The only legal election betting market in the United States is going away.
On August 4, the Commodities and Futures Trading Commission (CFTC) published CFTC Letter No. 22-08. The letter regards the withdrawal of CFTC Letter No. 14-130.
What was letter 14-130? Well, that was the letter that was the regulatory genesis for the PredictIt prediction market. If you are looking at either of those letters for the name PredictIt, you will not find it.
Then what are the election betting letters about?
Instead, the letter issued in 2014 (14-130) granted no-action relief to Victoria University of Wellington in New Zealand to operate a prediction market on certain political events, similar to a prediction market that had been approved years earlier and run by the University of Iowa‘s Tippee College of Business.
The CFTC grants no-action relief for a variety of reasons to a variety of different entities. But in the case of PredictIt, the relief was granted in part on the basis that the exchange would function primarily as an academic experiment for research purposes.
In letter 22-08, the CFTC stated that “the University has not operated its market in compliance with the terms of letter 14-130. As a result, letter 14-130 is hereby withdrawn.” This will likely mean that as of February 15, 2023, PredictIt will cease to exist.
Betting on elections in the United States is illegal through traditional sports betting channels.
The grant of no-action relief
In 2014, the CFTC issued a six-page letter to the Deputy Vice-Chancellor of Victoria University of Wellington in New Zealand granting no-action relief (this simply means that the CFTC will not take action against the operator, not that other agencies or state entities could not) “to operate a not-for-profit market for the trading of event contracts and offering of such event contracts to U.S. persons.”
The no-action relief from the CFTC was granted on the following information:
- All contracts have an initial price of $1
- Each contract that reaches the outcome of the event would pay those who are correct $1, those who were incorrect receive nothing
- The price at any given time reflects the traders’ belief that an event will occur
What election betting markets specifically were OK
Perhaps more importantly, the letter detailed that the following markets would be available to traders:
- The presidential nominee from each party
- The winner of the presidential popular vote
- The winner of the electoral college vote
- The nominees for Vice President
- The party that will control Congress
While the list is not exhaustive, the letter details that the marketplace could list as many as five economic indicator contracts, provided that those contracts do not compete with contracts on CFTC regulated markets.
The management
The no-action relief was granted on the basis that it would follow many of the same procedures that had been the basis for the approval of the University of Iowa’s markets, notably that the project would be overseen by university professors and an administrator, and they would receive no compensation.
The key differentiating factor between the University of Iowa prediction markets and those approved in the Victoria University letter were that the New Zealand university was allowed to operate a slightly larger platform with more market participants, and investors were allowed to put in slightly more money than in the Iowa markets.
The Victoria University market was also allowed a limited amount of advertising to attract sufficient numbers of investors.
A short but impactful history
PredictIt launched on November 3, 2014. The website notes that:
PredictIt is a project of Victoria University of Wellington, New Zealand, a not-for-profit university, for educational purposes. The site is supported by Aristotle International, Inc., a U.S. provider of data processing and verification services.
The site has become a mainstay in virtually all election discussions, alongside political projections from sites like FiveThirtyEight and RealClearPolitics. PredictIt has long been cited as one of the more accurate predictors of political outcomes.
PredictIt has, according to its website, also shared data widely throughout the academic community, listing more than 100 researchers who the site refers to as “partners.”
Just like that, it all went away
The CFTC’s Division of Market Oversight issued its letter revoking the no-action relief, citing the nine conditions that preceded the issuance of the relief letter in 2014.
The letter does not cite a specific violation of the no-action letter but has said that the market has not operated in compliance with the terms of the original letter.
The letter notes that PredictIt is to close out and liquidate all contracts no later than 11:59 PM on February 15, 2023.
What to make of this?
In all likelihood, this means that the end for PredictIt will be on or before February 15, 2023.
The site had grown in popularity and was frequently featured as part of election coverage across networks. While the wide swath of markets offered by the site was certainly fair more expansive than those offered by the Iowa markets, that had been the case for some time.
While the CFTC’s letter certainly leaves open where exactly PredictIt deviated from the original letter, the timing of the decision is interesting as there does not appear to be some sort of material change that has recently taken place.
The closing of the site will undoubtedly open up more discussion around election betting markets. We have seen states express an interest previously, though regulated options were extremely limited outside of the Iowa markets and PredictIt.
One question that remains open is whether the CFTC could reverse this decision. While it is in theory possible, it remains unclear if PredictIt could undertake some action to have the 2014 letter reinstated.
