The Clarity Act Is A Great Example Of The Value Of Prediction Markets

Contrary to popular belief, I don’t hate prediction markets. Sometimes, I think they offer valuable information.Subscribe nowThis week gave us one of those examples, for my money. Prediction markets offered trading on the fate of the Clarity Act, the cryptocurrency market structure bill that has been a huge topic in Congress in recent months.The bill was generally considered to be on life support heading into the week, before Republicans dropped a new version that they claimed addressed many of the concerns of Democrats.The markets reacted. The odds of passage of the Clarity Act increased as chatter about a compromise grew and the new bill language was released:I think it’s fascinating to see how a market prices things in real time! I am one of the people who goes to Kalshi and Polymarket to see what their markets say the odds of things happening are for things related to the news.This is something that prediction markets honestly solve: price discovery in some important markets. The market thought passage of Clarity was possible, but still an underdog. You can agree or disagree with that assessment, but it’s what a decently liquid market thought! You could also in theory find ways to hedge on this market, depending on your interest; it’s not entirely clear if that was going on, but it was possible!But as the week went on, the market’s enthusiasm waned for passage. Democrats were saying Republican changes were not enough; some Republicans expressed skepticism. The market reacted again.Eventually, a Wednesday vote on cloture to end debate failed, and we never even got a vote on the bill. Now the odds for passage before the end of the year are very long.You may also disagree that we need to trade on things like federal legislation, but I don’t have a problem with it…as long as no one is insider trading, of course.And with that, I have fulfilled my quota for saying nice things about prediction markets for September. Kidding. Maybe.The Event Horizon briefingA quick look at what matters most in prediction markets.📍 The Big StoryTexas talks prediction marketsCommittees in both the Texas Senate and House held a hearing on prediction markets on Tuesday. And it seemed like members in both chambers were often skeptical that prediction markets are not a form of betting.Here was the agenda item on the Senate Committee on State Affairs hearing:Closing Gambling Loopholes: Study the sudden inundation of prediction market gambling and the exploitation of federal law to circumvent Texas gambling prohibitions by allowing users to place bets on the outcome of elections and other events. Examine the relationship between federally regulated derivative markets and state-prohibited gambling. Make recommendations to ensure the integrity of Texas elections and Texas sports.That’s not a great starting point if you are prediction markets and Kalshi!In the first part of the Senate hearing, we had these folks testifying. Kalshi Head of Enforcement Robert DeNaultAmerican Gaming Association VP of government relations Tres YorkProblem gambling policy expert Brianne Doura-SchawohlThe Senate hearing didn’t have a ton of fireworks and was pretty cordial (except for one senator who was very much not into calling prediction markets something other than gambling). Much of the hearing revolved around how and if prediction markets are different from sportsbooks. I understand why that debate happened here and in this setting; state lawmakers are just trying to learn. But that debate has happened ad nauseam over the past two years. Yes, there are obvious differences between sportsbooks and exchanges. I also believe a lot of the behavior at prediction markets is gambling, whether it’s considered gambling legally or not. (There are a lot of parlays at Kalshi!) I am not super interested in rehashing that debate. But to be clear, DeNault argued that Kalshi doesn’t offer sports betting, York insisted that it does, and Doura-Schawohl argued the behavior is gambling, no matter what the legal arguments are. These are the refrains we have been hearing in nearly every setting.So what was interesting that happened in the Senate hearing? After the witnesses gave their initial testimony, things got dicey immediately for prediction markets. Sen. Bob Hall offered a monologue, saying this is “gambling violating the law.”He also talked near the end of the initial testimony, insisting again that it’s gambling. “They’re just dressed up differently. They’re different costumes on gambling is what it is. Wearing a different costume to the ball. Some have high heels and a tiara and others have on miniskirts or a bikini.”State legislatures trying to materially ban or even regulate prediction markets right now are arguably wasting their time. Either let prediction markets be, or just tax them, or the attorney general should try to stop them (if your state doesn’t want them). That last one is what York suggested. Maybe Texas could complain to its elected officials in Congress, but that probably wouldn’t accomplish much. A new law is likely a one-way ticket to a courtroom right now; the dynamic at present is either this is federally legal or current state gambling laws apply. Hemming and hawing in a state legislature is fine for education, but I would argue it’s not really the venue for dealing with prediction markets right now.DeNault suggested consumer protections at the state level could be a good idea, including standards for advertising. That would be great! DeNault argued those kinds of rules wouldn’t run into preemption problems. But where exactly is that line? If courts ultimately decide the CFTC has exclusive jurisdiction over prediction markets, it’s not obvious how far states could go in regulating advertising and other consumer protections.DeNault offered that election markets are 15-20% of Kalshi’s business. That may have been the case at one point, but not today. The “midterms hub” at Kalshi shows just under $750 million in all-time volume for this election cycle, which is far less than current daily volume at the prediction market. Ticker Tracker data shows that elections have accounted for 0.6% of volume since the start of the year.Why do they make the witnesses sit so close together, and can’t everyone get their own microphone?You can watch the Senate hearing here.Here’s a sampling of coverage of the Senate hearing:Texas Lawmakers Prep For Lieutenant Governor’s Agenda With Hearing That’s Decidedly Anti-Predictions And Wagering (InGame): “As Texas lawmakers began Tuesday to educate themselves about prediction markets — in particular, sports and election contracts — it was clear what at least one senator thinks of allowing them in Texas.”“That’s kind of like we’re going to give you some drugs so when we cut your throat, it won’t hurt so much,” Sen. Bob Hall said during a hearing held by the Senate State Affairs Committee. “Our job is to protect the consumer, this is not anti-business in any way at all, it’s an evil business that hurts people and … our job is to protect the people from predators, and the gambling industry across the board is a predator.”Texas Scorecard: Houston-based pediatrician Lindy McGee expressed that she was ‘very disappointed in this last panel to hear the representative from Kalshi not say that 21 should be the age for these products.’“Gambling addiction can impact people of all ages and their families, not just young people,” said McGee. “Families’ experience play a critical role in child development. Parents and other relatives with gambling addiction may normalize addictive behaviors and contribute to financial instability and family distress, placing children at greater risk for adverse outcomes.”Covers: “Texas lawmakers could pursue litigation or legislation against prediction markets offering sports event contracts, potentially opening another front in the nationwide fight over whether the products are federally regulated derivatives or an unlawful form of sports betting.”There was also a House hearing where prediction markets were discussed, and that was a little testier than the Senate version for Kalshi:A good thread:DeNault and a committee member had a lengthy back and forth about whether Kalshi is “betting,” and at one point, there was agreement that some financial products can be called “betting” colloquially. To be fair, Kalshi has long argued that saying that things are “betting” is common in financial parlance, and that terminology doesn’t matter talking about a specific law.But, I would argue that giving oxygen to the idea that someone could view financial products as “betting” — in a somewhat hostile environment where your legal status is being called into question — is subideal. The start of the exchange is below; it keeps going long after that (full video linked below):There was also a discussion about the actual Texas statutes and how they might apply to prediction markets. Rep. Ken King, the committee chair, didn’t mince too many words in wrapping up the hearing:“If you're betting on whether or not Democrats are gonna beat Republicans, that's not playing with dice or other than the phone, but actually what the code says ‘makes a bet on the result of any political nomination, appointment, or election.’ That's what it says is prohibited. That's in the definition of gambling in our state. I tend to agree. I mean, we're not a judge or a jury here. There is no bill before us. We're just gathering information. But I have to say I have to agree with Ms. Holt. If you don't like it, and I may not like it, I'm not opposed to