Venture capital firm Paradigm has filed a legal brief in support of the prediction market platform Kalshi, which is currently in a legal battle against the Commodity Futures Trading Commission (CFTC).

In a “friend-of-the-court” brief filed recently, Paradigm, despite not being an investor in Kalshi, argued that such contracts could be beneficial for businesses, including cryptocurrency startups, to hedge against risks while also producing positive effects for the general public.

Kalshi had requested the court to overturn the CFTC’s denial of its proposal to list contracts related to the control of the U.S. Congress by political parties after elections.

The CFTC claimed that Kalshi’s activities were unlawful gambling and against the public interest.

Prediction Markets See Surge in Activity

The intervention from Paradigm comes at a time when prediction markets, especially those running on crypto platforms, are experiencing a resurgence in optimism.

These markets allow participants to bet on real-world events, ranging from weather predictions to geopolitical developments.

In a December report, Bitwise Asset Management estimated that prediction markets staked with over $100 million would emerge as a new “killer app” for cryptocurrencies.

The forecast represents a twofold increase from the previous peak in late 2021, as analyzed by Bitwise using data from The Block and DefiLlama.

Additionally, Polymarket, a leading crypto-based prediction market platform, recorded its highest trading volume in January, according to data from Dune Analytics shared by Rob Hadick, a general partner at Dragonfly, another venture capital firm.

The “prediction markets are the future” meme has existed for a long time, but it finally is starting to seem like the world is ready. On the back of that, @Polymarket is having its’ best month ever and others, like @ManifoldMarkets and @Kalshi are seeing a resurgence in interest.…

— Rob Hadick >|< (@HadickM) January 26, 2024

Paradigm’s interest in this case stems from the potential impact prediction markets could have in the crypto industry, in which the firm invests.

The brief provided an example of an entrepreneur building a crypto startup in the U.S.

The entrepreneur’s prospects could be influenced by the likelihood of Congress passing legislation that affects the viability of U.S.-based crypto startups, which is in turn influenced by which party controls Congress.

In such a scenario, the entrepreneur may seek to purchase an event contract that pays out based on the party in control.

Prediction Markets Provide Real-Time Infor to Public

Paradigm’s brief also supported the longstanding argument that prediction markets provide valuable real-time information to the general public, even for those who do not actively participate in the markets.

This is because when participants place substantial bets on specific event contracts, it provides insights into the probability of outcomes.

In fact, Paradigm suggested that prediction markets could be even more accurate predictors of electoral outcomes compared to public opinion polls since participants have a financial stake in their predictions.

Joseph A. Grundfest, a professor at Stanford Law School, has also filed a friend-of-the-court brief in support of Kalshi.

In the filing, Grundfest emphasized the objectivity and public utility of prediction markets, particularly in a world characterized by low poll response rates, high polarization, and rampant fake news.

He argued that prediction markets offer an unbiased indicator of the probability of election outcomes.

“In a world with miniscule poll response rates, sky-high polarization, and rampant fake news, prediction markets offer an objective indicator of the probability of particular election outcomes.”

The CFTC has approximately one month to respond to Kalshi’s motion for summary judgment and present its own friend-of-the-court briefs.

Kalshi will then respond to those filings in March, and arguments in the case are expected to conclude in early April.

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