Attorneys with the Commodity Futures Trading Commission (CFTC), a federal independent agency that regulates derivatives markets, including event contracts like those offered on Kalshi, argue that election betting on such platforms has forced the organization to act as a gambling regulator.
In September, a federal judge in D.C.’s District Court sided with Kalshi in its lawsuit against the CFTC.
Kalshi, an online peer-to-peer betting exchange, allows users to buy and sell shares of outcomes on various topics, from culture and climate to economics and politics. The CFTC has taken issue with the latter, claiming Kalshi is essentially running gambling odds on elections and political events.
“The reason we’re here today is because a federally regulated exchange has turned itself into an online casino for betting on elections. The question for the court, though, is not whether that’s right or wrong, but whether the CFTC can even evaluate that activity,” said Rob Schwartz, the CFTC’s general counsel, during oral arguments on Friday.
The CFTC has appealed the September ruling to the U.S. Court of Appeals for the District of Columbia, and the case is ongoing.
Political Prohibition
The CFTC has long regulated various financial instruments, including futures, swaps, and options. Kalshi’s attorneys argue that political event contracts “serve the interests of the public by harnessing the unparalleled power of free markets to produce high-quality, dynamic, predictive data.”
Kalshi’s legal brief claims that Congress has deemed derivatives involving politics permissible for exchanges registered and regulated by the CFTC. When the CFTC ordered Kalshi to remove its election odds in June 2023, the agency said the contracts amounted to “gaming,” one of the CFTC’s prohibited unlawful offerings, along with questions about terrorism, assassination, and war.
Judge Jia Cobb refuted the CFTC’s claims that Kalshi’s political contracts violated federal regulations.
“The CFTC’s order exceeded its statutory authority,” Cobb wrote in September. “Kalshi’s contracts do not involve unlawful activity or gaming. They involve elections, which are neither.”
Cobb emphasized that the case “is not about whether the Court likes Kalshi’s product or thinks trading it is a good idea. It’s about what Congress did, not what it could do or should do. Congress did not authorize the CFTC to conduct the public interest review it conducted here.”
Decision Forthcoming
The federal appeals court in the nation’s capital will review the evidence and oral arguments and is expected to render its decision on whether Cobb erred in her ruling in the coming weeks.
Cobb was appointed to the appellate bench in 2021 by President Joe Biden and was confirmed largely along party lines, with 49 Democratic senators and three Republicans supporting her confirmation.
It’s anticipated that the CFTC under the incoming President Donald Trump administration will take less issue with Kalshi and other exchange platforms it regulates that operate political derivatives. CFTC Chair Rostin Behnam, a strong opponent of allowing political wagering, is departing the office effective Feb. 7.
Trump is likely to appoint a conservative to the chair. Front-runners include CFTC Commissioners Summer Mersinger and Carolina Pham—both Republicans.
CFTC rules mandate that no more than three of the five commissioners be from the same political party.
