Paradigm: Prediction Markets Hedge Regulatory Risks for Crypto Startups

• Paradigm Supports Kalshi's Legal Dispute Against Commodity Futures Trading Commission
• Details of the Case
• Paradigm's Stance
• Paradigm's Involvement Amidst Growing Optimism for Prediction Markets
• Positive Forecast for Prediction Markets
• Polymarket's Success Story
• Risks Hedge and Public Benefits
• Additional Support for Kalshi's Cause

Paradigm Supports Kalshi's Legal Dispute Against Commodity Futures Trading Commission

Paradigm, a venture capital firm led by Fred Ehrsam, co-founder of Coinbase, has filed a legal brief in support of Kalshi, a prediction market platform. Kalshi is in a legal battle with the Commodity Futures Trading Commission (CFTC) following the denial of its proposal to list contracts that determine which party will control each chamber of the U.S. Congress after an election.

Details of the Case

The case, which was instigated in November, saw Kalshi request the court to revoke the CFTC's refusal of its proposition. The CFTC concluded that the New York-based Kalshi was pursuing unlawful gambling which they deemed against public interest.

Paradigm's Stance

In a friend-of-the-court brief filed recently, Paradigm, which doesn't hold an investment in Kalshi, postulated that such contracts could assist businesses, including cryptocurrency startups, in hedging their risks, while also creating positive spillover effects for the general public.

Paradigm's Involvement Amidst Growing Optimism for Prediction Markets

Paradigm declared its stance during a time of hopeful projections for the long-underperforming prediction markets, especially those that operate on crypto platforms. These platforms allow participants to bet on real-world events, ranging from weather patterns to military operations.

Positive Forecast for Prediction Markets

A report by Bitwise Asset Management in December forecasted that more than $100 million would be staked in prediction markets, which are expected to emerge as a new 'killer app' for crypto. This figure represents a significant increase from the peak reached in late 2021, as per Bitwise's analysis from The Block and DefiLlama data.

Polymarket's Success Story

Polymarket, a leading crypto-based prediction market platform, recorded its highest volume month in January, as per data from Dune Analytics shared on X by Rob Hadick, a general partner at another venture capital firm, Dragonfly.

Risks Hedge and Public Benefits

Paradigm expressed its interest in the case, stating that prediction markets could significantly influence the use of crypto and related technologies, where Paradigm has investments. The brief provided a hypothetical scenario of an entrepreneur building a crypto startup in the U.S, who may want to buy an event contract that pays out depending on which party controls Congress.

Supporting the long-held argument in favor of prediction markets, the brief stated that market participants hedging large sums on a specific event contract provide valuable real-time information to the general public. Such markets could even offer better predictions of election outcomes than public opinion polls, as they require participants to have a stake in the results.

Additional Support for Kalshi's Cause

Another friend-of-the-court brief was filed in support of Kalshi, this time by a renowned legal scholar, Joseph A. Grundfest, a professor at Stanford Law School. Grundfest also emphasized the potential public benefits of prediction markets, citing them as an objective indicator of specific election outcomes in a world marred by low poll response rates, extreme polarization, and widespread fake news.

The CFTC has approximately a month to respond to Kalshi's motion for summary judgment and to submit its own friend-of-the-court briefs. Responses to these filings from Kalshi are expected in March, and the case's arguments may conclude in early April.

Edited by Jonathan Stoker