Because prediction market traders generally rely more on skill than on chance to win, I’-ve argued that they do not qualify in “-gambling”- as defined by U.S. law. I’-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.
“-We have been threatened several times with suits by various states,”- he wrote, “-but so far the CFTC coverage [i.e., the two ‘no action’ letters that the CFTC gave the IEM] has been our trump card.”- Prof. Neumann offered this example: When the IEM ran a market on Hilary Clinton’-s run for the New York Senate seat, an N.Y.C.-based district attorney “-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.”- Wielding the CFTC’-s “-no action”- 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’-s feat of legal acumen, the CFTC’-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’-re at it, please ask the CFTC to issue an advisory opinion saying, “-The CFTC has no rationale to regulate transactions or markets in which price discovery functions predominate over hedging functions.”- It could state a market cap limit to make clear the limits on its discretion.
Such a “-public no action letter”- 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’-s experiences, give new prediction markets a shield from state anti-gaming prosecutions.
[Crossposted to Agoraphilia.]
Excellent scoop. Congrats.
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