Kalshi wins case against CFTC, still faces shutdown

The U.S. District Court ruled in favor of the Kalshi prediction market, effectively sanctioning betting on the outcome of the presidential election.

Kalshi wins case against US Commodity Futures Trading Commission (CFTC) after regulator bans betting on US political events

But in response, the regulator has launched an urgent move to make this decision, which the company believes threatens the platform’s downfall.

What is known about Kalshi?

Kalshi is a financial exchange that allows investors to trade assets based on the expected outcomes of future events. Founded in 2019, Kalshi’s markets cover a range of areas, from economics to international relations, from weather to the chance of detecting aliens. The platform raised $30 million in Series A funding led by Sequoia Capital in 2021.

According to its founders, Kalshi is the first CFTC-regulated exchange dedicated to direct trading of future event outcomes. The exchange allows investors to take yes or no positions on whether an event will occur through a new asset class called event contracts.

What is the essence of the Kalshi-CFTC conflict?

In September 2023, the CFTC banned Kalshi from contracting in congressional elections. The regulator explained this by saying that such betting is against the public interest and is effectively illegal in some states.

The company operating the platform went to court and the regulator’s decision was described as “capricious and arbitrary”.

On September 6, U.S. District Judge Jia Cobb ruled in Kalshi’s favor but did not provide a reasoning. She said she would release the ruling in writing later.

CFTC response

On the day of the court’s decision, the regulator filed a motion to stay the order for 14 days after the judge’s opinion was issued. The CFTC explained that it needed to thoroughly review the documents for any future appeal. If the urgent motion is granted, the contract placement ban will remain in effect until the end of September.

The Commission is in an unenviable position of having learned that it had lost only to find out without any explanation or justification. There is no doubt that the issues presented in this case are serious legal questions. However, at this time, the CFTC cannot fully defend its chances of success on any future appeals because the court has not yet issued its memorandum opinion.

This would be disastrous for the platform, Kalshi said, a delay that the agency will likely try to turn into another delay before it’s too late, which would be devastating for Kalshi, whose future is tied to this case and these markets.

Kalshi said the commission lost fairly and could not be allowed to “snatch a procedural victory from the jaws of defeat” by allegedly delaying. The company also noted in its appeal the growth in market share of platforms like Polymarket and PredictIt. Unlike Kalshi, neither of those sources are regulated by the CFTC.

US election betting ban

In August, several members of the U.S. Congress approached the CFTC asking for a ban on betting on the outcome of the presidential election. In the letter, the politicians equated such activities with gambling.

Five senators and three members of the House of Representatives sent an open letter to CFTC Chairman Rostin Benham, warning that such markets could undermine public confidence in the country’s election system.

The congressmen stated that elections should not be perceived as a “commercial enterprise.” According to them, this negatively affects the democratic processes in the United States. Therefore, the congressmen believe that the CFTC has a duty to develop rules that eliminate this phenomenon.

What’s Happening in Election Betting

Meanwhile, the Polymarket platform saw bets on the 2024 presidential race exceed $850 million. According to the platform, entrepreneur Donald Trump is the leader. Users estimate his chances of winning at 52%, while 45% of bettors believe in a victory for Vice President Kamala Harris. $126 million was bet on Trump’s victory, while $111 million was bet on Harris.

Source: Polymarket

At the same time, the political section on the platform exceeds $ 1 billion in funding. Project participants bet on hundreds of events.

However, Polymarket’s predictions are likely to be wrong. Nevertheless, the fact that such large-scale investments are being made to predict the election outcome via cryptocurrency platforms demonstrates the growing influence of the crypto community on the perception of political processes and the willingness of its participants to take financial risks associated with political events.