The CFTC argued that election-based markets are vulnerable to manipulation and could undermine public trust.
The United States’ Commodity Futures Trading Commission (CFTC) is appealing a recent court decision that would allow the prediction market platform Kalshi to offer contracts linked to US election results. The current legal struggle has raised several questions regarding the integrity of election betting and the scope of the CFTC’s regulatory jurisdiction.
Court Hearing Pits CFTC Against Kalshi
Rob Schwartz, the general lawyer of the Commodity Futures Trading Commission (CFTC), and Yaakov Roth, the lawyer for Kalshi, argued for the company’s permission to run political prediction markets during a hearing before the United States Court of Appeals for the District of Columbia Circuit.
A district judge’s decision, stating that the CFTC cannot prevent Kalshi from issuing contracts based on which party controls both houses of Congress, prompted the convening of the hearing.
The court of appeals ultimately granted the Commodity Futures Trading Commission’s (CFTC) request for a temporary stay after the ruling. The three judges, Patricia Millett, Cornelia Pillard, and Florence Pan, contested both arguments, expressing doubts about the presented logic.
The justices questioned the Commodity Futures Trading Commission (CFTC) about its perspective on the Commodity Exchange Act and the implications of allowing individuals to choose whether or not to place a wager on the outcome of the election.
Concerns Over Market Manipulation and Election Integrity
The United States Commodity Futures Trading Commission was concerned about a number of issues, including potential threats to market integrity and manipulation of prediction markets tied to elections.
Schwartz observed that the political prediction markets, compared to other event markets, are more vulnerable to manipulation and misleading information. According to him, allowing these contracts could result in misunderstandings among the general public, which would further undermine people’s already low level of faith in the elections that take place in the United States.
This is especially true at a time when more people are questioning the legitimacy of the democratic system.Schwartz also noted that agenda-driven media, such as fake polls, fake news, and other forms of media, can influence political markets, even though typical futures contracts are based on true and reliable information.
He pointed out that the Commodity Futures Trading Commission (CFTC) is unable to monitor these underlying events in an acceptable manner, and as a result, it continues to be difficult to ensure fairness and transparency in the markets.
Kalshi Defends Market Viability and Regulatory Compliance
Kalshi’s attorney, Yaakov Roth, addressed the concerns raised about the compliance measures Kalshi has implemented. He pointed out that regulated prediction markets are more transparent and provide more monitoring than less regulated international platforms.
Roth asserted that a robust and comprehensive legal regime supports markets that are less susceptible to manipulation than the unregulated overseas markets Kalshi seeks to compete in within a regulated environment.
Roth’s argument was based on the fact that Kalshi is operating in a government-controlled environment. According to Roth, the company has also implemented ‘Know Your Customer’ methods to ensure that only approved market players engage in transactions.
Additionally, the company has suggested that there should be a local regulated market in order to reduce the reliance on international marketplaces that have less transparency. He argued that permitting these regulated prediction markets would enhance participant protection and lessen the possibility of external factors causing distortion.
Therefore, we expect the appeals court to render a decision promptly for the upcoming US elections in 2024. Because the commission believes that contracts based on political events are harmful to the public interest, the Commodity Futures Trading Commission (CFTC) has been working on a regulation that would likely prohibit trading on political events.
Legal experts suggest that the courts or the legislature may need to step in and guide the future of election-related prediction markets.
Additionally, the Chairperson of the Commodity Futures Trading Commission (CFTC), Rostin Behnam, has voiced her concerns on the possibility of the financial regulator becoming engaged in election contracts. She has stated that such activities may be beyond the purview of the agency.
