Are Politics About to Get Even More Corrupt? Federal Courts Allow Gambling on Elections
To many Americans, politics may feel like a professional sport. They both involve a certain degree of tribalism. They can be emotional roller coasters. The media constantly analyzes strengths and weaknesses of each team and predicts outcomes. And the outcome is often a gamble — in the case of many sports, that's literally true.
But while sports betting is not illegal in many parts of the country, why haven’t we seen more betting on political outcomes? There does some to be more at stake in the latter, a potential jeopardizing of democratic ideals. But why are they so different? A new lawsuit may shed some light.
In a recent legal dispute, the U.S. Commodity Futures Trading Commission (CFTC) has come under scrutiny for its decision to prohibit Kalshi, a financial services company, from listing what are known as “event contracts,” which predict political control of Congress. The case centers on the CFTC's interpretation of a "special rule" under the Commodity Exchange Act (CEA), which allows the agency to review and potentially ban certain event contracts deemed contrary to the public interest.
As you can guess, this is a pretty complicated case. So, let’s take a brief primer on event contracts and their regulation by the CFTC before we dive into the legal arguments and the potential consequences of the court’s ruling.
Event Contracts 101
Event contracts are a specific type of derivative contract. A derivative’s value is derived from the performance of underlying assets such as commodities, securities, or debt instruments. For event contracts, the payoff is contingent upon the occurrence of a specified event.
Event contracts have gained attention in financial markets for their unique structure and potential applications. They’re designed to payoff based on the outcome of specific events, occurrences, or values. For instance, an event contract might be based on the occurrence of a weather event like a hurricane or snowfall, posing a straightforward yes-or-no question to the buyer. The buyer takes a "yes" position, betting that the event will occur, while the seller implicitly bets "no."
The pricing of these contracts fluctuates based on the perceived probability of the event occurring, similar to stock prices. They are binary in nature. This means that the contract either pays out a predetermined amount, if the event occurs, or nothing if it does not. This binary structure makes them appealing for both risk mitigation and speculative purposes. For example, a beachfront property owner might purchase an event contract predicting a hurricane's landfall to offset potential rental income loss due to storm damage. Conversely, some investors might trade event contracts purely for financial gain, speculating on the likelihood of various events.
Like other derivatives, event contracts are regulated by the Commodity Futures Trading Commission (CFTC, not to be confused with the FTC, though both are federal agencies that work in consumer protection). The CFTC is the independent federal agency responsible for ensuring that these types of contracts comply with federal laws such as the CEA. The CFTC oversees various forms of derivatives, including futures, options, and swaps, which are commonly used to transfer market or credit risk between parties.
CFTC Regulation
The CFTC's regulation of event contracts ensures that these financial instruments are traded on designated contract markets (DCMs) and comply with the CEA. The CFTC has the authority to review and potentially prohibit certain event contracts under a “special rule” of the CEA. This rule empowers the CFTC to determine whether specific event contracts are contrary to the public interest.
The CFTC can only exercise this authority if the contracts involve particular activities enumerated in the CEA. Some examples of activities outlined in the statute are unlawful activity under any Federal or State law, terrorism, assassination, war, gaming, or other similar activities deemed contrary to the public interest. If the CFTC finds that an event contract involves any of these activities, it can prohibit the contract from being listed or traded on regulated exchanges. This regulatory power is designed to ensure that event contracts do not promote or facilitate activities that are harmful or illegal.
Over time, the regulatory framework has evolved. Initially, the CEA required designated contract markets to demonstrate that their contracts served an economic purpose and were not contrary to the public interest. However, later amendments to the CEA have since allowed for DCMs to self-certify their contracts' compliance with statutory and regulatory requirements, subject to CFTC review under specific circumstances.
The rule allows designated contract markets to either self-certify their contracts as compliant with statutory and regulatory requirements or voluntarily seek CFTC preapproval. However, if the CFTC determines that a contract involves any of the enumerated activities, it can initiate a 90-day review period, during which the listing or trading of the contract must be suspended. At the end of this period, the CFTC must issue an order either approving or disapproving the contract for trading.
Kalshi Raises the Stakes
Since the CFTC regulates events contracts, it only makes sense that they have oversight over the platforms on which these kinds of trades occur. In the United States, a major financial exchange platform that allows users to trade on the outcome of future events is Kalshi. On Kalshi, users can buy and sell contracts based on their predictions of whether specific events will occur, such as weather conditions, economic indicators – and even political outcomes.
Not so fast, said the CFTC. The commission determined that such contracts involved unlawful activity and gaming, and were contrary to the public interest. It issued an order prohibiting Kalshi from offering event contracts that would allow participants to take positions and trade on the outcome of United States congressional elections.
