Seemingly overnight, Americans learned they could legally bet on the U.S. election. Kalshi had defeated the CFTC’s effort to block election contracts from being offered on a regulated financial exchange.
Kalshi wasn’t the only beneficiary of its victory. After Kalshi’s stay was dissolved, Interactive Brokers announced its own election contracts on its event contracts platform, ForecastEx. Academics can study prediction markets and the conditions under which they’re right or wrong. American customers can trade on elections legally with ground rules and standards set by the CFTC instead of an unregulated platform.
The road included twists and turns, and the fight over election betting likely isn’t over. It began with Kalshi’s self-certification of its election contracts in 2023.
Self-certification and rejection
On June 12, 2023, Kalshi self-certified its congressional control markets. The 2000 Commodity Futures Modernization Act allowed exchanges to self-certify, enabling derivatives exchanges to expedite new products to market. A 2022 law expanded that ability to digital commodities. Kalshi provided the documentation to prove that its election contracts complied with the CFTC’s regulations.
On June 23, the CFTC commenced a formal review of Kalshi’s self-certification. This was the first official action in which the CFTC signaled its suspicion of election contracts. On Sept. 22, the CFTC issued a formal disapproval of Kalshi’s election contracts. The CFTC argued that Kalshi’s election markets involved gaming and unlawful activity.
Whether election markets “involved” gaming or unlawful activity would form the basis of both sides’ arguments in the D.C. District and Circuit courts.
Kalshi saw its election contracts as natural extensions of the logic that originally allowed futures contracts and, later, event contracts. Investors can use derivatives to hedge against economic risk. Since events can pose economic risks and elections can impact the economy and personal finances, Kalshi believed its election contracts were legitimate.
On Nov. 1, Kalshi put that argument to the test and sued the CFTC in the D.C. District Court.
District case
On Sept. 6, 2024, the D.C. District Court awarded Kalshi a summary judgment, ruling in favor of its election contracts without either party having to undergo a full trial. The ruling didn’t come until 10 months after Kalshi sued its regulator.
However, the CFTC successfully appealed for a stay, which prevented the judgment from going into effect. The district judge heard oral arguments for and against the stay on Sept. 12. Kalshi won the argument, the stay was dissolved, and Kalshi launched its election contracts.
As Kalshi launched its congressional control markets, the CFTC appealed for an emergency stay at the D.C. Circuit Court of Appeals. The D.C. Circuit implemented a stay which paused Kalshi’s election markets again. Kalshi paused trading in its congressional control markets that evening and prepared to confront the CFTC in the Circuit Court.
Circuit hearing
On Sept. 19, Kalshi and the CFTC presented oral arguments before the D.C. Circuit Court of Appeals. The panel of three judges questioned both lawyers for about an hour, then both sides adjourned.
During oral arguments, the CFTC and Kalshi rehashed the same arguments that the District Court adjudicated. The CFTC’s lawyer was pressed to name proven, concrete harms that would arise from allowing election contracts. Kalshi’s lawyer defended the notion that election contracts were not gambling instruments. After two-and-a-half hours, both lawyers had defended their arguments in great detail.
On Oct. 2, the D.C. Circuit released its opinion dissolving the emergency stay. At that point, Kalshi was able to launch its election contracts.
Kalshi’s congressional control markets went up that day, but Kalshi also announced new markets. The company’s presidential election market went live on Oct.4. On Oct. 7, Kalshi announced 29 new election markets on electoral college forecasts, balance of power markets, and state and governor races.
Shortly after Kalshi’s victory, Interactive Brokers announced that it would launch its own election contracts through ForecastEx. Its markets included congressional control markets and presidential election winners. Election betting had arrived in the finance industry, and finance companies embraced it.
Outlook and next steps
Even without a trial, it took almost a year for Kalshi to win its case against the CFTC. The CFTC’s attempts to delay election markets until either a legal victory or the 2024 election’s end still pushed Kalshi’s election contracts almost a month past Kalshi’s original victory in its District Court case.
Election betting appears here to stay for the 2024 election. However, the Circuit opinion listed examples of evidence the CFTC could use to obtain a successful stay in the future. The legal battle between Kalshi and its regulator was largely over whether the District Court’s judgment would be delayed pending a larger trial. There still hasn’t been a full trial at the appellate level.
This election cycle is likely an interlude in the war over election betting. The CFTC’s opposition to election contracts has been made clear. With openings to contest election contracts’ legality, the CFTC is likely preparing for a fresh attempt to shut election markets down.
