Cryptocurrency venture firm Paradigm backs prediction market Kalshi: Prediction platforms can help companies hedge risks

Coindesk reported that the crypto venture fund Paradigm filed court documents yesterday in support of the prediction market platform Kalshi's lawsuit against the Commodity Futures Trading Commission (CFTC), claiming that the existence of prediction contracts can help startups hedge risks and have positive externalities on the general public.

Note: Kalshi is a CFTC-regulated derivative prediction contract trading platform, not an on-chain prediction platform.

Paradigm Supports Market Prediction Platform Kalshi in Lawsuit Against CFTC

According to documents filed by the crypto venture capital firm Paradigm with the District Court of Columbia on Thursday, the company expressed its support for the lawsuit that Kalshi, a prediction market platform, has brought against the CFTC.

Previously, the CFTC banned Kalshi from listing prediction contracts related to the U.S. elections in September last year, 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 against the CFTC, alleging violations of the Administrative Procedure Act and arguing that the contracts were outside the CFTC's regulatory purview.

In the filing, Paradigm stated:

Prediction market contracts can help businesses, including crypto startups, hedge risks and have positive externalities on the public.

It emphasized, "Although Paradigm is not an investor in Kalshi, we believe that the existence of prediction platforms could become a killer application in the crypto space and hence are interested in this case."

Paradigm Co-founder: Prediction Contracts Can Hedge Risks

Paradigm co-founder Fred Ehrsham illustrated with an example:

Assume that Congress is about to pass a bill that will affect U.S. crypto startups, and this bill will be directly influenced by a specific party in Congress. Entrepreneurs can hedge risks by purchasing a prediction contract related to party control in Congress, allowing them to avoid potential risks based on political developments.

He added, "When users participate in prediction markets, those who are not part of the market can also obtain valuable real-time information, such as election stances, which may be more efficient and accurately assess the current situation and future outcomes than traditional polls."

Legal Scholars Also Support Kalshi

A similar view was presented in another court document supporting Kalshi, where Joseph A. Grundfest, a law professor at Stanford Law School, believed:

In a world filled with low-response opinion polls, polarizing and extreme opinions, and rampant misinformation, prediction markets provide an objective probability or indicator for specific election outcomes.

Reportedly, the CFTC will need to respond to Kalshi's motion for summary judgment by February 26, 2024.

Bitwise: Prediction Markets Have Growth Potential

Incidentally, Paradigm's optimistic outlook on prediction markets is supported not only by the company's own investments in the field but also by data.

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

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

Legal Risks Still Exist

However, despite being called prediction markets, they essentially remain what is known as gambling platforms and still face legal concerns at the national level.

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).

Additionally, participating in political election betting through prediction platforms in Taiwan could violate election laws and result in a maximum sentence of 6 months in prison.

How was I caught up in the Polymarket election betting scandal?