On Thursday (19 September), representatives from the US Commodity Futures Trading Commission (CFTC), Kalshi and a three-judge panel in a federal appeals court debated everything from the definition of gaming to the purpose of elections in a hearing regarding the fate of Kalshi’s election-focused futures contracts.
In the nearly three-hour hearing, the CFTC and Kalshi laid out their oral arguments. Judges grilled both sides in an attempt to better understand the nature of the contracts and whether the CFTC erred in disallowing them last year.
Ultimately, the appeals court did not rule or lay out a timeline moving forward. But judges indicated they’d like to take their time to review the case. Essentially any review would likely tie the matter up past the 5 November election that the contracts are contingent on.
The federal commodities regulator aims to prevent Kalshi from offering the futures contracts tied to congressional elections. It cites state laws outlawing election betting and alleges that election integrity would be adversely affected. Kalshi, a New York-based derivatives exchange, argues that the contracts are legal and could positively impact some of the problems currently surrounding elections. The contracts were listed with limits of $100m (£76.2m/ €90.2m).
On 12 September Judge Jia Cobb from the US District Court for the District of Columbia ruled in Kalshi’s favour. Cobb said the CFTC “exceeded its statutory authority” in halting the futures. The exchange then offered its contracts for approximately eight hours before trading was halted again in response to a stay from the US Court of Appeals for the District of Columbia Circuit.
Kalshi said on Thursday that it took in about $50,000 worth of contracts in that span. It is unclear how those contracts will be adjudicated. The company claims in the suit that it has invested several million in developing the offerings and would suffer irreparable harm if it were unable to list.
Dispute cuts to the heart of gaming, investing and elections
The hearing centred mainly around definitions and concepts, often devolving into philosophical debate as to what constitutes gambling versus economic investment. Both sides’ arguments over the definition of “gaming” was especially animated.
Rob Schwartz, general counsel for the CFTC, called the district court’s ruling “seriously flawed”. He explained that the commission has the ability to disallow contracts involving gaming. Over the course of discussion, he mentioned several times that gaming involves wagering on “a contest of others”. This would include sporting events, awards shows or, in this case, elections.
Other examples of legal commodities contracts, like those tied to materials or crops, do not involve such contests.
Conversely, Kalshi attorney Yaakov Roth contended that the “contest of others” clause does not appear in any common definition of gaming. Rather, he argued that gaming must centre around a game. This includes casino games, sporting events, etc, but not elections.
“If you look at a dictionary, and we surveyed a lot of dictionaries, it’s playing games or playing games for stakes,” Roth told the judges. “The common denominator is a game. If you don’t have a game, you definitely don’t have gaming.”
The issue of “hedging economic risk”
Another significant dispute in the case has to do with the idea of staking money on election outcomes.
Schwartz and the CFTC argue that the ability for unknown users to place $100m bets on elections makes them “uniquely susceptible” to manipulation. Of the numerous sports betting integrity scandals to break in the last year, none involved bets approaching that size. And sports contests do not have the same influence as congressional elections. “It’s just gambling,” he said. “That’s what they’re for.”
Schwartz confirmed that the high monetary value of the contracts is of chief concern to regulators. He also referenced former president Donald Trump, who, along with many of his supporters, has disputed the integrity of the 2020 presidential election. If that already persists, Schwartz said, how could high-stakes wagering make things better? He was adamant that the commission “refuses to become the election cop”.
But Kalshi and Roth laid out an interesting response, framing elections as an economic factor. If a business or individual senses they would lose money based on who is elected, they could use Kalshi’s contracts as a way of “hedging economic or political risk”.
Roth said that in three years of dealing with the commission, the contract limit was never mentioned. He also cited letters of support from real businesses that have expressed interest in purchasing contracts to hedge risk.
Kalshi: Elections would benefit from allowing contracts
Over the course of questioning, Roth went on to argue that Kalshi’s contracts would actually help address some of the current election-related issues. Much like how bookmakers say that wagering makes games more interesting, the exchange argues that the contracts would drive more civic engagement.
“The ability to participate commercially has the effect of increasing civic participation because people now have more of a stake in the election,” Roth said.
He then made another sports betting analogy by saying that derivative markets would create accurate reporting. In a world of misinformation, concrete futures markets would become “a powerful tool to expose truth”, Roth said.
To these points, judges seemed unmoved. The chief concern they had was that open wagering would bring in everyone, including bad actors and speculators. At this point, the exchange does not have enough know-your-customer (KYC) protocols in place to ensure manipulation would not happen, it argued.
Existence of black market mentioned by both sides
As is typically the case with any gambling-related discussion, the existence of the black market was used by both sides. When asked about non-licensed election futures platforms, Schwartz contended that none have limits even close to Kalshi’s. But he conceded that their existence has not appeared to have resulted in election manipulation thus far.
Judges mentioned the platform PredictIt, which is currently operating under an injunction. That site has limits of $850 and can’t advertise, Schwartz argued. Polymarket was another gray-area site mentioned, but that platform is not allowed in the US.
Legal operators FanDuel and DraftKings were mentioned by name. Judges asked whether such companies offer these markets, but Schwartz explained they are not available in the US. On 15 July, FanDuel and BetMGM announced they were suspending US election bets in Canada after the failed assassination attempt on the former president, Trump.
And earlier this year, the UK political scene was rocked by a wide-ranging betting scandal. Several officials were discovered to have placed bets on the date that former prime minister Rishi Sunak called for the snap election. It is believed that those officials had insider information – the date was 4 July, but the bets were placed well in advance of the public announcement.
Kalshi leveraged discussion about unlicensed platforms to say that its regulated platform is safer. Roth posited that “a billion dollars” worth of election betting is already taking place on Polymarket. If the money is out there, they argue, it might as well go through a legal marketplace to ensure compliance.
