Do Gambling Laws Threaten Prediction Markets?

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Because prediction market traders generally rely more on skill than on chance to win, I&#8217-ve argued that they do not qualify in &#8220-gambling&#8221- as defined by U.S. law. I&#8217-ve also admitted, however, that over-ambitious prosecutors might see the matter differently. A recent email exchange I had with Prof. George R. Neumann, who serves on the Board of Directors of the Iowa Electronic Markets, confirmed my worries. I here quote him, with his permission.

&#8220-We have been threatened several times with suits by various states,&#8221- he wrote, &#8220-but so far the CFTC coverage [i.e., the two ‘no action’ letters that the CFTC gave the IEM] has been our trump card.&#8221- Prof. Neumann offered this example: When the IEM ran a market on Hilary Clinton&#8217-s run for the New York Senate seat, an N.Y.C.-based district attorney &#8220-contacted us (via a very nasty letter) to tell us that NY had a law that forbade gambling on elections in that state. He demanded a list of each and every NY State resident who was a participant in our market.&#8221- Wielding the CFTC&#8217-s &#8220-no action&#8221- letter in defense of the IEM, Prof. Neumann directed the DA to file suit in, um, a venue at once very local and yet very inconvenient.

Alas for those who would like to match Neumann&#8217-s feat of legal acumen, the CFTC&#8217-s treatment of the IEM so far looks like a one-shot deal. Or, rather, it looks like a big-shot deal- you would probably need some political help to squeeze another such letter out of the CFTC. While you&#8217-re at it, please ask the CFTC to issue an advisory opinion saying, &#8220-The CFTC has no rationale to regulate transactions or markets in which price discovery functions predominate over hedging functions.&#8221- It could state a market cap limit to make clear the limits on its discretion.

Such a &#8220-public no action letter&#8221- would give a great many useful prediction markets freedom to help us discern the future, just as the IEM has done. It would also, to judge from the IEM&#8217-s experiences, give new prediction markets a shield from state anti-gaming prosecutions.

[Crossposted to Agoraphilia.]

2 thoughts on “Do Gambling Laws Threaten Prediction Markets?

  1. Chris. F. Masse said:

    Excellent scoop. Congrats.

  2. Midas Oracle .ORG » Blog Archive » Trader: InTrade-TradeSports management is neither reliable nor trustworthy. said:

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