U.S. Election Betting: CFTC, Kalshi Both Grilled by Judges in Appeals Court

A
panel
of
judges
grilled
attorneys
for
the
U.S.
Commodity
Futures
Trading
Commission
and
prediction-betting
platform
Kalshi
over
the
company’s
efforts
to
launch
political
prediction
markets
in
the
U.S.,
without
indicating
whether
they’d
allow
Kalshi
to
offer
these
products
while
reviewing
a
lower
court’s
ruling
on
the
products.

CFTC
General
Counsel
Rob
Schwartz
and
Jones
Day
Partner
Yaakov
Roth
took
turns
explaining
why
an
appeals
court
should
or
should
not
block

Kalshi
from
listing
these
events
contracts.

The
Thursday
hearing
came
days
after
a
federal
judge
ruled
that
the
CFTC
could
not
block
Kalshi
from
listing
political
prediction
markets,

letting
the
company
list
contracts
predicting
how
control
of
the
House
and
Senate
might
play
out.
But
it
only
lasted
for
a
few
hours,
since
the
CFTC
quickly
filed
for
an
emergency
stay,

which
the
appeals
court
granted
on
a
temporary
basis.

During
the
2.5-hour
hearing,
the
judges
did
not
seem
especially
impressed
by
either
party,
saying
various
arguments
or
explanations
did
not
make
sense
and
drilling
into
specific
terms
of
the
Commodity
Exchange
Act
and
what
they
mean.
The
judges
did
not
get
to
asking
what
an
event
contract
actually
is
until
more
than
two
hours
into
the
hearing.

The
CFTC’s
Schwartz
called
D.C.
District
Court
Judge
Jia
Cobb’s
Sept.
12
ruling
“seriously
flawed,”
and
said
it
could
allow
Kalshi
–
and
other
companies
–
to
immediately
launch
“high-stakes”
betting
markets.

“If
that
happens,
the
harm
to
the
public
is
going
to
be
profound
at
a
time,
and
I
don’t
mean
to
be
dramatic,
but
Americans
broadly
believe
that
our
democracy
is
under
threat,”
Schwartz
said.

“In
order
to
obtain
a
stay,
the
commission
has
to
show
two
things:
merit,
and
that
there
will
be
some
harm,
irreparable
harm,
absent
the
stay,
and
they
can’t
make
either
of
those,”
Roth
said
in
his
opening
statement.

Kalshi
saw
$50,000
deposited
in
its
two
political
events
contracts
in
the
eight
hours
or
so
that
the
products
were
live
before
the
CFTC
filed
for
an
emergency
stay,
Roth
said.

The
CFTC’s
arguments
revolve
around
the
agency’s
stated
inability
to
police
the
underlying
events
–
namely,
U.S.
elections.

Market
participants
could
distort
markets
to
suggest
one
candidate
is
doing
better
than
another,
Schwartz
said,
and
it
would
be
more
difficult
to
correct
than
other
markets.

A
judge
posed
the
hypothetical
question
of
whether
a
counterparty
might
take
the
other
side
of
a
bet
made
for
manipulative
purposes:
“Somebody
will
take
the
other
side
and
eat
their
lunch.
Is
that
what’s
supposed
to
happen?”

That
is
what
should
happen,
but
political
prediction
markets
may
be
susceptible
to
manipulation
that
cannot
be
easily
corrected,
Schwartz
said.

“It’s
because
the
sources
of
information
that
they
absorb
and
reflect
are
opaque
and
unreliable.
I
am
talking
about
polls
with
undisclosed
methodologies,
so,
bad
methodologies,
fake
polls,
pollsters
with
agendas,
inaccurate
news,
fake
news,
on
and
on,”
he
said.
“Normal
futures
contracts
have
an
objective
indicator
that
is
reliable,
kind
of
a
published
index
report.”

If
these
markets
are
manipulated,
that
would
both
harm
the
market
participants
and
could
even
undermine
election
integrity,
Schwartz
said.
Later
in
the
hearing,
he
drew
a
distinction
between
political
event
contracts
and
other
types
of
bets
that
could
be
placed.

“There’s
really
very
little
monkeying
around
you
can
do
with
an
earthquake,”
Schwartz
said,
responding
to
one
example.

Roth,
speaking
on
Kalshi’s
behalf,
pushed
back,
saying
the
more
robust
a
market
is,
the
less
susceptible
it
would
be
to
that
type
of
manipulation.

He
pointed
to
the
$1
billion
already
bet
on
Polymarket,
which
does
not
offer
services
in
the
U.S.
after
a
settlement
with
the
CFTC,
saying
the
regulator’s
argument
essentially
suggests
having
an
overseas
vendor
provide
these
products
may
be
better
than
Kalshi
doing
so.

“The
most
important
thing
I
want
to
make
is
that
the
way
to
reduce
that
risk
is
to
allow
Kalshi
markets
to
offer
because
right
now,
this
activity
is
happening
and
being
reported
to
voters
based
on
markets
that
are
not
regulated,
that
are
open
to
foreign
traders,
that
have
no
surveillance.
…
There’s
no
transparency,”
he
said.
“We
don’t
know
who’s
buying,
who’s
selling
cryptocurrency.
If
this
was
happening
on
Kalshi’s
markets,
we
would
have
this
whole
suite
of
regulatory
provisions
that
apply.”

The
CFTC
needed
to
show
there
was
a
risk
of
“irreparable
harm”
in
allowing
Kalshi
to
continue
listing
and
trading
its
events
contracts.
Todd
Phillips,
an
assistant
professor
of
law
at
the
Georgia
State
University
Robinson
College
of
Business,
told
CoinDesk
it
was
“unclear
if
[the
CFTC]
did
that”
over
the
course
of
the
hearing.

The
regulator
could
have
done
a
better
job
explaining
what
event
contracts
actually
are
and
how
a
state
prohibiting
gambling
on
elections
counts
as
gaming
for
the
purposes
of
the
Commodity
Exchange
Act,
he
said.

On
the
other
hand,
Kalshi
also
faced
tough
questioning
from
the
panel
of
judges
on
the
appeals
court.

“Kalshi
is
making
an
argument
that
‘you
should
allow
us
to
do
something
that
29
states
prohibit,
and
that’s
big,”
he
said.
“That
would
be
effectively
overturning
the
law
in
more
than
half
the
country.

Marc
Hochstein
contributed
reporting.