Kalshi is suing the CFTC over election betting

In a rebuke to regulators’ stance that political prediction markets and democracy don’t mix well, events betting platform Kalshi has sued the Commodities Futures Trading Commission (CFTC) over the regulator’s recent rejection of its bid to let investors wager on US elections.

Kalshi called the CFTC’s order “arbitrary, capricious, and otherwise contrary to law,” asking the court to vacate it and allow its election contracts to hit the market. The CFTC told CFO Brew it couldn’t comment on the lawsuit.

What’s up, docket? Kalshi isn’t your typical financial exchange. Since last year, it’s been letting users trade on the outcomes of real-world events like a hurricane hitting Miami. In September, the CFTC, which regulates the US derivatives market, shot down Kalshi’s plan to let users place bets on a political party winning control of the US House or Senate in the 2024 election.

Kalshi’s suit came after the CFTC determined that selling congressional election events contracts would not be in the public’s best interest. In its decision, the CFTC found that Kalshi’s political bets constitute gaming that’s illegal in multiple states, and don’t offer sufficient economic value, while potentially providing an incentive for election tampering.

In a statement, Commission Chairman Rostin Behnam claimed that it’d force the CFTC to become an “election cop,” tasked with “monitoring elections, candidates, and countless participants in the political machinations that proliferate in the media and cyberspace…to prevent manipulation and false reporting.”

Not so fast. In its lawsuit, Kalshi claimed that the CFTC overstepped its authority and misapplied the law. It said the CFTC can evaluate whether a bet on an event is in the public’s interest only if the event itself is related to “crime, a terrorist attack, an assassination, an act of war, or gaming.”

As congressional elections themselves don’t fall into any of those categories, the agency had no authority to rule on whether election betting is within the public interest, according to Kalshi’s lawyers.

Aside from pushing back on the claim that state laws prevent Kalshi from running the election bets and that it’d force the CFTC to police elections, the company said allowing wagers on congressional races is useful to society.

Kalshi claims that it would enable smaller companies and investors to hedge against political risk. For instance, a sustainability startup could get a payout for election contracts in the event that Congress becomes dominated by anti-green subsidy Republicans.

It also argued that election prediction markets aid academic research, as the distribution of bets by folks willing to risk their cash often acts as a more accurate barometer of public opinion than polls.

Among the various experts that backed Kalshi’s claims is Harvard economist Jason Furman, who in a September letter to the CFTC said he used prediction markets to assess public sentiment when he chaired the Council of Economic Advisers under President Obama, as well as in economic research and teaching.

There are currently at least two small-scale nonprofit election prediction markets set up for research purposes in the US, including New Zealand-based PredictIt and one operated by the University of Iowa. PredictIt was embroiled in its own legal battle with the CFTC, before an appeals court recently ruled it can stay online for the time being.

Not everyone buys the boon narrative. Election betting “would create a huge amount of incentive for folks to do dark money smearing of candidates," Senator Jeff Merkley (D-OR) told CFO Brew. He notes that the two existing election contracts markets have a low betting limit, while Kalshi planned to let investors wager up to $100 million.

Prior to the CFTC’s ruling, he led a group of Senate colleagues in urging the agency to reject Kalshi’s plan. The agency’s decision echoed their concerns that it “would profoundly undermine the sanctity and democratic value of elections.”