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Betting on U.S. presidential elections has a long history, according to a November 2022 article in The New Yorker. In the early 1860s, half of all betting was done outside of Wall Street offices or on the steps leading up to stock exchanges. Now, however, proponents of betting on elections want to do so in regulated exchanges with the legitimacy that regulation confers.

The Commodity Futures Trading Commission (CFTC) has requested public comment on an application from Kalshi, a startup exchange, to request CFTC approval to allow trading of a contract based on the political party control of one or both chambers of Congress (“Control Contract”). IATP has submitted 45 comment letters to the CFTC since 2010, mostly on proposed rules affecting agriculture and managing climate-related financial risk. However, because IATP is a public interest organization and betting on elections is not in the public interest, we are obliged to respond to the Kalshi proposed contract.  

Kalshi first sought the CFTC’s approval for the contract in 2022, when the maximum bet on that contract was $25,000. As we noted in our 2023 comment letter, Kalshi is a retail customer-oriented exchange. For example, Kalshi offers $25 to a user of its website who refers a friend to Kalshi, provided the friend bets on a Kalshi event contract within a certain time and with a certain amount after referral.

In Kalshi’s revised 2023 application, the Control Contract is designed for large institutional investors, such as hedge funds. The contract’s position limits, defined by Kalshi as “maximum loss exposure,” for one class of Kalshi-approved investors is up to $100 million. (CFTC position limits for physically backed contracts, such as a corn futures contract, are set to prevent excessive speculation and market manipulation by as few as four investors.) Nevertheless, Kalshi alleged that the revised contract is otherwise “similar” to its other event contracts, such as one that enables betting up to $25,000 on the end date of the Screen Actors Guild strike. Our analysis found the Control Contract to be fundamentally dissimilar from Kalshi’s other event contracts. IATP urged the CFTC to disapprove the Control Contract application in 2022 and did so again in our July 24 comment letter.

Among other regulatory criteria, the CFTC must judge whether the contract is “contrary to the public interest.” It must also determine whether trading the contract is gambling, which the CFTC does not regulate, or whether the contract design enables market participants to hedge against price risks, e.g., that a price might suddenly and rapidly decline. A confidential appendix to the application apparently contains the methodology by which Kalshi determines whether its wealthiest class of market participants has a “sufficiently demonstrated economic hedging need” for the multi-million-dollar position it takes in the contract. Most of the application is confidential, forcing IATP and others to comment on the available “General Terms and Conditions” of the Control Contract.

If one or both parties contested election outcomes that would determine the party control of one or both chambers of Congress, Kalshi alone would determine the authoritative source of price forming election information (“Source Agency”). If the objectivity and verifiability of that Source Agency were in dispute, the CFTC’s administrative law judges could be forced to become involved in election-related litigation. Nothing in the Commodity Exchange Act, the CFTC’s fundamental legislation, or its rules provides for the CFTC to become involved in an election dispute, even if the source of the dispute were disinformation published on the Kalshi website.

In a July 25 opinion in The Hill, Better Markets' president and CEO Dennis Kelleher alerted the public to some of the risks for democracy of approving the Control Contract: “Imagine what damage an AI [Artificial Intelligence] deepfake video, supercharged by viral social media, could do if a gambler wanted to try to increase the odds of winning his or her bet in the days before an election. The truth will not catch up to the lie before the votes — and die — are cast.” Furthermore, there is no effective legal remedy to misinformation advocated or even originated by the multi-million-dollar bettor on the Control Contract. IATP wrote that because Kalshi defines price forming election information as outside the terms and conditions of the Control Contract, the CFTC would face a legal challenge to use its anti-fraud and anti-manipulation authority against election results disrupting information. And by the time the CFTC used such authority, the party control of Congress very likely would be decided, and enforcement penalties would have no effect on that outcome.

In the growth industry of sports gambling, legalized nationwide by a 2018 U.S. Supreme Court ruling, the odds of winning a bet are calculated by a bookmaker or an algorithm. The trading of the Kalshi “Control Contract” discovers the price of positions of the contract by buying and selling, with the exchange taking a percentage fee for each transaction. Price discovery by itself, however, does not fulfill the regulatory requirement for Kalshi to demonstrate the economic need to hedge price risks by calculating the specific anticipated benefit (i.e., profit locked in, or loss avoided) to the Control Contract investor of the election outcomes that result in a party’s control of a chamber of Congress. When a bona fide hedger takes a position, e.g., in the Chicago Board of Trade wheat futures contract, the price risk that the hedger seeks to manage can be quantitatively demonstrated relative to the volume of wheat represented in the contract. No such quantitative demonstration is possible for the bettor on the party control of one or both chambers of Congress.

What is the likely outcome of a CFTC Chair and Commissioners’ majority vote to disapprove the Control Contract? To judge by a November 2, 2022 (the day before U.S. federal elections) article in the sports section of The Washington Post, disapproval could lead to litigation.  

The Post reports that PredictIt, another election betting platform, allowed by a 2014 CFTC staff letter to operate as a small New Zealand academic experiment, was ordered by the agency to wind up operations by February 15, 2023, after the non-profit research objectives of the experiment were subsumed to a commercial exchange that violated the terms of the letter. PredictIt is suing the CFTC not in the U.S. District of Columbia, where the CFTC has its headquarters, but in the West District of Texas federal court, where PredictIt presumably anticipates a more sympathetic hearing.

It would be surprising if there were not organized betting on the outcome of the PredictIt lawsuit. That betting would likely occur outside the United States, in jurisdictions such as the United Kingdom, where betting on breaking news events and the final results of U.S. elections is a growth industry. Indeed, proponents of the legitimation of election betting through its legalization by the CFTC argue that if the CFTC disapproves the Kalshi Control Contract and similar election betting contracts, yet more betting will move overseas. IATP believes that forgoing the tax revenue that results from foreign betting is a small price for the U.S. to pay to prevent the legalization of election betting from exacerbating the digital and physical attacks on U.S. elections and democracy.    

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