A Bear’s Perspective on Augur
Myles Snider has already written an excellent introduction to Augur and Prediction markets and for the sake of brevity I will not rehash it here. I highly recommend reading his piece before considering my piece: here. In this I will present a different perspective on the coin, focusing on potential regulatory risk, but not on the normal worry of the SEC treating the coin as a security.
In the United States the Commodity Futures Trading Commission (CFTC) has previously cracked down on other prediction markets. Most visibly and noticeably on Ireland based Intrade. Despite its international basis it was still able to be shut down by the United States based CFTC. Even DARPA and the CIA experimented with a prediction market, that was shut down due to Congressional pressure. (Interesting read about it here) These and other examples of various prediction markets being shut down thanks to regulatory pressure, seem to suggest that the United States is not ready for a prediction market. The common argument given defending Augur is that because it is decentralized it is protected from this kind of intervention. However, several issues arise when you consider that argument. First and foremost there needs to be a way to get your fiat money (think USD) into and out of the currencies being used for Augur. I would not expect a significant crackdown on the Ethereum that is used to trade (though it is possible with the SEC comment about coins being security, and the fact that there was an initial sale). The greater issue here is that the market makers need to hold the REP coin associated with this platform. That means they must have a way to get into and out of this coin. In the Intrade shutdown it was possible because there was cooperation between the CFTC and the bank associated with Intrade. It is possible that any exchanges that offer trading from fiat to REP or vice versa will have difficulty finding banks that will accept their business, or if a bank is found it is also possible that individual holders of REP could become a target of investigations. We have already seen many cryptocurrencies including Binance and Bitfinex having trouble finding banking and I do not see that being an issue that will be easily solved soon. Carrying coins like this will make it that much more difficult for exchanges to find banking.
The second major CFTC risk I see associated with Augur is the ability for anyone to make a market on anything, and then collect trading fees on it. This potentially could mean that the real risk here is that these individuals market makers could end up sanctioned by the CFTC. Especially since they are receiving a portion of the fees associated with the market, meaning that they are receiving a direct and trackable benefit from this platform. This is especially worrisome in light of some of the specific complaints that were levied against Intrade that led to its closure. In 2005 Intrade was found to be in violation and they were then required to inform US customers with a pop-up on the exchange that told US customers they were not allowed to trade these options, and to try to ensure that US based customers could not trade these options. My fear with Augur here is two-fold, one the Augur trading platform will need to make sure that US customers are told that they cannot trade these options, and that individual market makers will become liable for US customers who do trade their options.
Insider Trading Risk
There is another risk that is neglected, but in my opinion represents a smaller overall risk to Augur as a whole, however, it does represent a risk to people using Augur. Every single market participant on the Augur platform needs to understand that they are liable for insider trading regulations in their countries. Many of these options, especially if they are tied to the price or performance of “real” securities, are ones where anyone trading in the market need to ensure that they are not in violation of insider trading laws. Failure to appropriately recognize this risk, by any market participant increases their legal liability.
Manipulating market to affect real world
Augur has described the potential for these prediction markets to serve as a more accurate way to predict various real life events. However, what I have not seen described yet is the fact that if these markets are being used to predict various real life events, they are open to manipulation. For example, consider a prediction market in Augur that is predicting the price of oil a month later. The market on Augur is likely going to be much smaller than the equivalent futures contract. This means that a sufficiently large enough whale could potentially make large enough bets to manipulate the Augur market, which could then potentially change either the futures market or the actual price of oil. This is in my opinion is one of the smallest risks to the price of REP and to Augur in general because it requires several things to happen:
- Augur needs to become a large enough platform that its predictions are used in securities trading.
- The market needs to be small enough that a single or a team of whales can manipulate the market.
- The whales need to be able to make these manipulations, while hiding that these manipulations are occuring.
As such this seems to be the smallest risk in my opinion to Augur as a platform or REP’s price.
In conclusion, while I feel that Augur is a fascinating platform, and the way REP is used to adjudicate disputes in the prediction market is innovative, I worry the regulatory risks are being underestimated. There is a history of these kind of markets coming under regulatory investigation and that is neglecting the fact that it is possible that the REP ICO may have also been an illegal security sale (based on the recent comments suggesting most ICO’s were illegal). This suggests to me that REP may initially gain value, it is likely to fall under regulatory scrutiny that will significantly depress its value, and may permanently prevent Augur from flourishing, which is disappointing because I find prediction markets fascinating.
If you would like to subscribe to my free weekly newsletter then please go here.
If you want the posts from this blog delivered to your inbox:
I also have a Discord server that you can join here.