A federal regulator is warning that a possible surge in de facto wagering on the outcome of the presidential election and other political campaigns is a clear and present danger to the voting public.
The U.S. Court of Appeals for the District of Columbia Circuit ordered Monday that a half-hour of oral arguments regarding political betting will happen on Thursday, with 15 minutes reserved for prediction-market Kalshi and 15 for the Commodity Futures Trading Commission (CFTC).
Kalshi wants to offer election-related event contracts, noting similar products are already available on unregulated exchanges. The CFTC seeks to keep political wagering off the menu at the entities it oversees.
The appeals court issued an administrative stay last week of a lower-court decision that was favorable for Kalshi, as the judges wanted time to weigh a CFTC motion to pause the district court judgment pending an appeal.
In a filing on Saturday, the CFTC, a federal regulator, said Kalshi's argument that Polymarket and others are already offering election-related markets outside of the agency's regulation is "sophomoric" and shouldn't mean Kalshi can do the same.
“A pharmacy does not get to dispense cocaine just because it is sold on the black market,” the CFTC’s response said. “The Commission determined that election gambling on U.S. futures markets is a grave threat to election integrity. That another platform is offering it without oversight from the CFTC is no justification to allow election gambling to proliferate.”
U.S. election betting markets remain up and relatively unchanged in Ontario following the latest incident during the campaign:https://t.co/GI4QyW2eNp @Covers
— Geoff Zochodne (@GeoffZochodne) September 16, 2024
Much is riding on the court case, at least according to the parties involved.
Election betting is not allowed at regulated sportsbooks in the U.S. That means the likes of BetMGM and DraftKings are not hanging U.S. election odds in New York, even though they are in the Canadian province of Ontario, where such wagering is legal.
So, depending on how the courts see it, Kalshi and similar entities could be another way for would-be political punters in the U.S. to scratch their itch for some action.
That may boost the amount of legal betting on the congressional and presidential races. The only such avenues at the moment in the U.S. are the limited amounts of trading permitted at “experimental” prediction markets PredictIt and Iowa Electronic Markets.
But time is of the essence.
“In short, having unlawfully blocked Kalshi’s contracts for over a year, the CFTC seeks months of additional delay to destroy their value and withhold them from the public,” Kalshi said in a filing on Friday. “This Court should not play along.”
'Open season for election gambling'
The CFTC prohibited Kalshi from listing its election contracts last September, claiming they involved gaming and unlawful activity and were contrary to the public interest.
Kalshi sued, saying the CFTC overstepped its authority. A lower court sided with the company earlier this month, paving the way for Kalshi to offer contracts for about eight hours on Sept. 12 regarding which party would win control of the U.S. House of Representatives and Senate in November.
Another CFTC-regulated entity, Interactive Brokers, announced its intention to launch a presidential betting market following the lower-court decision.
Yet Kalshi paused trading in its contracts "pending court process" after the appeals court decided last week to issue an administrative stay of the lower-court decision.
“The district court’s order has been construed by Kalshi and others as open season for election gambling,” the CFTC said in its reply over the weekend. “Without a stay, other [designated contract markets] will follow suit. An explosion in election gambling on U.S. futures exchanges will harm the public interest.”
You think this is a game?
Both Kalshi and the CFTC go deeper into their arguments in their most recent filings.
Kalshi, for instance, noted the lower court denied a stay following a hearing after considering the “critical factors,” which were the likelihood of the CFTC succeeding on the merits of its arguments and the “irreparable harm” that could be done. The company said the appeals court should come to the same conclusion for the same reasons.
In addition, Kalshi said election contracts do not involve unlawful activity and that the CFTC's stance would upend existing law by allowing the agency to ban "any" event contract. The company also said its contracts do not involve "gaming," as that category "requires a predicate 'game,' and elections are anything but."
Moreover, Kalshi said staying the lower-court decision would "strip" the company's congressional contracts of any value for this election cycle. This would allegedly cost the company revenue, as the election will likely wrap up before the appeal concludes.
“The Commission worries that these contracts would create incentives (or be used as a vehicle) to spread electoral misinformation,” the company added. “But other election prediction markets (including Polymarket and PredictIt) are operating right now outside of any federal oversight, and are regularly cited by the press for their predictive data. So a stay would accomplish nothing for election integrity; its only effect would be to confine all election trading activity to unregulated exchanges. That would harm the public interest.”
The CFTC's reply in support of its motion for a stay pending appeal said that at stake is the possible start of "large-dollar election gambling" this election cycle before a decision by the appeals court is issued.
“This Court should have the opportunity to review the district court’s missteps in allowing this election gambling to take place,” the regulator argued. “Without a stay, Kalshi will relaunch its betting markets, and the CFTC will have little or no recourse to stop Kalshi, or other entrants, from offering a panoply of wagers on the outcome of U.S. elections.”
Harris is back on top. pic.twitter.com/zLPkZmm0KV
— Polymarket (@Polymarket) September 17, 2024
Kalshi claimed the CFTC's only example of attempted manipulation of election-related markets failed and was done through an unregulated exchange. The company suggested the CFTC could even police election markets against attempted manipulation.
The CFTC then pointed in its reply to what it says were three cases of alleged market manipulation: a fake poll on PredictIt showing Kid Rock leading Michigan Sen. Debbie Stabenow, "spectacular manipulation" efforts by Polymarket traders betting on Vice President Kamala Harris, and a trader in 2012 who staked "millions" on Mitt Romney to win the presidency, "likely to make the U.S. presidential election seem closer than it was."
"These examples are not mere speculation; manipulation has happened and is likely to recur," the CFTC argues. “Kalshi argues that the CFTC can simply use its enforcement authority, but such enforcement actions are typically filed after financial damage is done. The CFTC cannot remediate damage to election integrity after the fact.”
The CFTC also noted several elected officials have expressed concerns and that there is no guarantee Kalshi's markets would be accurate given they could be susceptible to manipulation.
“If [Kalshi] prevails on appeal, it can list election contracts into the foreseeable future and make up its losses,” the regulator argued.
