Crypto needs prediction markets to hedge regulatory risk, Paradigm says

Paradigm, an investment firm led by Coinbase co-founder Fred Ehrsam, is supporting prediction market platform Kalshi in its clash with a U.S. regulator, according to a recent court filing. 

The Commodity Futures Trading Commission issued an order in September disapproving Kalshi’s contract that allowed people to bet on which party would likely control the U.S. Congress for the next term, saying it involved “gaming and activity that is unlawful under state law.” 

Two months later, Kalshi sued the regulator, saying the agency exceeded its authority.

"While Kalshi isn’t a crypto company, we felt compelled to intervene in this case because we believe that prediction markets are one of the potentially revolutionary use cases for crypto," Paradigm said in a post on Monday. 

Betting pros

Political events are highly relevant information for crypto firms as they determine the future regulation for the industry, Paradigm explained. Watching people bet on certain outcomes can help crypto companies calibrate their corporate strategies and hedge regulatory risk, the firm said in its amicus brief filed in the U.S. District Court for the District of Columbia. 

“The likelihood that Congress will pass legislation that will impact the viability of U.S.-based crypto startups is directly affected by which party is in control of Congress, or whether the government is divided,” Paradigm said in a blog post. 

Prediction markets might even be better predictors of electoral outcomes than public opinion polling because participants must have their own skin in the game, Paradigm wrote in the amicus brief. That makes products like the one Kalshi introduced useful not only for crypto entrepreneurs, but for the general public, too, it argued.