The Commodity Futures Trading Commission (CFTC) has not yet officially ruled on whether it will allow Kalshi to offer political contracts. However, there are multiple reports circulating that the agency’s staff has recommended against it.
Kalshi is what’s known colloquially as a predictions market, meaning users trade shares whose value is tied to real-world events. Staffers have completed their review of Kalshi’s application and public comments on the relevant issues. If reports are to be believed, they will advise the CFTC’s five commissioners to vote against approving Kalshi’s request to allow trading on political outcomes, like the results of elections.
The move is certain to come as a disappointment to many who see the value of prediction markets. It comes on the heels of the CFTC’s decision to withdraw the No-Action letter allowing a PredictIt to offer similar contacts. After PredictIt’s February 2023 shutdown date, there will be only one place for Americans to legally wager on election outcomes. That is the Iowa Electronic Markets, which are very small scale.
What We Know
The deadline for CFTC to make a decision on Kalshi’s political event markets was Oct 28. In the morning, things seemed optimistic over at Kalshi’s webpage as they maintained a countdown clock, indicating the company’s belief that regulatory approval would be forthcoming.
However, almost a week later, the CFTC remains silent. Kalshi has as well, save for retweeting messages of support.
No news does not seem to be a sign of good news. At 5:00 PM on the 28th, Bloomberg first reported that it had information that staff had recommended denying the request. That claim has now been widely circulated, though we must stress again that it is not an official announcement.
Is it Game Over for Kalshi?
The recommendations of the CFTC staff are not binding on the five commissioners. However, their advice is highly influential, and the commissioners genuinely follow it.
Indeed, it would be a fairly extraordinary event for a majority of CFTC commissioners to disregard staff recommendations.
The proximity of the elections, combined with the delayed announcement, is another factor seemingly making approval unlikely. The US midterm elections Kalshi sought to begin offering wagering on are now just days away.
According to a news report from Yahoo, Kalshi is prepared to litigate if the CFTC denies its request.
It is, however, premature to speculate about such a suit until the CFTC makes its official decision. While litigation could theoretically change the outcome, it would be difficult for Kalshi to obtain an injunction in time for the 2022 midterm elections.
What is Kalshi?
Kalshi is an event futures trading site. It offers numerous contracts which users can buy and sell, and which pay out to those holding the winning predictions.
The financial justification for such products is that they provide hedging opportunities for those looking to offset risk from other markets.
For example, Kalshi currently offers markets on upcoming inflation numbers and the price of oil. Anyone worried about the effects of inflation on their other holdings could hedge by buying shares predicting a high rate of inflation.
The current controversy emerged when the site petitioned the CFTC to allow it to offer contracts on the results of the upcoming election. The controversy surrounding election betting is something that has consumed CFTC decision-making around prediction markets. At the same time, it has attracted the attention of lawmakers and bettors alike.
Arguments for and Against Political Predictions Markets
Some feel there is little fundamental difference between being able to bet on an NFL game versus an election result. Others feel that wagering on elections could end up changing how people vote and therefore compromise the integrity of the election.
Political betting is popular in other jurisdictions. Some foreign sportsbooks even allow betting on US elections. However, doing so has never been legal in the regulated US market. Many states even have explicit prohibitions against it.
The CFTC has cited such laws in the past to justify its rejection of other similar applications. It has also pointed to a section of the Dodd-Frank Act, which prohibits the authorization of “gaming” contracts by the CFTC.
Political betting has long been seen as taboo by regulators. However, proponents say that the insights gained from prediction markets are incredibly useful. They provide valuable insight into the functioning of markets, and of democracy.
It is also fairly easy to argue that most event markets offer a meaningful opportunity to hedge risk. After all, most world events are interlinked, whether directly or indirectly.
Why People Are so Worked Up About This
If the commissioners decide to adopt the purported recommendation, it will be a second blow to those interested in regulated political event markets. As it stands, many were upset by the decision to shut down PredictIt.
The news regarding Kalshi further limits places for people with an interest in betting on politics to go. The PredictIt decision, in retrospect, was not a good omen for Kalshi. There were accusations at the time that the CFTC had shut PredictIt down as a favor to Kalshi. However, if the CFTC does deny Kalshi’s request, that would seem to discredit that notion.
There is an undeniable scientific value in prediction markets. They have shown themselves to be highly reliable predictors of outcomes in the right circumstances, perhaps better than polls. Even so, despite the support of many in the academic and scientific communities, betting on elections still seems to fail the sniff test for many regulators and politicians.