On Wednesday, Oct. 2, the D.C. Circuit Court of Appeals dissolved the stay preventing Kalshi from offering its election markets. It was a legal victory that Kalshi had been fighting for since November 2023. The Circuit judges found:
“The Commission [CFTC] has failed to demonstrate that it or the public will suffer irreparable injury absent a stay pending appeal, and therefore its motion for a stay is denied without prejudice to renewal should substantiating evidence arise. The administrative stay is hereby dissolved.”
While Kalshi won an important legal victory, the full opinion left an important opening for the CFTC. The CFTC failed to show “irreparable injury” from election contracts this time. However, the Circuit opinion gave three examples of the pieces of evidence the CFTC could use to obtain a stay:
- Political campaigns encouraging followers to buy election contracts
- Foreign investors bypassing Kalshi’s restrictions
- Evidence of widespread voter confusion resulting from election contracts
These would be concrete harms that a court could use to justify implementing a stay on CFTC-regulated election markets.
Evidence of concrete harms
The specific harms that could prompt a court to issue a stay are related to market manipulation and risks detaching voters from reality.
If Donald Trump encouraged his followers to buy many event contracts on Kalshi or ForecastEx to improve his price, that would be an example of market manipulation. The resulting price change would be caused by artificial behavior rather than new information that changed traders’ minds. A product that encouraged mass fraud would give a court pause.
Mass confusion linked to election markets could lead to a new pause in election trading. If election markets detached enough voters from the reality of their candidate’s performance or the election’s outcome, a court could be persuaded to issue a new stay.
Foreign investors
The U.S. Treasury publishes reports that summarize U.S. derivatives held by foreigners. So, some CFTC-regulated securities are available overseas. Due to its current regulatory status, Kalshi is only available to U.S. customers. One of its most important quality-control measures is ensuring that its customers are based in the United States.
If Kalshi’s know-your-customer requirements regularly failed, unreported foreign money could infiltrate the market. The unaccounted money would change contract prices, and there wouldn’t be a transparent way to separate the foreign investment from the domestic traders.
That lack of transparency would raise further questions about which foreign traders were participating in the market and why. Those new traders could be ordinary citizens of other countries, but they could also be intelligence operations aimed at skewing prices to paint false pictures of a candidate’s electoral chances.
These are all before operational questions that would come from failing to enforce appropriate know-your-customer requirements.
High stakes for prediction markets
Although Kalshi won the battle over election markets in 2024, the larger war over election betting is not over. The CFTC will be monitoring trading activity and platform compliance closely. Kalshi and ForecastEx both had to delay their presidential election market launches after announcing them. Each misstep will be another event that the CFTC saves for a future attempt at a new application for a stay.
Even if 2024 ends in victory for the prediction market platforms, it’s too early to say the question is settled for the 2026 midterms or the 2028 presidential election.
