Crypto Industry Dives Deeper Into Prediction Markets as Kraken Buys Exchange

Kraken isn’t the only crypto firm diving into the predictions markets. (Tiffany Hagler-Geard/Bloomberg)

Key Points

• Kraken acquired Small Exchange for $100 million to offer event contracts and launch a U.S.-native derivatives product suite.
• The acquisition of Small Exchange, a designated contract market, allows Kraken to create exchange-listed derivatives in the US under CFTC oversight.
• Government shutdown may delay designated contract market mergers, including Kraken’s, as CFTC operations are largely halted.

Cryptocurrency exchange Kraken said it paid a $100 million for a CFTC-licensed exchange that will allow it to offer event contracts, marking the latest entrant into the burgeoning world of prediction markets.

“This move lays the foundation for us to launch a fully U.S.-native derivatives product suite, creating a deep, sophisticated onshore venue in the world’s largest capital market,” the company said in a press release.

Kraken isn’t the only cryptocurrency firm pushing into prediction markets.

Coinbase, another crypto exchange, announced in July that it will rebrand as an “everything exchange,” adding event contracts to its offerings. “We’re bringing all assets onchain: stocks, prediction markets and more,” Coinbase vice president of Product Max Branzburg said in a press release.

Small Exchange, which Kraken purchased for $100 million, is a designated contract market. “A DCM authorizes us, under the oversight of the Commodity Futures Trading Commission, to design and create markets for exchange-listed derivatives in the U.S.,” the press release said. Designated contract markets are what all companies hoping to sell event contracts must register as.

Polymarket, the crypto-forward prediction market that last week inked a $2 billion deal with the parent company of the New York Stock Exchange, also recently acquired a designated contract market, QCX, paving the way for its return to the U.S.

Polymarket and Kraken’s designated contract market mergers may be on hold, however, due to the government shutdown. In a Sept. 29 letter to the White House Office of Management and Budget, CFTC executive director Jeffrey Sutton wrote that “the vast bulk of the CFTC’s operations will cease during a lapse of appropriations,” including “designated contract market applications, certifications of continued compliance in situations of merger or sale, and demonstrations of compliance with core principles.”

Write to Nick Devor at nicholas.devor@barrons.com