PredictIt, an academic prediction market run by the Victoria University of Wellington, has offered election contracts since 2014. It has offered markets on presidential elections, swing state outcomes, and other events affected by elected officials.
In 2022, the CFTC revoked the no-action letter that PredictIt depended upon. That revocation began a legal battle that threatened PredictIt’s existence.
The Commodity Futures Trading Commission (CFTC) allowed PredictIt to operate by issuing a no-action letter. In that letter, the CFTC agreed to not recommend enforcement action against PredictIt for offering election contracts. PredictIt limited the scope of its markets and imposed position limits in return.
The prediction market industry has grown dramatically since PredictIt received its no-action letter. Kalshi, a commercial prediction market regulated by the CFTC, won its lawsuit to offer election markets in September 2024. After its stay was dissolved in October, Kalshi offered election contracts in the weeks leading up to the election. A free-to-play prediction market, Manifold, also adopted a sweepstakes model in 2024.
PredictIt’s place in this new dynamic industry – an industry it helped build – now seems uncertain.
Two revocations and four objections
The CFTC withdrew its no-action letter twice. First, the regulator withdrew its original no-action letter in August 2022 but failed to offer reasons in writing for the letter’s withdrawal. The CFTC followed up with a second no-action letter in March 2023 with alleged violations.
The four violations the CFTC accused PredictIt of making were:
- Aristotle Inc. operated PredictIt instead of Victoria University.
- Victoria University received $2,000/month in user fees from Aristotle.
- PredictIt offered contracts outside the original no-action letter’s scope.
- 17 markets in particular were outside the original no-action letter’s scope.
In April 2023, PredictIt’s legal team responded to the CFTC’s letter with detailed refutations of all four points.
Who operates PredictIt
Under the original no-action letter, the people overseeing PredictIt’s operations were three University employees and one administrator. These four people were responsible for “overseeing the market.”
Aristotle Inc. is a political consulting and data company based in Washington, D.C. It provides the technical backend of PredictIt’s site and know-your-customer services for PredictIt.
PredictIt’s legal team cited ongoing communication about proposed amendments to the original no-action letter. From 2017 to 2021, PredictIt and Artistotle Inc. emailed and met with CFTC representatives to discuss issues like the 5,000 trader limit in election markets. Traders who bought contracts early in a market’s lifetime then became inactive counted toward the 5,000 trader limit even though they no longer used the site.
The filing documents emails and meetings that explain how Aristotle’s role expanded by 2021 to include responsibilities such as “anti-money laundering and customer verification services,” “market question formulation,” and “responding to academic requests for data.”
According to PredictIt’s filing, “PredictIt had nearly tripled in size since the NAL [no-action letter] was granted (from over 15,000 funded accounts, i.e., traders, in 2015 to over 43,000 funded accounts in 2019).”
Aristotle’s role in PredictIt evolved, but the University maintained the site’s core functions and regularly informed the CFTC about Aristotle’s role.
Victoria University compensation and cost-covering
Part of the original deal with the CFTC was for PredictIt to remain a non-profit platform. Even though it used real money, PredictIt couldn’t become a booming financial business.
The CFTC objected to Victoria University’s subsidiary, Victoria Link Limited (VLL), receiving a $2,000 monthly payment. The CFTC alleged that this payment breached PredictIt’s commitment to operate as a non-profit platform.
PredictIt’s legal team explained that the $2,000 monthly payment was an early estimate to cover VLL’s expected operating costs, not income. They also detailed how Aristotle managed revenue transactions, stating: “Aristotle collects these fees [user trading fees], deducts the fixed monthly payment, and remits this to the University. Market operations, accordingly, generate the revenue to cover VLL’s costs.”
The section concludes with PredictIt showing that it has operated at a loss, including a $1 million net loss from 2014 to 2016. According to its letter, 2020 was the only year PredictIt turned a profit, driven by its presidential election markets.
No-action letter’s contract scope
The CFTC’s original no-action letter limited the types of political contracts PredictIt could offer. Elections were allowed and so were some markets that depended on which politicians were in power.
On Nov. 24, 2014, PredictIt launched 33 markets, 14 of which were non-election markets. They included markets like whether President Obama would have a veto overridden before he left office or whether Vladimir Putin would be president of Russia in April 2015.
