CFTC Appeals Decision Favoring Kalshi On Election Betting Contracts

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As a seasoned crypto investor and a fervent supporter of transparency and fairness in financial markets, I find myself caught between the CFTC’s concerns and Kalshi’s aspirations. Having witnessed the evolution of the digital asset space and its subsequent regulatory challenges, I can empathize with both parties.

The U.S. Commodity Futures Trading Commission (CFTC) is contesting a recent court ruling that permits prediction market platform Kalshi to sell contracts based on U.S. election results. This ongoing legal dispute has sparked worries about the honesty of election wagering and the boundaries of the CFTC’s regulatory power.

Court Hearing Pits CFTC Against Kalshi

At a court hearing in the U.S. Court of Appeals for the District of Columbia Circuit, Rob Schwartz (General Counsel of the Commodity Futures Trading Commission – CFTC) and Yaakov Roth (counsel for Kalshi) presented their arguments on whether Kalshi should be permitted to run political prediction markets. This hearing took place following a lower court ruling stating that the CFTC does not have the authority to prohibit such contracts based on which political party controls both houses of Congress.

Immediately following the decision, the Commodity Futures Trading Commission (CFTC) filed an appeal for a short-term halt, and this request was approved by the appellate court.

The appeals court judge asked: “Is there actual proof, not just a suspicion or guesswork, that brief interventions in the betting markets for elections can impact the overall election process or its results?” In response, the CFTC general counsel said: “I do not possess such evidence.

Hearing in Kalshi case:

— m/arc (@MarcHochstein) September 19, 2024

The three judges, Patricia Millett, Cornelia Pillard, and Florence Pan, raised doubts and seemed uncertain about the logic presented, and they also scrutinized the given arguments. They inquired about the Commodity Futures Trading Commission’s (CFTC) perspective on the Commodity Exchange Act and the potential impacts of allowing bets on election outcomes.

Concerns Over Market Manipulation and Election Integrity

The U.S. Commodity Futures Trading Commission expressed worries about potential issues like market deceit and tampering with election forecast markets. Schwartz highlighted that political prediction markets are particularly vulnerable to misinformation and manipulation compared to other type of event markets.

He stated that permitting these contracts could lead to misperceptions among the public and thus erode the already weak confidence in the U. S. elections, particularly during a time when more citizens doubt the validity of the electoral system.

Schwartz pointed out that unlike conventional future contracts which rely on genuine and authentic data, political markets might be influenced by misleading polls, biased news, and other media driven by agendas. He emphasized that the Commodity Futures Trading Commission (CFTC) may struggle to oversee these underlying events, making it difficult to maintain fairness and transparency in the markets.

Kalshi Defends Market Viability and Regulatory Compliance

Yaakov Roth, representing Kalshi, countered the concerns about Kalshi’s compliance procedures, emphasizing that regulated prediction markets offer greater transparency and oversight compared to less regulated international platforms. He contended that markets under a strong and extensive legal framework are less susceptible to manipulation than unregulated foreign markets that Kalshi competes against, by operating within a regulated setting.

Roth suggests that the company has implemented ‘Know Your Customer’ procedures to ensure that only authorized market participants are allowed to trade. He also advocates for a locally regulated market to reduce reliance on less transparent overseas markets. This local market, he believes, would provide greater security for participants and decrease the potential for manipulation by foreign entities.

In the 2024 U.S. elections, it’s anticipated that the appeals court will deliver a swift decision soon. Meanwhile, the Commodity Futures Trading Commission (CFTC) has been developing a regulation that could ban trading on political events due to concerns about their negative impact on public interest. Given this regulatory uncertainty and potential consequences for election-related prediction markets, legal scholars suggest that courts or legislature may need to intervene and provide clarification regarding the future of such markets.

In a recent statement, Rostin Behnam, the head of the Commodity Futures Trading Commission (CFTC), voiced apprehension about the possibility of his organization getting entangled in election-related contracts, as he believes these matters might fall beyond the CFTC’s jurisdiction.

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2024-09-20 04:06