In a crescendo of dissent, Dragonfly Digital Management and Crypto.com have aligned with Coinbase (COIN) to voice their collective disapproval of the Commodity Futures Trading Commission’s (CFTC) recently proposed restrictions on prediction markets. The CFTC’s suggested regulations, which broadly seek to categorize and prohibit specific event contracts—particularly those linked to gaming and elections—have been met with fierce opposition. Critics argue that such sweeping definitions threaten to exceed the CFTC’s statutory bounds, stifle innovation, and overlook the substantial economic value these contracts potentially offer.

Central to the critique is Coinbase’s assertion that the CFTC’s broad-brush definition of gaming is dangerously ambiguous, a sentiment echoed by others who view the rules as an overreach. Dragonfly’s Jessica Furr and Bryan Edelman, legal experts within the firm, articulated this stance in a formal communication to the CFTC, stating, “Political event contracts must not be conflated with gambling on games of chance such as the Super Bowl. Elections carry profound economic ramifications.” They emphasized that these contracts are intricately designed to fulfill essential risk-hedging roles, in alignment with the stipulations of the Commodity Exchange Act (CEA), and provide invaluable predictive insights to the public.

Read more: Andrena Secures $18M to Pioneer a Decentralized Broadband Revolution with DAWN Protocol

Dragonfly further contends that the CFTC’s proposal to broadly ban prediction markets lacks the necessary thorough evaluation. This concern is particularly poignant in light of the Supreme Court’s recent ‘Chevron’ ruling, which curtails the agency’s interpretive powers absent a clear Congressional directive.

Steve Humenik, Crypto.com’s Special Vice President overseeing Capital Markets, reinforced these criticisms, highlighting the procedural shortcomings of the CFTC’s approach. He argues that the CFTC’s bid to prohibit prediction markets is at odds with the rulemaking process mandated by the CEA, which prescribes a meticulous three-step assessment.

According to Humenik, the CEA mandates the CFTC to first determine whether a contract involves an excluded commodity, then assess if it engages in specified activities, and finally, evaluate if it conflicts with the public interest before moving to ban it. “The CFTC must clearly justify its determination that a given contract pertains to an underlying excluded commodity. This should not be presumed,” Humenik stated. He urged the CFTC to adhere strictly to the three-step review process for these event contracts and to reconsider the relevant sections of the Event Contracts NOPR [notice of proposed rulemaking].

The controversy extends beyond the cryptocurrency industry, drawing attention from legal scholars and other stakeholders. Joseph Fishkin, a Law Professor at UCLA, weighed in on the debate, advocating for the preservation of prediction markets due to their role in enriching public discourse and political analysis. “Prediction markets provide significant insights into public opinion and political events. They deepen our comprehension of politics, the media, and the prevailing political wisdom. Shutting them down through overregulation would be a disservice,” Fishkin wrote. “I strongly urge against regulating them out of existence within the U.S.”

This growing coalition against the CFTC’s proposed rules highlights the tension between regulatory oversight and the evolving landscape of financial innovation, with the outcome poised to significantly impact the future of prediction markets in the United States.