When Victoria University of Wellington’s great little prediction market, iPredict, announced that it would be shutting down back in 2015, it had a couple hundred thousand dollars of traders’ deposited funds in the bank. It was a very small, very limited, academic enterprise.

Kalshi is a US-based prediction market. It is regulated by America’s Commodity Futures Trading Commission, the CFTC, which fully authorised it in 2023.

It is identical in principle to what iPredict was. But Kalshi’s Series F funding round raised a billion dollars at a $22 billion dollar valuation earlier this year. Their annualised trading volume recently hit $178 billion, generating annualised revenue of around $1.5 billion.

The difference between iPredict and Kalshi does not come down to the difference in scale between the US and New Zealand – though that certainly matters. The scale, the ambition, and the permissions differ considerably.

iPredict ran as a futures exchange authorised by the Securities Commission, able to quickly define contracts and let traders figure out what they were worth. Contracts like, “Pays $1 if National forms government after the next election, pays $0 otherwise.” Prices on those contracts tell you traders’ expectations about probabilities – and they were highly accurate.

Anyone could sign up to trade, and many people did – at very low stakes. Accounts with five or ten dollars in them were common.

It was small because New Zealand’s regulators wanted it that way. They were happy to let iPredict play in a small regulatory sandbox with laudably liberal rules on how it operated because nobody was allowed to put very much money into it.

And because nobody expected anyone to authorise anything more ambitious, there was no point in even asking.

At first, traders were allowed to deposit only up to $2000. That limit later increased to $10,000. If traders had larger accounts with more money on the line, regulators would not have felt safe letting iPredict run as it did. Regulation around how it defined contracts would have hardened. It may have had to start issuing a full prospectus on each one.

Issuing a full prospectus for a prediction market contract would destroy the real value that a prediction market can bring: quickly establishing new markets when they are needed. Jeremy Maletz is head of Prediction Markets at Susquehanna International Group – a substantial American market-maker in equity options. Maletz argues that where it can take a year to create a new hedging contract on traditional markets, prediction markets can do it in a day.

Suppose that your business depends on trade with Taiwan. If China blockaded Taiwan, you’d be in trouble. It’s always possible to diversify your business. But it should also be possible to hedge against that risk more directly. A prediction market could quickly list a contract that pays out if that event happens before a set date, and doesn’t otherwise. Traders on the contract set the price; organisations like Susquehanna prepared to take on some risk provide liquidity.

Being able to set contracts quickly, when they are needed for hedging, is valuable. But that value is small if deposit limits are tight.

iPredict consequently ran on the smell of an oily rag, barely able to wash its own face, and certainly unable to cover the cost of meeting anti-money-laundering regulations imposed by the Key-led National Government. Somewhat ironically, the constraints under which it operated meant it was nigh-impossible for anyone to ever really try laundering money through it. It simply did not have the trading volume to bring that risk.

The deposit limits didn’t just mean that iPredict could not afford those kinds of costs. They also meant that the thing was hamstrung from the outset. It could never take up the kind of role that Kalshi is quickly moving into in making financial markets simply work better.

Kalshi is innovative. Last month, they were authorised to launch America’s first perpetual futures contract. Normal futures contracts come with expiration dates. A perpetual futures contract simply tracks the value of a defined indicator.

Perpetual futures contracts on house prices would be immensely valuable. Contracts could track the value of the median home in our major cities. People could save for their first home by buying the relevant house price index. No matter what happened to house prices, your progress toward a deposit would be locked in.

New Zealand’s Department of Internal Affairs decided that, because Kalshi had not been authorised by the Financial Markets Authority, it must be gambling. So they sent a letter to Kalshi demanding that it not let Kiwis trade there. And Kiwis can no longer set accounts.

It does not just stop Kiwis from trading on the outcome of the next American election. It also will substantially hinder financial market innovation and hedging options. Our regulators ensured that no Kiwi Kalshi could ever emerge and now ensure that foreign innovation cannot reach our shores.

The regulatory attitude is hardly limited to prediction markets. And it is stifling.

It is very small thinking from a country that can ill-afford it.