A renewed effort by retail-focused futures provider Kalshi to offer markets on congressional elections currently before the Commodity Futures Trading Commission (CFTC) has attracted the scrutiny of watchdogs and lawmakers, including Senators Elizabeth Warren, Jeff Markley, and Dianne Feinstein.
Kalshi is a regulated exchange that allows customers to trade on the outcome of events. Examples of the more than 300 available futures markets include when the writers’ strike will end, the length of the potential government shutdown, the monthly rental increase in NYC, and whether the room-temperature superconductor works.
In June, Kalshi filed a request with the CFTC to offer markets on whether Democrats or Republicans will gain control of Congress. The CFTC is the independent agency that regulates the US derivatives market, which includes futures, swaps, and particular options.
Despite the public comment period on the ask closing on July 24, lawmakers leveled their concerns on the proposal in Aug. 2 letter to CFTC chairman Rostin Behman.
Allowing trading on political outcomes would undermine the political process, the letter argued.
The CFTC has never allowed a for-profit venture to operate a political event contract, nor has the agency permitted any entity to operate a political event contract of such scale. Establishing a large-scale, for-profit political event betting market in the United States by approving Kalshi’s requested contracts, would profoundly undermine the sanctity and democratic value of elections. Introducing financial incentives into the elections process fundamentally changes the motivations behind each vote, potentially replacing political convictions with financial calculations.
Lawmakers: Political Futures Risk Election Fraud
Additionally, the lawmakers added, opening the door to political futures trading will only invite the potential for election fraud and manipulation:
Billionaires could expand their already outsized influence on politics by wagering extraordinary bets while simultaneously contributing to a specific candidate or party. There are strong ethics concerns as political insiders privy to non-public information could wield their inside information to profit at voters’ expense. Lastly, these bets could sway the outcome of our elections, undermining the voices of voters. If citizens believe that the democratic process is being influenced by those with financial stakes, it may further exacerbate the disenfranchisement and distrust of voters already facing our nation.
Notably, this is Kalshi’s second attempt to get the CFTC to approve political markets. However, the company withdrew its previous application last year just before an expected decision.
According to industry watchdog Better Markets, public statements made by CFTC commissioner Caroline Pham before Kalshi’s previous withdrawal raise ethical concerns.
The not-for-profit has since filed an ethical complaint with the CFTC over Pham’s behavior.
CFTC Commissioner Pham Subject to Ethics Complaint
In a statement shared in late June, Dennis Kelleher, Better Markets’ co-founder, president, and CEO, summarized the issue:
Apparently, in response at least in part to CFTC Commissioner Pham’s improper disclosure of internal confidential CFTC deliberations, analysis, and information, Kalshi withdrew its prior submission to prevent the CFTC from ruling against it and prohibiting this gambling. In an apparent attempted sneaky end run around the CFTC review process, Kalshi has now self-certified its own gambling event contracts, trying to prevent the CFTC and others from thoroughly addressing the very serious issues raised by its proposal.
Better Markets added that allowing political event contracts would challenge the fundamental principles and historical foundations of CFTC’s futures regulation.
These markets, they said, exist to manage the risk and prices of essential physical commodities based on supply and demand. Widespread speculative gambling contradicts these markets’ critical public purpose.
Additionally, they added, excessive speculation is prohibited by law:
These markets are not intended to function as casinos or predominantly cater to speculative activities, which is the inevitable result if not intent of Kalshi’s attempt to force fit gambling into the remit of the CFTC. Presumably that is why the CFTC was going to deny Kalshi’s prior application, as previously disclosed to the public and Kalshi by Commissioner Pham.
Senators Urge CFTC to Quash Kalshi Proposal
In their objections to Kalshi’s request, Congressional lawmakers and Better Markets point out that the CFTC prohibits event contracts that “involve, relate to, or reference” gaming or activities that are unlawful under state laws—or an activity “similar to” these activities—so long as the CFTC determines the contract to be “contrary to the public interest.”
Despite this, lawmakers said, the Kalshi plan clearly opens the door to electoral gambling on election outcomes. Should the CFTC approve this plan, they added, it would be the first time a for-profit entity could offer event contracts on political events.
There is no doubt that the mass commodification of our democratic process would raise widespread concerns about the integrity of our electoral process. Such an outcome is in clear conflict with the public interest and would undermine confidence in our political process — we urge the CFTC to deny Kalshi’s proposal.
Previous CFTC Precedents a Mixed Bag
The CFTC has historically permitted binary event contracts under more controlled conditions.
In 1993, the Commission allowed (with restrictions) the University of Iowa’s Tippe College of Business to run Iowa Electronic Markets (IEM), an academic prediction market, in conjunction with other universities.
Again in 2014, the CFTC allowed PredictIt, a market run by researchers from the Victoria University of Wellington, to operate as long it met certain conditions.
However, since then, the CFTC withdrew its no-action letter against the firm, setting off another election-betting battle. While a lower court initially sided with the CFTC’s claimed right to withdraw its permission at will, a Fifth Circuit Court of Appeals judge saw more merit to PredictIt’s objections.
The case is now headed back to District Court, with an injunction against action by the CFTC until the case concludes.
Notably, the CFTC denied a similar application to Kalshi’s made by the North American Derivatives Exchange (Nadex) in 2012. The Commission cited unpredictability and a potentially adverse effect on election integrity as reasons at the time.
In the order prohibiting the markets, CFTC found that the contracts, to be paid out based on federal election results, “involved gaming” and were contrary to the public interest.
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