Election betting see-saw swings back in Kalshi’s favour after appeals court rejects CFTC stay

On Wednesday afternoon, the Kalshi website did again feature the contracts in question. They are tied to which party will win control of the House or Senate in the 5 November elections. The Senate contract currently lists the Republicans as 75% favorites. The House version lists the Democrats as 63% favorites.

Underneath the listings, the website says that $45,000 worth of contracts have been placed on the Senate. For the House, it lists $20,000. Kalshi previously said it took in approximately $50,000 before being halted by the stay. It is unclear if Wednesday’s totals are up to date.

Judges: CFTC had options, failed to invoke them

In its ruling, the court said the commission has the ability to change its policy to ban election contracts but has not. According to CoinDesk, the CFTC has been considering such a rule change but has not finalized it.

“[I]f the Commission felt the risks of election contracts were as concrete and pressing as it argues here, it has long had—and still has—the power to forbid them on the exchanges it regulates,” Millett wrote. “Specifically, the Special Rule [in the Commodity Exchange Act] empowers the Commission to find through a formal rule or notice-and-comment rulemaking that certain types of event contracts—such as election contracts—are ‘contrary to the public interest’ and to forbid them.”

The judges also turned one of the commission’s arguments back on itself. When arguing that the contracts would lead to manipulation and misinformation, the CFTC pointed to a 2017 incident in Michigan. A poll from that year erroneously said that musician Kid Rock was leading a Michigan Senate race. He of course was not running, and Senator Debbie Stabenow won reelection.

Rather than convincing the court of the potential harm, the judges viewed it as a lack of action.

“In the seven years since the fake Kid Rock poll was used, the Commission has not invoked the very tool Congress gave it to head off such harms,” Millett wrote.

Ruling is more than a year in the making for Kalshi

Kalshi first sought to list the contracts last June, with limits of $100m. By September, the CFTC had disallowed them, citing its ability to halt contracts involving gaming or unlawful activity. It has argued ever since that the contracts do not have economic value and are simply gambling and speculation-driven offerings.

Kalshi, meanwhile, has defended the contracts, saying that elections are neither gaming nor unlawful. On 13 September, Judge Jia Cobb from the US District Court for the District of Columbia agreed. She ruled that the commission “exceeded its statutory authority” in halting Kalshi’s contracts.

The New-York based exchange then listed the contracts for approximately eight hours before the appeals court stay was granted later that night.

Case centers around definition of gaming, elections

On 19 September, judges grilled both sides as they delivered oral arguments. One central issue was the definition of gaming. The CFTC argued it was synonymous with gambling but Kalshi contented that gaming must center around a game, not an election.

Kalshi also argued that a regulated election betting market is safer than the black market. It pointed to illicit sites like Polymarket, which Kalshi alleged has taken $1bn in election contracts already. The CFTC acknowledged these platforms, but conceded that their existence has not yet led to tangible proof of election manipulation.

While the CFTC argued that the contracts would lead to fraud and misinformation, Kalshi said the opposite. It argued that a regulated market would be “a powerful tool to expose truth” in that the data doesn’t lie. Much like sports betting, Kalshi also posited that the contracts would drive civic engagement because people would have a stake on the results.

Better Markets, a nonprofit advocate for public interests in financial markets, decried the ruling. “There is no way to undo the potential damage to the public interest of allowing bets in the final weeks of an election year,” legal director Stephen Hall said in a statement Wednesday.

The American Gaming Association (AGA), which represents the regulated gaming industry, declined to comment.