Federal judge opens door to election gambling

(CN) — A federal judge determined Thursday the Commodity Futures Trading Commission overstepped its authority by prohibiting a company from offering investments based on election outcomes.

U.S. District Judge Jia Cobb wrote in a 27-page decision that Kalshi’s election market, which would allow investors to wager on future political control of Congress, did not sell contracts based on “gaming” or other unlawful activity.

The investments therefore fell outside the commission’s authority, Cobb ruled.

“This case is not about whether the court likes Kalshi’s product or thinks trading it is a good idea,” Cobb, an appointee of Joe Biden, wrote. “This court’s only task is to determine what Congress did, not what it could do or should do.”

Cobb denied a motion to stay the decision as the commission appeals. Visitors to the company’s website Thursday afternoon could buy contracts on which party would win the House and Senate, with Republicans favored in both chambers.

The court’s ruling could open the floodgates for gambling on political races, which is permitted in other countries, including the U.K., but has long been controversial in the United States.

Kalshi filed a notice in June 2023 alerting the federal regulator it would begin selling “congressional control contracts,” a derivative contract that would allow investors to predict which political party would control Congress in future elections.

The commission responded by initiating a 90-day review of the contracts while seeking public comment on the issue.

More than 1,300 comments were filed with the commission. Supporters argued election markets would provide deeper insight into the political landscape and help companies manage risk. Opponents warned they would further undermine trust in elections while creating dangerous incentives for malfeasance.

Susquehanna, a market maker for Kalshi, wrote in a public comment that the New York-based company had tailored the contracts to closely resemble traditional financial products. Members would be required to purchase 5,000 contracts at a time and most individuals would only be able to spend up to $125,000.

Congressional elections affect businesses in myriad ways, from new safety requirements for energy companies to larger reserve requirements for banks, Susquehanna argued. By purchasing congressional control contracts, companies could hedge against unforeseen changes that harm their bottom line.

Cantrell Dumas, director of derivatives policy for the nonprofit Better Markets, countered in a statement this week that political event contracts are unreliable and inappropriate for hedging. Meanwhile, political gambling threatened to undermine the country’s elections by incentivizing manipulation, disinformation and wild speculation.

“The focus would no longer be on electing the best candidate or having the outcome reflect the will of the voters but on impacting the process so that the outcome is most profitable from winning or losing a bet,” Dumas said.

The commission issued an order this past September prohibiting sale of the contracts, determining they involved gaming that is illegal under state law while harming the public interest.

“Betting or wagering on elections, as proposed by Kalshi, meets the definition of gaming,” CFTC Chairman Rostin Behnam said in a statement. “And in many states, betting or wagering on elections is prohibited by statute or common law.”

In Thursday’s opinion, Cobb disagreed. She cited Merriam-Webster’s definition of the gaming, which means “the practice or activity of playing games for stakes.”

“Kalshi’s contracts do not involve unlawful activity or gaming,” the judge wrote. “They involve elections, which are neither.”

Better Markets has called on the commission to amend its rules to ban contracts tied to political contests or elections.

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