Legal Battle Over Election Prediction Market Continues
The legal fight over the future of a website's election prediction market is set to continue on Sept. 19, with an appeals court hearing the case of Kalshi v. CFTC. The outcome of this case could significantly alter how Americans participate in political discourse.
The three-judge U.S. Court of Appeals for the District of Columbia Circuit will be considering whether individuals should be allowed to buy contracts to participate in predictive markets that trade on the outcome of elections. If so, should these markets be regulated like other financial exchanges and commodity markets or as a form of gambling?
KalshiEx LLC's Argument
New York-based KalshiEx LLC argues that the elections market section of its website is a derivatives trading platform where participants buy and sell contracts based on projected outcomes of events, such as elections. It believes it should be regulated no differently than grain futures that investors purchase as hedges against price fluctuations.
Kalshi maintains that these markets provide a “public benefit” by gauging public sentiment in real-time. This could be a valuable guide for policymakers, politicians, and pundits in charting the public pulse.
The Commodity Futures Trading Commission's Argument
On the other hand, the Commodity Futures Trading Commission (CFTC), which regulates the U.S. derivatives markets, argues that Kalshi’s platform blurs the line between commodity trading and gambling, and should not be viewed the same as futures contracts.
The commission maintains that Kalshi’s market puts it in a position to be a de facto elections regulator, which it is not designed to be. Such contracts provide no “public interest” and, in fact, pose a risk to electoral integrity and could potentially incentivize manipulation and fraud, the CFTC argues.
Key Issues to be Deliberated
These conflicting contentions are the core of what the appellate panel will deliberate on before it decides to lift or sustain its stay on U.S. District Judge Jia Cobb’s Sept. 6 ruling in favor of the platform. Judge Cobbs found that the defendant, CFTC, exceeded its statutory authority as a Wall Street regulator when it issued a September 2023 order stopping Kalshi from going online with its market because it is a “prohibited gambling activity.”
The appellate panel will essentially be engaged in a technical legal debate over the definition of “gaming” and “gambling,” and how they would apply, in this case, to any potential regulation.
Arguments on the Definition of Gaming and Gambling
In its Sept. 13 filing calling for the stay to be lifted, Kalshi rejected CFTC’s definition that trading on election prediction markets is “gaming.”
The CFTC said in its Sept. 14 filing that because “Kalshi’s contracts involve staking something of value on the outcome of elections, they fall within the ordinary definition of ‘gaming.’”
Implications of the Ruling
Regardless of how the panel rules, some believe that the situation has already progressed too far to be reversed. There are plenty of opportunities to place election wagers on offshore websites or other platforms that cannot legally accept wagers from within the United States.
The nuance, according to Carl Allen, author of The Polls Weren’t Wrong, is that Kalshi’s platform would be the first federally regulated U.S.-based predictive elections market open to all individuals without spending limits.
Views on the Matter
Prediction market trader and Kalshi community manager Jonathan Zubkoff said the CFTC’s claim that elections markets are betting websites is mistaken. He believes that unlike sports betting, in elections markets, “there actually is a hedge” that gives people an opportunity to put money where “their bias is.”
Coalition For Political Forecasting Executive Director Pratik Chougule said another difference between sports betting and other types of gambling and predictive elections markets is that “unlike many other forms of speculation, the wagering here has a real public interest benefit. These markets inform in a way that is very beneficial.”
Bottom Line
The outcome of this case could have far-reaching implications for the future of election prediction markets and how they are regulated. It raises important questions about the line between gambling and financial trading, and how best to protect the integrity of elections while allowing for innovative forms of political engagement. What are your thoughts on this issue? Share this article with your friends and let's get the conversation started. You can also sign up for the Daily Briefing, which is every day at 6pm.
