Eight Democratic lawmakers are urging the Commodity Futures Trading Commission (CFTC) to enforce a May proposal to prohibit US election predictions on platforms like PredictIt and Kalshi.
The lawmakers include five US Senators and three House Representatives:
- Jeffrey A. Merkley, Senator from Oregon
- Sheldon Whitehouse, Senator from Rhode Island
- Elizabeth Warren, Senator from Massachusetts
- Chris Van Hollen, Senator from Maryland
- Richard Blumenthal, Senator from Connecticut
- Jamie Raskin, Representative from Maryland
- John P. Sarbanes, Representative from Maryland
- Eleanor Holmes Norton, Representative from Washington DC.
The legislators say that speculating on elections is a form of gambling and that enforcing the prohibition is necessary to prevent Wall Street from creating large-scale political betting markets. They claim that would further disrupt and lower the public’s confidence in elections and US democracy.
Prediction markets allow users to trade shares whose ultimate value depends on the outcome of real-world events. In the case of political markets like PredictIt and Kalshi, the available propositions include policy decisions and other political outcomes. Only PredictIt currently offers contracts on elections, but Kalshi has been fighting for permission to do so.
These markets function similarly to a stock exchange, where users can buy and sell shares. Like a stock market, the shares’ prices fluctuate based on real-world events and traders’ beliefs about the future. They differ from other securities in that there are always exactly as many Yes shares in circulation as No shares for the same proposition. Once the outcome of the proposition is final, those holding the correct prediction receive $1 per share, while the shares for the incorrect prediction become worthless.
The CFTC oversees securities and derivatives in the US. It regulates certain types of these futures contracts because they allow businesses to hedge against events—including some political events—that could affect their operations. PredictIt and Kalshi fall under CFTC regulations, but the Commission is considering an end to contracts based on elections.
Lawmakers Say Ban Will Help Restore Election Trust
In their August 5 letter, the lawmakers say that violence and extremism threaten US elections and that the country is targeted by outside individuals and entities that want to meddle in elections. They argue that large wagers on election outcomes would compound the issue and that by enforcing its May proposal and prohibiting election predictions, the CFTC can help restore Americans’ trust in the election process.
The CFTC’s existing rules prohibit contracts on “gaming.” Its proposed rules expand and clarify that definition to include election outcomes. The letter’s signatories agree with that assessment and point out that some states have banned election betting. They state that allowing it at the federal level interferes with states’ responsibility surrounding elections:
Placing a bet or wager on the outcome of an election is already prohibited by well over a dozen states nationwide – to offer these bets at the federal level potentially represents an unlawful pre-emption of State responsibilities in regulating and administering federal elections.
Furthermore, the lawmakers say election betting allows “billionaires to wager extraordinary bets while simultaneously contributing to a specific candidate, and political insiders to bet on elections using non-public information.” They say this will further degrade public trust in elections.
For now, such scenarios are only hypotheticals. PredictIt limits users to a maximum $850 investment on any event. Also, CFTC regulations require PredictIt to cap the number of traders at an event at 5,000. Kalshi’s limits are higher on both fronts, but it can’t offer election contracts.
CFTC Has a Rocky Relationship With PredictIt, Kalshi
PredictIt has been operating in the US since 2014 under the grace of a no-action letter from the CFTC. However, In August 2022, the Commission withdrew the letter and issued a notice to PredictIt to cease operations. A month later, PredictIt responded with a lawsuit challenging the shutdown, which is still ongoing.
Meanwhile, In October 2022, Kalshi sought CTFC’s authorization to offer political contracts under a different model, but the regulator denied it. In November 2023, Kalshi filed a federal lawsuit against the CFTC, arguing that the Commission does not have the power to prevent it from offering political contracts.
The Commission’s proposal to update its rules comes in the context of those ongoing battles. PredictIt, in particular, has accused the CFTC of wielding its powers in an “arbitrary and capricious” manner by granting permission to operate the market and then withdrawing it. Clarifying the rule underlying its decision could make the agency’s position easier to justify.
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