candidates based on subjective indications of their popularity, rather than on genuine policy-based enthusiasm. Speculators might not always buy shares based on their own preferred candidate, but on who they believe is the preferred candidate in the public’s eye. Some bettors might even bet against their preferred candidate in hope of a consolation prize if things don’t go their way.
This can create reactive swings in predictive markets that do not necessarily relate to genuine grassroots support.
As stated by the letter, this behavior can be corrosive to democratic norms by encouraging bad-faith political engagement. Some bettors might even amplify or fabricate campaign missteps on social media to induce mass buys and selloffs in operations reminiscent of pump-and-dump schemes.
Beyond the betting market
Investment swings in other asset classes such as bitcoin already track investor confidence in who will win the election. Trump has promised to be softer on crypto regulation, and crypto prices frequently track common perception of his popularity. After Trump survived an assassination attempt last month, the price of a bitcoin jumped by around $7,000.
Shares in Trump’s social media platform Truth Social also heavily track public confidence in his campaign performance, signaling that politically-gamified securities and other assets will remain popular even if political betting markets are proscribed.
This resembles a more general concern that some asset classes might become unmoored from confidence in their intrinsic values, instead becoming niche markets for speculation enthusiasts.
These concerns resemble those voiced during the GameStop and AMC craze of early 2021, and controversies surrounding celebrity endorsements of crypto.