CFTC Says No to Election Betting
The CFTC determined that these contracts involved unlawful activity and gaming, and were contrary to the public interest. The CFTC noted that that many states criminalize betting or wagering on elections. Therefore, the congressional control contracts, which allow buyers to purchase and potentially receive a payout based on the results of congressional elections, amounted to activity that is illegal in many states.
The CFTC also reasoned that the term "gaming" includes betting or wagering on elections. The CFTC cited various dictionary definitions and state statutes that define gambling as staking something of value upon the outcome of a contest, game, or contingent event. The CFTC found that Kalshi’s congressional control contracts involved "gaming" because taking a position in these contracts would be staking something of value upon the outcome of congressional election contests.
Finally, the CFTC also found the whole thing “contrary to public interest.” The more straightforward part of it was that there are potential negative impacts on the integrity of elections and the perception of integrity, such as creating monetary incentives to vote for candidates or incentivizing the spread of misinformation. The more complicated part was that the CFTC further reasoned “that the control of a chamber of Congress does not have ‘sufficiently direct, predictable, or quantifiable economic consequences’ for Kalshi’s contracts to serve an effective hedging or risk mitigating function.”
If you think that sounds like a lot of mumbo jumbo, you’re not wrong. In financial markets, hedging involves taking positions to offset potential losses in other investments, while risk mitigation aims to reduce exposure to various risks. For a contract to serve these purposes effectively, the underlying event must have a direct and predictable impact on economic variables or financial outcomes.
But the economic impact of control of Congress is too indirect, unpredictable, and difficult to quantify. This lack of clear and measurable economic consequences means that the contracts are unlikely to be used effectively for hedging or risk mitigation. Instead, they might be more likely to be used for speculative purposes, which could raise concerns about their potential impact on the integrity of the electoral process and the perception of fairness in elections.
As a result, the CFTC's order prohibited Kalshi from listing and trading its congressional control contracts.
Court Sides with Kalshi
Kalshi challenged this decision in the D.C. federal court, arguing that the CFTC's determination was arbitrary, capricious, and not in accordance with the law under the Administrative Procedure Act. Kalshi asked the court to vacate the order — and the court did so. The court concluded that Kalshi’s congressional control contracts do not involve unlawful activity or gaming based on a detailed analysis of the statutory language, context, and legislative history of the CEA.
The court rejected the CFTC’s argument that the contracts involve unlawful activity simply because many states criminalize betting or wagering on elections. The contracts' underlying event — elections — does not relate to any illegal conduct. Therefore, the court reasoned that the contracts do not “involve unlawful activity.” The court emphasized that the CFTC’s interpretation would render the statute too broad, potentially subjecting all event contracts to review under the special rule, which would contradict the statute’s intent to limit review to specific, enumerated activities.
The court also determined that “gaming,” as used in the CEA, refers to “playing games” or “playing games for stakes.” The court rejected the CFTC’s broader definition of gaming as synonymous with gambling, which includes betting on a contest or contingent event. The court reasoned that the ordinary meaning of “gaming” involves playing games, and that the CFTC’s interpretation would not be consistently applicable across the statute’s other enumerated activities (such as war, terrorism, or assassination). Thus, Kalshi’s congressional control contracts, which ask buyers to predict the political control of Congress, do not involve any game or gaming activity.
Because the Kalshi contracts do not involve either unlawful activity or gaming, they are not subject to being governed by the CFTC. The CFTC order prohibiting these contracts thus exceeded its statutory authority, and the court vacated the order.
What’s Next?
The ruling effectively gave companies like Kalshi the green light. Within hours of the D.C. court issuing the order, the company’s CEO boasted that it had just posted “the first trade made on regulated election markets in nearly a century.” On Kalshi’s coattails, another popular trading platform called Interactive Brokers announced that it would also be offering similar wages, including contractions on the presidential election.
The CFTC noted that “[t]he district court’s order has been construed by Kalshi and others as open season for election gambling.” Just hours after the federal district judge vacated the CFPB’s order, the United States Court of Appeals for the District of Columbia Circuit intervened to press the pause button. The appellate court stayed the district court’s ruling, but on October 2, it upheld the district court. Congress could always pass a law specifically prohibiting purchasing event contracts on political outcomes, but unless that happens, and certainly for this year's election, all bets are on.
Related Resources:
- Justice Kagan Throws Shade at Shadow Docket (FindLaw's Federal Courts)
- Voting Made Clear (FindLaw's Voting Rights Resources)
- 3 Election Day Laws to Know (FindLaw's Law and Daily Life)