Kalshi Justifies Commodity Futures Commission Lawsuit Over Election Marketplace Decision

Article ByDavid Weir

November 7, 2023

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Posted in: Federal Gambling News, US Gambling News, US Sports Betting News

KalshiEX LLC, an online predictions marketplace, has taken legal action against the U.S. Commodity Futures Trading Commission (CFTC) after September’s decision rejected its proposal to offer a political marketplace.

The commission equated the proposal to political betting and gambling, and decreed it outside the public interest. Political betting is not currently legal at U.S. online sportsbooks or casinos.

Kalshi is appealing to the U.S District Court for the District of Columbia against the decision. The lawsuit alleges that the CFTC has overreached its regulatory mandate with the ruling.

“It is clear the CFTC has no power to prohibit political event contracts. We believe these markets are necessary and they are most certainly lawful,” said Kalshi in a post on its website.

“Elections are not a game; they have real economic consequences, and you deserve the right to trade on the outcomes,” the company stated.

Hedging Bets and Research

The CFTC’s order is an “unlawful agency power grab,” according to the lawsuit, and breaks the commission’s statutory mandate.

Kalshi argued that the serious implication of putting cash down on election results, and the potential for it as a research tool on public opinion, should leave it out of the betting classification.

It asserts that the rejection of its event contracts was based on arbitrary and capricious reasoning, thus violating the Administrative Procedure Act (APA). The company insists that it is legally entitled to list the Congressional Control Contracts on its regulated exchange.

Kalshi’s complaint further argues that event contracts are essential for companies to hedge and manage risks associated with political outcomes. The firm points out that it has previously offered markets approved by the CFTC, which were based on government outcomes, such as the confirmation of presidential nominees or the likelihood of a government shutdown.

The Debate Over Definitions

At the heart of the lawsuit is a debate over the definition of gambling. Kalshi challenges the CFTC’s broad interpretation, stating that “gaming” should not encompass betting on elections, which it says are foundational exercises of democratic governance.

It argues these “bets” can have significant political and economic consequences. Therefore, the lawsuit says, these practical applications of their event contracts qualify as not merely gambling, but economic tools.

Kalshi added that the similar markets the CFTC has previously approved demonstrates its commitment to providing tools for risk management, rather than facilitating gambling.

“Access to tools for actively managing election risks is exclusively reserved for institutions and the wealthy, leaving the average American behind. Our contracts will level the playing field for all,” said Kalshi CEO and cofounder Tarek Mansour.

The CFTC now has 60 days to respond to the claim filed on November 1st. Kalshi’s move to sue the CFTC reflects a broader discussion on the nature of election betting and its place within the regulatory framework of financial markets. The outcome of this case could set a precedent for how such event contracts are treated by regulatory bodies in the future.

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Political Betting Options

U.S. residents wishing to bet on politics can currently use specific prediction market PredictIt, which uses results for academic research, and therefore gained an exemption from the CTFC. Many offshore sportsbooks also offer political betting and have done for years.

Interestingly the CTFC actually tried to rescind PredictIt’s exemption, which it granted in 2014. But earlier this year, the Fifth Circuit Court of Appeals sided against them and with PredictIt.

On the other side, earlier this year, a group of U.S. senators put together an open letter opposing the idea.

They say that political market wagering could expand billionaires’ influence on politics through extraordinary bets that shift the market, or lead to political insiders using nonpublic information for profit.