Betting on Democracy? The Truth About U.S. Election Wagers

The Legal Landscape and Market Players

With the US presidential election looming, election betting is back in the news. Despite its growing popularity, the legality of election betting platforms is unclear and changing. With some recent court decisions, the question of whether we should be able to bet on election outcomes is being debated across the country.

Election betting was banned under the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 and other federal laws. However, the recent court decisions have opened a possible path for limited legalization of election betting and some platforms could be allowed to offer these markets under regulated conditions.

One of those platforms is Kalshi, a New York based platform that just got approval from the Commodity Futures Trading Commission (CFTC) to offer futures contracts on congressional elections.

But CFTC’s position is still largely against these types of markets and is appealing the court’s decision, reflecting the ongoing unease about the impact of election betting on the democratic process.

Another major player is Polymarket, which has skirted domestic regulations by operating offshore and using blockchain to offer its clients transparent and decentralized prediction markets.

Election Betting Opens Up New Perspectives

Election betting markets can react to campaign events in real-time. Participants motivated by profit are watching and adjusting their predictions. So betting odds on Kalshi or Polymarket often give a real-time snapshot of public opinion, more up to date than traditional polls.

The data from election betting markets can be a useful tool for media, political analysts and the general public. With odds changing in response to public opinion and campaign activity, these markets add another layer to traditional election data. For example, odds on election betting platforms can be an extra reference point to traditional polls and expert analysis to get a fuller picture of the political landscape.

Proponents say election betting could encourage more public participation in the political process. The possibility of profit may motivate citizens to stay informed on candidates, watch debates and even analyze political programs more closely. This increased engagement could lead to a deeper understanding of the issues and market participation a more active and informed citizenry.

What’s Wrong with Election Betting

U.S. Senator Jeff Merkley from Oregon has called the court decision that allowed election betting in the US a “nightmare” saying it could allow wealthy sponsors to manipulate public opinion.

Merkley argues election betting could create a “deeply corrupting” relationship between big money and elections, where individuals or groups with deep pockets can move the betting markets.

High stakes bets on a favorite candidate can create the perception of viability and influence voter opinion and possibly the outcome of the election.

Another con of election betting is the demographics of the market participants don’t represent the broader electorate. Betting markets, especially those tied to cryptocurrency, may attract participants who are more interested in profit than in getting it right.

Some participants may speculate for profit rather than making an objective prediction and that could distort the market odds and public opinion, making these markets less useful as a predictive tool.

Additionaly, despite the court decisions there is still a regulatory void that raises fraud and manipulation concerns. Platforms like Polymarket which operate outside U.S. jurisdiction are an example of this. Operating offshore they are beyond domestic oversight and it’s hard for regulators to enforce protections and standards to prevent market abuse.

Social media influencers add another layer of risk. Someone like Elon Musk can move the market with a single tweet and candidate odds can fluctuate wildly even if there’s no basis for it in the actual political landscape. This volatile interaction between social media and betting markets makes these markets unreliable as a political indicator.

Case Study: Polymarket and Election Betting

Polymarket, a major player in the prediction market space was founded in 2020 by Shayne Coplan. This blockchain based platform allows users to bet on a wide range of events from economic indicators and weather patterns to awards and political outcomes.

Using USDC cryptocurrency users trade shares representing the likelihood of various outcomes, trades are conducted on the Polygon blockchain to reduce transaction costs and increase accessibility.

Coplan launched Polymarket with the idea of creating a decentralized transparent platform inspired by the work of economist Robin Hanson and philosopher Frederick Hayek on prediction markets.

Since its launch Polymarket has gotten a lot of attention from investors and the public especially as it grew in popularity during the Covid pandemic when people were looking for information on the probability of various events like vaccine rollouts or city reopenings. High profile investors like Peter Thiel and Vitalik Buterin have invested $70 million in Polymarket, that’s a lot of interest in the platform.

But Polymarket has faced regulatory scrutiny. In 2022 the CFTC fined the platform $1.4 million for regulatory violations. Despite these legal issues Polymarket has maintained a loyal user base and is still growing in the prediction market space.

Market Manipulation

In the last weeks Polymarket recorded a high volume of bets on Donald Trump winning the election which some have called manipulative. It got worse when it was discovered that a large chunk of those bets came from a single user in France.

Polymarket investigated and found the user had no malicious intent and was just making bets based on personal beliefs. But this incident highlights the risk of manipulation especially for platforms that don’t limit the maximum bet amount for individual users.

Critics say that unlike PredictIt which caps individual bets at $850 per market to prevent manipulation Polymarket allows unlimited bets which increases the risk of market distortion by “whales” or big players. And since Polymarket operates outside U.S. jurisdiction it’s hard to hold anyone accountable or prosecute fraud.

Polymarket’s user base is mostly from the cryptocurrency community and may not be representative of the general electorate. Users are often tech savvy individuals with strong opinions on decentralization and privacy which may affect the platform’s overall political predictions and its alignment with public opinion.

The Future of Election Betting and Democracy

The future of election betting in the U.S. is hard to predict. The CFTC figures out the implications of prediction markets on democracy and it’s unclear if these markets will find a permanent home in the U.S.

The risks and benefits are big. On one hand election betting markets can provide real time data that complements traditional polling. On the other hand they introduce new risks of manipulation, speculation and disproportionate influence by big players which can undermine democracy.