A New York company has filed a federal lawsuit against the U.S. Commodity Futures Trading Commission, arguing the investment regulator acted in a manner that was “arbitrary, capricious, and otherwise contrary to law” when it denied the online exchange operator’s request to offer futures markets tied to the outcomes of elections.
In June, Kalshi submitted its proposal to list “congressional control contracts” on its exchange, with contracts for which party would control the U.S. House of Representatives and which would control the U.S. Senate. After the commission received nearly 1,400 comments, it ruled in September that such markets would equate to betting on political elections, which it said violated laws in several states. As a result, they would be against the public’s interest.
That led to the company filing its lawsuit Wednesday in the U.S. District Court for the District of Columbia that seeks to have the CFTC’s order vacated, arguing against the commission’s gambling rationale.
“Buying one of these contracts is nothing like betting on a game of chance or even the Super Bowl,” Jones Day attorney Jacob Roth wrote in the 27-page filing for Kalshi. “Elections are not a game; they have real economic consequences. Nor did Congress implicitly empower 50 state legislatures to ban event contracts through the backdoor; just the opposite, Congress gave the CFTC exclusive jurisdiction and preempted contrary state law.”
Kalshi also argues that the commission did not have the power to conduct a public interest assessment, which it said could apply to many other markets that government regulators have approved.
Exchanges Provide Hedging Opportunity
In exchanges, traders can buy and sell contracts on a position for a price ranging between a penny and 99 cents. When the market is settled, those who have contracts on the successful outcome receive $1 for each contract. All other contracts in the market receive nothing.
While Kalshi argues that political futures trading is not tantamount to gambling, the case and Kalshi’s attempts to offer such markets have attracted interest from those who want to see it offered through U.S. sportsbooks. In America, no state allows political betting, but it is a popular among bettors in the United Kingdom. In Canada, Ontario allows operators to accept wagers too. Some have argued legal betting on presidential elections could lead to handles rivaling the Super Bowl.
There is an online political futures exchange available in the U.S. market. PredictIt offers a myriad of markets on American political events, including elections. The CFTC sought to rescind its “no-action letter,” which allowed the exchange to operate with certain restrictions. PredictIt sued, and a federal appeals court ruled in its favor. That allows it to continue offering markets, including ones on the 2024 presidential election. The next election cycle in New York could help steer the ongoing push toward making online New York casino apps legal.
Kalshi touts its futures market as a way for people to hedge against certain events. For example, its climate category includes hurricane or natural disaster chances for numerous U.S. cities, including New York. The exchange says residents in those cities can buy contracts for those events happening and use them as an insurance policy to cover any losses they might incur should a hurricane, tornado, earthquake or other catastrophic event take place.
“Think of a consulting firm with deep ties to one party,” the complaint states. “Congressional control by the other party would directly harm its business. The Congressional Control Contracts would allow it to hedge against that risk, and it would allow others to more accurately determine the economic value of that firm.”
Fears Raised By Politicians
Politicians are among the critics of political futures trading. In August, during the public comment period, six Democratic U.S. senators wrote to the CFTC about their concerns. U.S. Sens. Jeff Merkley (D-OR), Sheldon Whitehouse (D-RI), Edward Markey (D-MA), Elizabeth Warren (D-MA) and Chris Val Hollen (D-MD) – along with Dianne Feinstein (D-CA) before she died – urged the commission to reject the request. They said such an exchange threatened to erode public confidence and the democratic process by putting financial incentives behind a vote.
“For example, billionaires could expand their already outsized influence on politics by wagering extraordinary bets while simultaneously contributing to a specific candidate or party,” they wrote. “There are strong ethics concerns as political insiders privy to non-public information could wield their inside information to profit at voters’ expense.”
However, proponents of political exchanges say they also serve as a better indicator than polling of who will win an election. Kalshi CEO Tarek Mansour explained why Wednesday in a series of tweets announcing the lawsuit on the social media platform X (formerly known as Twitter).
“The country is drowning in noise,” he posted. “We live in a puddle of polarized news, self-interested punditry, increasingly biased polls, and outright fake news. We need more signal. We need more truth.
“And election markets are our best shot at it. Letting people trade on their beliefs will yield more credible and transparent election forecasts. Will it be perfect? Like anything, no. Will it be better than what we currently have? It’s not hard to beat what we currently have.”
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