Predictions market provider Kalshi filed a federal lawsuit in DC District Court against the Commodity Futures Trading Commission (CFTC), arguing that the Commission lacks the power to prevent it from offering congressional control contracts for trade.
The filing comes six weeks after a CFTC ruling barred Kalshi from offering event contracts for the 2024 election. With that ruling, the Commission deemed the trading of election-focused event markets amounts to gambling and is contrary to the public interest.
However, Kalshi counters that the order exceeds the CFTC’s authority.
Trustworthy election forecasts, rooted in enabling people to put their money where their mouth is, are not just valuable; they are essential. And they are most certainly lawful. Kalshi has built the protective rails to comply with U.S. law. It expects the Commission to comply, too.
Instead, the order is an unlawful agency power grab that corrupts and dramatically expands the Commission’s statutory mandate. In rejecting Kalshi’s event contracts, the CFTC exceeded its lawful authority and engaged in arbitrary and capricious reasoning. This Court should therefore set aside the Order under the Administrative Procedure Act (APA), and declare that Kalshi is entitled by law to list the Congressional Control Contracts on its regulated exchange.
Kalshi: Political Event Contracts Hedge Against Risk
Within the 27-page complaint, Kalshi elaborates, arguing event contracts allow individuals and companies to hedge against potential risk.
Political risk is no different, the lawsuit suggests.
Politics—no less than agriculture, weather, or inflation—is beset with uncertainty. And given the many ways in which governments influence the economy, political events can have just as profound an effect on a firm’s bottom-line as spikes in energy prices or interest rates. Businesses and individuals thus have good reason to use derivatives to hedge political risks, just as they hedge other risks. And no financial instrument is better suited to hedge risks associated with political events than contracts that reference the events themselves.
Large financial institutions, the suit asserts, already design “bespoke derivatives” for their enterprise clients.
Specifically, the brief notes the “complex” products structured to offset risks associated with Brexit, the 2016 US election, and other “world-changing” political events.
The document contends that event contracts on exchanges like Kalshi’s provide the same opportunity to insure against risk to smaller businesses and everyday people.
Kalshi also argues it has previously offered CFTC-approved markets based on government outcomes, including the confirmation of presidential nominees and the likelihood of a shutdown. The suit also notes the existence of PredictIt and Iowa Electronic Markets (IEM), CFTC-approved political prediction markets that operate under stringent rules.
Further, Kalshi says that political event contracts have additional social benefits.
Researchers, public organizations, businesses, and governments continuously seek information about the likelihood of future political events. Among other things, that information helps to determine prices for assets that are exposed to political risk. But, traditional opinion polls and other methods of measuring public attitudes often cannot replicate the robustness, flexibility, or neutrality of market-based indicia. That is why media outlets routinely rely on political event marketplaces when reporting on political developments.
CFTC Order ‘Contorts and Misapplies’ CEA Intent
Kalshi’s argument contends the analysis behind the Commission’s final order prohibiting Kalshi from offering political event contracts “fails at every step.”
The order, Kalshi asserts, “contorts and misapplies” the intent of the Commodity Exchange Act (CEA), permitting a “narrow exception to swallow the rule” based on “faulty and unsupported” reasoning.
The CEA does not authorize special scrutiny of political event contracts or those relating to elections. Congress could have added “elections” or “politics” to its list of enumerated activities, but did not—despite the long history of political event markets both in the United States and around the world.
Further, Kalshi maintains the CFTC’s accusation that it is undermining American democracy is unfounded. The brief then pushes back against the idea the contracts “profoundly undermine the sanctity and democratic value of elections.”
Returning to the brief:
Why? Because someone might vote for a candidate he despises in a Quixotic bid to swing settlement of a contract on control of Congress. That is unsubstantiated: The CFTC can point to no example of such behavior despite the prevalence of prediction markets both in the United States and abroad. It is also implausible: Why would anyone buy a contract favoring a party they oppose and then bootstrap that purchase to change their voting intentions?
Instead, Kalshi holds that election markets offer “transparency, clarity, and truth.”
That, the exchange maintains, equips Americans to filter out the noise and nonsense and empowers informed decisions when navigating uncertainties.
Some Fear Lawsuit Gamble Could Backfire
It’s still too early to tell whether Kalshi’s political gamble will pay off, but some insiders are ringing alarm bells.
In a piece by PlayUSA’s Steve Friess, those who support trading political event contracts worry Kaslshi’s lawsuit could backfire.
If that happens, it will kill any possibility of trading legal, political event contracts in the US for a long time.
Pratik Chougule, founder of the Coalition for Political Forecasting, told Friess last week the case gives him the jitters.
Every single intervention Kalshi has made, without exception, has moved the ball backwards, not forward. They’ve offered a handful of political markets on their site, very, very few, none of which have meaningful liquidity, none of which are unique or cannot be offered. But with that exception, the only thing that their intervention has done is provoke antibodies in the space, draw a whole bunch of people into engaging on this issue who had never even thought twice about this issue, provoked the CFTC to take intervention where they were perfectly content to leave it alone in kind of a stalemate.
The CFTC has 60 days from Nov. 1 to respond to the claim before the case moves forward.
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