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As the Commodity Futures Trading Commission (CFTC) appeals a federal court’s latest decision rejecting its attempt to prohibit online platforms from offering event contracts involving elections, the agency’s chairman insists officials will not shirk their regulatory responsibilities.
“We’ll pursue any action as we do in any part of our market,” said CFTC chairman Rostin Behnam.
Federal Judge Jia Cobb, with the U.S. District Court for the District of Columbia, initially ruled in September in favor of Kalshi offering markets to allow Americans to use derivatives for event betting, including on the U.S. elections.
The ruling was a setback for the CFTC, which had sought to block event contracts based on political events.
A federal appeals court in Washington, D.C. upheld the order on October 2.
Kalshi, a financial exchange and prediction market, relaunched its contracts a few hours after the ruling and has reportedly already seen close to $200m in trades related to the outcome of the U.S. presidential election that will be held on November 5.
A panel of three federal judges unanimously ruled that the CFTC, which argued the wagers were illegal and could harm the integrity of elections, “erred in categorizing the Congressional Control Contracts as involving either gaming or gambling”.
“Because the commission has failed at this time to demonstrate that it or the public will be irreparably injured absent a stay, we deny its motion without prejudice to renewal should more concrete evidence of irreparable harm develop during the pendency of this appeal,” Judge Patricia Millett wrote for the D.C. Circuit Court of Appeals.
Behnam did not get into specifics during an interview with Bloomberg regarding how the CFTC will enforce its oversight of the election derivative markets.
“The contracts will continue to grow, and we will have to monitor them closely,” said Behnam, who participated in Bloomberg’s Global Regulatory Forum on October 23. Behnam added that he sees the CFTC as an “elections cop”.
Event derivatives trading involves buying and selling contracts that allow traders to speculate on the outcome of specific events, including elections.
They are a different proposition to wagering on the outcome of sporting events, which is regulated by state and tribal governments across the United States as a form of gaming.
“I think the legal battle is far from over, and we are even further from states deciding to legalize and regulate election betting,” said Behnam Dayanim, a partner with law firm Orrick based in Washington, D.C.
The CFTC has already appealed the October 2 decision, and a federal appeals court fast-tracked the agency’s case challenging the right of Kalshi to offer U.S. political election contracts.
But the fast-tracked appeal required the CFTC to file its legal brief on October 16 and for Kalshi to respond with its brief by November 15, or ten days after Election Day. The CFTC would then have until December 6 to file a reply to Kalshi’s brief.
The U.S. Court of Appeals for the District of Columbia Circuit directed the court’s clerk “to calendar this case for oral argument on the first appropriate date following the completion of briefing”.
Dayanim said he believes the “appellate argument will be hard-fought, and the outcome not obvious”.
“Even a win for Kalshi may leave room for the CFTC to adopt a prohibition through a rule-making,” Dayanim told Vixio GamblingCompliance.
“I also expect Congress to take a very close look at this issue. It potentially could step in next year to prohibit election-based contracts explicitly.”
And the issue of election betting is so fraught, Dayamin told Vixio, he believes “most states will be exceedingly reluctant to permit it, especially while the federal uncertainty remains — in other words, no time soon”.
The expedited federal appeal comes as Kalshi, PredictIt and another platform, Interactive Brokers, are already offering political contracts, including wagers on the outcome of next week’s presidential election between Republican nominee Donald Trump and Vice President Kamala Harris.
On Monday (October 28), digital trading platform Robinhood confirmed it would become the latest company to begin offering event specific trading contracts, or wagers, on the U.S. presidential election. The presidential election event contracts are offered by Robinhood Derivatives and accounts are restricted to U.S. citizens.
Robinhood Derivatives, a futures commission merchant, is registered with the CFTC.
“We believe event contracts give people a tool to engage in real-time decision making, unlocking a new asset class that democratizes access to events as the unfold,” Robinhood said in a statement.
For now, only presidential election contracts are available to trade on the broker’s website.
Kalshi and Interactive Brokers are also offering political contracts on U.S. Senate races, as well as on which political party will control each chamber of Congress as a result of the elections.
Currently, 63 percent of the event contracts traded on Kalshi believe Trump will win the race for the White House, while 37 percent favor Harris.
Tarek Mansour, CEO of Kalshi, told CNBC on Tuesday that “people are confusing the odds these markets are giving us with polling”.
According to a new poll by Reuters/Ipsos released on Tuesday, Harris leads Trump 44 percent to 43 percent in polling for the popular vote. Due to the Electoral College system, it is very possible that a candidate may garner the most votes nationally but still lose the election.
Among respondents who appeared the likeliest to vote, Harris led Trump 47 percent to 46 percent. Harris’ one-point lead falls within the Reuters/Ipsos poll’s margin of error of approximately three percentage points.