On the same day, the CFTC directed PredictIt to remove its market on the number of Ebola cases in the United States, deeming it outside the scope of the no-action letter. The CFTC argued the market had “no relationship to elections or any other meaningful political question.” PredictIt complied and removed it.
According to PredictIt’s legal team, the email request to remove the Ebola market “was the only written guidance PredictIt ever received regarding DMO Staff’s interpretation of the NAL (albeit there have been periodic discussions about specific markets).”
PredictIt also adhered to its regulators’ increasingly narrow interpretations of the no-action letter. In 2020, the Division of Market Oversight’s Director informed PredictIt that “markets must be ‘closely related to the outcome of a particular election.’”
Even though PredictIt thought “this new interpretation had no grounding in the text or history of the NAL,” the platform “followed a significantly narrowed interpretation of the NAL, resulting in not listing certain markets.”
The guidance PredictIt received from its regulator changed over time, and PredictIt adjusted. The markets the CFTC cited as violations in 2023 were not considered violations in 2014.
PredictIt’s legal team claims “the CFTC is seeking to apply the new interpretation retrospectively to contracts that were listed under the earlier interpretation taken by Mr Van Wagner and followed by the University in good faith.”
The 17 markets the CFTC took issue with
At the time of PredictIt’s April 2023 response letter, the platform had offered 6,829 markets. The CFTC identified 17 markets it claimed violated the original no-action letter, all of which were listed before the DMO Director narrowed its interpretation.
PredictIt’s April 2023 response letter addresses each market individually. For example, in September 2017, PredictIt listed a market on whether Southwest Border Patrol apprehensions would drop below August levels. With immigration central to Trump’s 2016 presidential campaign, PredictIt argued that southern border crossings were a significant political issue. The legal team justified the market by citing the no-action letter’s scope:
“The NAL [no-action letter] approved the issuance of contracts about the outcome of elections and other significant political events unrelated to war, terrorism, or assassination. The Van Wagner email from 2014 so confirmed, asking that markets have a relationship to elections or other meaningful political questions.”
Although the border crossing market wasn’t directly tied to elections, it addressed a critical political issue. PredictIt offered markets like this before 2020, when regulators began narrowing their interpretation of the original no-action letter.
PredictIt’s current operations and future
The CFTC’s March 2023 revocation of PredictIt’s no-action letter required the platform to shut down within six months. Because of the shutdown’s immediate timeline and the District Court’s failure to issue a ruling on a preliminary injunction, PredictIt filed an appeal. In July 2023, the Fifth Circuit Court of Appeals issued an injunction against the CFTC, which kept PredictIt open while the case returned to the District Court.
In January 2024, the Texas Court moved to transfer PredictIt’s case to the D.C. District Court. However, the Fifth Circuit later ruled in favor of PredictIt’s request to return the case to Texas, where it was originally filed. The Fifth Circuit agreed to the retransfer, noting that “court congestion was not an adequate ground upon which to transfer a case.”
PredictIt and the CFTC are still filing motions required for a trial date to be set. A trial date isn’t likely to be announced until between March and May when the final procedural deadlines occur.
PredictIt’s crossroads
During the 2024 election, PredictIt limited the number of markets it offered, focusing exclusively on those tied to electoral outcomes rather than high-profile political events. While PredictIt treads lightly to avoid running afoul of its regulator, the rest of the industry is quickly growing.
PredictIt faces a crossroads where it will either be able to join the evolving industry or fall behind.
The new administration will be crucial in deciding PredictIt’s fate. Whoever Donald Trump picks to chair the CFTC will likely be someone who is friendly toward prediction markets. Trump’s administration will be influenced by major tech figures like Elon Musk, who share an anti-establishment attitude that favors alternative institutions. While cryptocurrencies have received the most attention, prediction markets are expected to benefit, too.
However, a withdrawal of the case against PredictIt would have to come soon. Commercial prediction markets like Kalshi can offer real-money political and election markets on a scale that PredictIt once provided.
PredictIt may not depend on profitability as its commercial counterparts do, but its ability to provide research material depends on a large user base that still finds the platform valuable. The future of that research capability could be decided in the next administration’s first 100 days.
