Prediction markets are a separate concept from cryptocurrency. You can run one on cash within the typical KYC regime. If the arguments in favor of prediction markets sound rational, maybe they are rational?
I'd argue that prediction markets are more like stock markets. Very useful, but they also create opportunities for abuse which will need to be addressed. If they are eliminated later because the current administration refuses to regulate them, that would be a huge shame.
Up to this point nobody has staked out a territory that exists between securities on the one hand, and wild anything goes betting markets on the other hand. Requiring the use of national currencies does nothing to prevent what are effectively tontines incentivizing murder, or other perverse outcomes.
Aren't death markets explicitly banned?
Stock markets also incentivize murder. Short a company, then kill the CEO. Boom, profit.
The point is that fascination is unrelated to value. I’d even argue that attention is unrelated to rationality. But attention is certainly related to profit.