US Regulators Reject Derivative Exchange’s Plans to Offer Bets on Congressional Elections

Signage outside of the Commodity Futures Trading Commission in Washington on Aug. 30, 2020. Andrew Kelly/Reuters

U.S. financial regulators have rejected a bid by prediction market Kalshi to offer bets on U.S. congressional elections.

The Commodity Futures Trading Commission (CFTC) on Sept. 22 issued a 23-page order (pdf) disapproving Kalshi’s congressional control political event contracts on the premise that they amount to prohibited gambling activity.

Kalshi, which is overseen by the CFTC, lets traders bet money on the outcome of various events, ranging from the future rates of inflation to the length of the looming government shutdown to the emergence of yet another COVID-19 strain.

In June, Kalshi proposed to roll out a new product: cash-settled, binary contracts for congressional elections that would be in the form “Will (chamber of Congress) be controlled by (party) for (term)?”

The proposal would have allowed various market players, including hedge funds, to bet as much as $100 million on which political party would win control on Capitol Hill.

However, after reviewing the matter, the CFTC stated that it had determined that Kalshi’s proposed contracts involve gaming in violation of state laws and were “contrary to the public interest.”

CFTC No ‘Election Cop’

The Commodity Exchange Act lists certain categories of commodities for which derivatives may be contrary to the public interest if they are listed on an exchange.

These categories include contracts that involve gaming or other activity that violates state or federal laws.

“Kalshi’s Congressional control contracts fall into both of these categories,” CFTC Chairman Rostin Benham said in a statement. “Betting or wagering on elections, as proposed by Kalshi, meets the definition of gaming.”

In many states, betting or wagering on elections is prohibited by statute or common law, he pointed out.

Mr. Benham added that the analysis CFTC has reached and its final determination “are squarely within” the panel’s “duty and discretion” given its role in regulating derivatives markets, which Kalshi is.

The regulator’s decision means that the elections wager contracts proposed by Kalshi are prohibited and can’t be listed or made available for clearing or trading on or through its platform.

Mr. Benham said that approval of political event contracts of the type that Kalshi was seeking to offer would require the CFTC to “exercise its oversight and enforcement authorities in the manner of an election cop.”

He said it makes sense for the CFTC to have a mandate to fight fraud, manipulation, and false reporting in derivative markets for things such as commodities—but not political contests.

“Our new authorities would per se include monitoring elections, candidates, and countless participants in the political machinations that proliferate in the media and cyberspace in an effort to prevent manipulation and false reporting within the political system—something that the CFTC currently lacks the mandate to do,” he said.

The decision was reached in a 3–1 vote, with all three Democratic commissioners voting against approval.

Summer Mersinger, a Republican commissioner who cast the lone vote in favor, said in a statement that her dissent from the majority shouldn’t be taken as an endorsement of Kalshi’s proposed contracts, that the reason for her vote was the CFTC’s failure to follow a process of notice-and-comment rulemaking.

One Republican commissioner, Caroline Pham, abstained from the vote.

‘Bold Missions Are Hard’

Tarek Mansour, CEO of Kalshi, expressed strong disagreement with the decision, which he said he considered arbitrary and capricious.

“We are evaluating options and are considering what the best course of action is. We believe we are right and are considering what it will take to make the government see what we see,” he said in a series of posts on X, formerly known as Twitter.

He said that many financial products that are commonplace today—such as insurance and exchange-traded funds—were initially met with skepticism.

“Our mission is bold. Bold missions are hard. This is not the first time the Kalshi team gets a ‘NO’ and it’s probably not the last time. We have pushed through all the previous NOs and we will push through this one,” he said.

Dennis Kelleher, co-founder and CEO of Better Markets, a nonpartisan organization that promotes the public interest in the financial markets, praised the CFTC’s decision.

“The CFTC’s well-grounded, thoughtful, 23-page Order to reject Kalshi’s backdoor attempt to unleash gambling on U.S. elections through so-called event contracts was the right one,” Mr. Kelleher said in a statement.

He argued that Kalshi’s proposal violates various provisions of the Commodities Exchange Act and that, at a time of historically high concerns about the integrity of elections, the CFTC correctly judged that Kalshi’s self-certified election contracts would be against the public interest.

“With at least hundreds of millions and more likely billions of dollars being bet and with the rise of low-cost social media and artificial intelligence, allowing betting on U.S. elections would almost certainly lead to election interference, abuses, and other illegal conduct,” he said.

Mr. Kelleher argued that gamblers would try to influence political outcomes for profit by, for instance, investing in negative ads, which could have a big effect on close races.

“Incentivizing election interference is the last thing this country needs right now,” he said.