(Bloomberg) -- PredictIt, a market that built its name by letting Americans bet on who will be elected to Congress or the next president, has lost its legal authority to operate in the US.
The move by the Commodity Futures Trading Commission on Aug. 4 to revoke the regulatory letter relied on by the platform sent shock waves through the political-gambling industry. Since 2014, PredictIt has used the permission granted for research purposes to a New Zealand university to let Americans bet on US elections, something that’s generally forbidden.
The focus on politics thrust PredictIt into the forefront of an emerging asset class that easily lets people wager on the outcomes of real-world events using derivatives. Odds based on PredictIt wagers have been widely cited by major media, and while the site’s origins were rooted in academia and bets are capped at $850, it’s become a favorite among American gamblers.
The CFTC said that PredictIt trading in contracts listed under the 2014 legal interpretation must end by Feb. 15, 2023. The regulator’s move didn’t involve an enforcement action.
As of Friday afternoon in Washington, traders still could use PredictIt to bet on everything from whether former President Donald Trump or Florida Governor Ron DeSantis would win the 2024 presidential election to whether New York’s Alexandria Ocasio-Cortez will file to run for president before 2024.
The website included a disclaimer that read: “Predictit.org is an experimental project operated for academic purposes under permission from the CFTC.”
The CFTC didn’t specify its exact rationale for revoking its letter to Victoria University of Wellington in New Zealand, other than stating that the university had “not operated its market in compliance with the terms” of the 2014 determination.
The letter gave the university the ability to list the products for research and academic purposes. Because of PredictIt’s relationship with the university, the platform never registered with the CFTC as a derivatives exchange -- an onerous process that involves intense scrutiny from the regulator.
In a statement, PredictIt said it disagreed with the agency’s decision and “maintains that all active markets are not only within the terms of the no-action letter but are also consistent with commission interpretations conveyed to us over the past eight years.” It added that it intends to continue normal operations until the Feb. 15 deadline.
The platform hasn’t yet decided how contracts with end dates after Feb. 15 will be settled, Margaret Hyland, a Vice-Provost at Victoria University of Wellington, said in a separate statement.
The decision to revoke the CFTC’s letter that effectively told the university it wouldn’t get sued for offering the contracts came after CFTC staff determined it had allowed PredictIt to stray too far from the original remit of being a small-scale market designed to facilitate academic research, according to four people familiar with the matter.
PredictIt is operated by Aristotle Inc. and it attracts a cadre of professional gamblers.
The uncertainty over whether the exchange was actually being operated as a for-profit entity, given its ties to Aristotle, which provides technology, data and other services to political campaigns, also drew concern within the agency, said the people who asked not to be named discussing internal deliberations.
The CFTC declined to comment.
In a statement, Aristotle said that American voters, politicians, journalists and academics rely on PredictIt for the valuable data it provides.
“Over the past eight years we have always strived to be a good actor in an industry rife with bad ones and have worked with the CFTC since the beginning and would like to continue working with them,” Aristotle spokeswoman Brandi Travis said in an email. “The CFTC has known for years about the extent to which Aristotle was involved with PredictIt day to day, as this was disclosed to them by us many years ago,” Travis said.
Victoria University of Wellington said in a statement that the PredictIt platform “remains a project of the university, operated by Aristotle. There has been no sale by the university to Aristotle.” PredictIt didn’t respond to a request for comment on the arrangements between it, the university and Aristotle.
Recently, the regulator has become more focused on event contracts, an area which has grown in popularity amid the recent explosion in retail trading.
In January, Polymarket, a crypto-based event market, agreed to pay a $1.4 million to settle CFTC allegations it had been running an unregistered trading platform. The firm didn’t admit or deny wrongdoing in the settlement.
Meanwhile, Kalshi, a Silicon Valley startup with venture capital backing, became the first exchange granted CFTC registration to run a fully-commercial event market in 2020.
Kalshi doesn’t currently offer trading in election outcomes, but recently filed papers with the agency to begin listing events contracts tied to the 2022 midterm elections, two of the people said. Kalshi didn’t respond to a request for comment.
In general, prediction markets have been viewed with a mixture of fascination and skepticism from some in the US news media and election watchers. While backers say they’re more accurate than polling, there have been occasional concerns about market manipulation to increase the perception of a candidate’s performance.
Rajiv Sethi, an economics professor at Barnard College, Columbia University says he’s found PredictIt data to be useful in his research. The CFTC decision means that elections-watchers could lose a major source of data ahead of the 2024 US presidential elections, he added.
“For those who are interested in market based predictions of political outcomes, including journalists and researchers, there is really no close substitute,” Sethi said.
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