Crypto isn’t the only emerging topic on the CFTC’s plate. The futures regulator is also considering a fintech sector that has similarly thorny political implications: election betting.
The Commodity Futures Trading Commission has until Oct. 28 to decide whether New York-based startup Kalshi can offer a form of betting of up to $25,000 on which party will control the House and Senate after the Midterms. PredictIt, another online election trading marketplace, has also sued the regulator over its decision to overturn a cease and desist letter.
The recently closed public comment period on Kalshi’s proposal brought letters from a number of big names in technology, finance and academia, discussing how so-called prediction markets could affect elections for better or for worse.
Gambling in elections is generally banned in the US – although it has not always been so and is legal in other countries including the UK. Kalshi describes his proposal not as Las Vegas-style gambling, but as a prediction market where users buy and sell contracts on events based on their perceived likelihood.
Kalshi was registered with the CFTC as a designated contracts market in late 2020, billing itself as the first regulated, event-driven futures market. On its service, users can trade contracts on everything from the size of the Fed’s next rate hike to the high temperatures in Chicago to the next moon landing. Contracts pay out $1 if the underlying event occurs as predicted and are priced to correlate with that perceived probability, so a price of 40 cents could be read as a 40 percent probability.
A few months after the company received regulatory approval, the company raised $30 million from a list of investors including Sequoia Capital, Charles Schwab (the financial services company’s chairman), and Henry Kravis of KKR. The mix of Silicon Valley funds and traditional finance speaks to Kalshi’s far-reaching ambitions.
“We want to build an ecosystem that can compete across the board with the New York Stock Exchange, or CME,” CEO and co-founder Tarek Mansour told Protocol.
This ecosystem has not previously included election-focused markets. But in July, Kalshi asked permission to change that and finalize two event deals on the Midterms result this fall. Such contracts, Mansour said, can help people hedge against election risks and paint a more accurate picture of the race.
The CFTC has denied similar requests in the past, ruling that election prediction markets are a gamble and not in the public interest. She has also cracked down on international companies that give Americans access to election trading. It has allowed small-scale voting contract trading only through limited permits for PredictIt and Iowa Electronic Markets, both of which are university-affiliated.
Reduce or create risks?
Kalshi has a mix of tech industry heavyweights and academics backing his regulation proposal.
Former top Obama economic adviser and Harvard professor Jason Furman wrote that the White House regularly used prediction markets to understand the potential impact of decisions on the real world.
“Elections are not games, and the outcome of congressional political scrutiny has a tremendous impact on public interest,” Furman said. “Choice-driven prediction markets combine the economic importance of a powerful risk mitigation tool for small businesses with the social importance of a powerful forecasting tool for researchers and policymakers.”
Elections are not games, and the outcome of Congressional political control has a huge impact on public interest.”
Dustin Moskovitz, the co-founder of Facebook and Asana, wrote that the $25,000 bets allowed by Kalshi were too small to have any bearing on the “multi-billion dollar affairs” in the US election. (He was a major Democrat donor himself.) But he thinks the prediction market could help people better understand elections.
“Rather than listening to experts with less than ideal track records and perceived biases, the general public can be informed through the unbiased marketplace,” he wrote.
Revive old worries
But many of the same concerns remain a decade after Nadex’s last proposal was rejected by the CFTC in 2012.
“When we think about what happened in 2020, do we really want another excuse for the American people to question the integrity of our elections?” Former CFTC Commissioner Jill Sommers told POLITICO.
Dennis Kelleher, chief executive of the non-profit organization Better Markets, said in an interview that the important role of commodity markets is “lost in the discussion” of the proposal. He made a lengthy argument against the proposal in a letter to the CFTC.
“The futures markets were not established as a new breed of casino, but to facilitate the supply of essential necessities to Americans by allowing commercial firms to manage the price risk associated with their productive commercial activities,” Kelleher wrote.
Whether Kalshi’s electoral contracts could be considered gambling or whether they serve a genuine risk hedging purpose is one of the key questions the CFTC considers in its review.
Mansour began his career on Wall Street, where he says he saw how institutional investors could structure trades that essentially hedged their business against election risks like Brexit. There are speculators in every market, but Mansour argued that the different risks Americans face in every election give prediction markets a different value and purpose than gambling.
“When you roll the dice or spin roulette, you’re taking a risk that doesn’t have to be,” Mansour said. “In financial markets like grain futures or insurance or election markets, that risk is already there.”
As the CFTC reviews the proposal, it faces a lawsuit over its decision to revoke the cease and desist letter that another operator, PredictIt, has been using since 2014 to offer contracts for US political events. The CFTC in August ordered PredictIt operated by a university in New Zealand to be phased out by February. A group of scientists, practitioners and the market’s technology provider have sought an injunction against this decision, allowing the exchange to continue through 2024.
When you roll the dice or spin roulette, you take a risk that doesn’t have to be. In financial markets like grain futures or insurance or election markets, that risk is already there.”
The CFTC’s next steps will be closely monitored. Kalshi isn’t the only company building a marketplace for events contracts. Polymarket, for example, offers blockchain-based event contract trading, but only for non-US users. The firm was ordered to close to Americans after a CFTC fine earlier this year.
One of their contracts asks if the CFTC will approve Kalshi’s proposal. So far, users tend to say no.
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