Last week, two federal court rulings allowed then subsequently disallowed Kalshi from offering futures contracts on the outcome of congressional elections. Over the weekend, federal regulators said it should have never been allowed in the first place.
On 12 September, Judge Jia Cobb from the US District Court for the District of Columbia Circuit ruled that the Commodity Futures Trading Commission (CFTC) “exceeded its statutory authority” when it halted the contracts last year. But hours later, the CFTC appealed to the US Court of Appeals for the District of Columbia Circuit. That court granted a stay, meaning Kalshi cannot offer futures until the appeals court rules. Kalshi and the CFTC are scheduled to give oral arguments for the case on Thursday (19 September).
Kalshi, a New York-based derivatives exchange, offers “predictive contracts” tied to a number of current events, including politics. Derivatives exchanges are sometimes referred to as DCMs, for derivative contract markets. The contracts at issue in the lawsuit had to do with which party would control either the house or senate after the 5 November election. They were offered with limits of $100m (£76.2m/ €90.2m). It is unclear how much money Kalshi accepted before halting trading.
The CFTC is authorised to disallow any commodities involving gaming or unlawful activity. It also argues that in this case, the contracts are a national security threat. But Cobb wrote that “congress did not authorise the CFTC to conduct the public interest review it conducted here”.
In its latest submission, on Saturday (14 September), the CFTC argued that the district court made a number of errors in reaching that conclusion.
Timing is of the essence
Perhaps the most pressing aspect of the proceedings is the timing. Given that the contracts are tied to November’s elections, Kalshi hopes for the stay to be lifted now. Conversely, the CFTC wants a thorough review from the appeals court. That outcome would tie up the matter in court past the elections and the contracts would be void.
“Without a stay, Kalshi will relaunch its betting markets and the CFTC will have little or no recourse to stop Kalshi, or other entrants, from offering a panoply of wagers on the outcome of US elections,” the commission argued.
Further, the commission wrote that the recent proceedings have “been construed by Kalshi and others as open season for election gambling”. It pointed to the fact that Kalshi advertised more political offerings after the ruling. It also said that another CFTC-registered platform had announced new election offerings.
“Without a stay, other DCMs will follow suit,” the commission said. “An explosion in election gambling on US futures exchanges will harm the public interest.”
CFTC: Court misconstrued three key aspects
In its argument, the CFTC alleges that the district court ruling has three main errors. These were misinterpretation of involvement, gaming and unlawful activity.
For the first example, the commission asserted it is authorised to prohibit contracts that “involve” certain subject matters. According to the CFTC site:
“CFTC Regulation 40.11 prohibits event contracts that reference terrorism, assassination, war, gaming, or an activity that is unlawful under any state or federal law, or that involves, relates to, or references an activity that is similar to any of those activities and that the CFTC determines by rule or regulation to be contrary to the public interest.”
But Cobb wrote that the term “involve” can “only be referring to the underlying commodity or subject of the transaction”. Under that premise, the event of the contracts would have to involve illegal activity to be outlawed. In other words, the object/goal of the contracts would have to be war, terrorism, or another illegal activity.
The CTFC said that the statute as written is far broader than the district court’s interpretation.
“Here, “involve” by its plain meaning can, without contradiction, embrace situations where an agreement, contract, or transaction involves an enumerated activity in differing ways, it argued.
What is “gaming”?
With regard to the definition of “gaming” the CFTC used “its ordinary, dictionary definition as synonymous with “gambling”. But the district court asserted that gaming requires a game, a vastly different interpretation. It also said that if gaming was to be construed as gambling, “all event contracts” would be considered illegal.
The commission acknowledged that “some state-law definitions of “gaming” could arguably capture all contingent events”. But it said that it “did not implicitly adopt every alternative definition in every source it cited, any more than a court adopts every alternative definition in its preferred dictionary.”
Lastly, the district court took issue with some of the commission’s cited sources for this issue. In response, the CFTC asserted that once it makes a determination, it need not consider additional sources or reasoning.
“An agency “retain[s] power to deal with… problems on a case-to-case basis,” it said. “Courts often do the same.”
CFTC say it aims to protect election integrity
For its last argument, the CFTC said that “unlawful activity” focuses on state interests, not whether the contracts would violate state law if traded on a DCM. To further its point the commission gave a rather colourful example.
“To illustrate, many state laws ban the sale of marijuana, but those laws don’t forbid trading futures contracts on its price; hence, the drug laws are not preempted,” it said.
A total of 22 state laws and 18 cases citing the illegality of election were also submitted. Because those laws focused on election integrity, the commission said “the contracts undermined those state interests in protecting elections.”
