CFTC bows out of election betting appeal against Kalshi

The Commodity Futures Trading Commission (CFTC) has signaled a substantial shift in its stance on election betting, highlighting the potential for a new era in prediction markets.

The landscape for legal election betting in the United States appears to have dramatically transformed in favor of prediction markets.

This week, the CFTC submitted a motion for voluntary dismissal, effectively concluding its appeal against Kalshi, a New York-based exchange that has revolutionized the sports betting sector. This case was under review by the U.S. Court of Appeals for the D.C. Circuit.

In conjunction with the dismissal, Kalshi has also waived any claims related to this matter in court and prior administrative proceedings.

“Election markets are here to stay,” proclaimed Kalshi CEO Tarek Mansour on X. He emphasized that prediction markets have faced extensive bans and restrictions over the decades, and this milestone affirms their right to operate and flourish.

Legal Battle Spurs Significant Change

The recent request for dismissal brings to a close a prolonged legal struggle between Kalshi and the CFTC, which had been mounting under the Biden administration. The conflict intensified after Kalshi self-certified its election contracts in June 2023, only to face CFTC disapproval by September.

The ensuing federal court litigation led to a pivotal judgment in October, with the appellate court ultimately siding with Kalshi. This ruling catalyzed substantial trading activity on election contracts during the November electoral cycle. Despite previous declarations from the CFTC to continue its opposition, that position has dramatically shifted.

Judge Patricia Millett, in the appellate court’s ruling, acknowledged the complexities of the case, concluding that the CFTC could not sufficiently demonstrate how the election contracts could harm the public—a crucial aspect of their argument against them. This shortcoming was deemed “fatal” to the Commission’s request to stay the ruling.

A Paradigm Shift in Regulatory Perspectives

Until this year, the CFTC had staunchly enforced prohibitions on contracts related to elections and gaming. However, Kalshi has successfully argued that prediction markets function as financial exchanges offering tangible economic hedging benefits. Users can buy and trade contracts linked to various event outcomes, akin to operations on traditional commodities exchanges.

The appellate court ruling, coupled with a correct prediction of Donald Trump’s substantial victory, hinted at a turning tide. Notably, Donald Trump Jr. was appointed as an adviser to Kalshi just before his father’s inauguration. He shared on X that the Kalshi platform enabled his family to ascertain their electoral success ahead of mainstream media reports, highlighting the predictive power of these markets.

In a further indication of a shift in regulatory sentiment, Trump nominated Brian Quintenz, a Kalshi board member, as the CFTC’s next chair. Quintenz previously served as a commissioner and has been a vocal advocate for prediction markets.

Emerging Concerns in the Gaming Landscape

The initial focus on election betting was met with limited concern from the gaming industry; however, the subsequent expansion of exchanges into sports betting has ignited considerable anxiety. This prompted the CFTC to announce a roundtable on sports contracts earlier this year, though details remain sparse, and the scheduled discussion was abruptly canceled.

Many state gaming regulators have since issued cease-and-desist orders against these markets, deeming them illegal gambling operations. Kalshi has countered in three states—Nevada, New Jersey, and Maryland—achieving preliminary injunctions in the first two. These legal victories, along with the canceled roundtable, suggest that approval for sports markets may follow the precedent set by election betting.

The CFTC: A New Regulatory Frontier?

As momentum builds for the approval of prediction markets, an essential question arises: what role will the CFTC assume going forward?

If the Commission decides to sanction widespread prediction markets, it may emerge as a de facto national gambling regulator—an idea it vehemently opposed just last fall. Industry analyst Steve Ruddock noted in his “Straight to the Point” newsletter that the CFTC’s budget and staffing levels seem inadequate for such a regulatory shift. In 2010, it operated with 699 employees, while current estimations suggest a workforce between 250 and 1,000, with a 2025 budget request of $399 million to cover all regulatory responsibilities.

Ruddock further highlighted that estimates suggest a national sports betting regulator could require a staffing range of 1,000 to 2,000 personnel to effectively manage oversight.

A Commission at a Crossroads

Andrew Kim, a gaming attorney, speculated that the CFTC’s withdrawal from its election betting appeal may signal internal deliberations and strategic recalibrations within the Commission.

Kim observed, “A CFTC that is becoming more supportive of prediction markets wouldn’t gain from a ruling affirming earlier stances, and a favorable outcome for the CFTC would complicate its reassessment of these markets.”

Adding to the complexity, the CFTC issued a statement raising concerns about its internal operations, affirming its commitment to uphold the highest ethical standards. Recent administrative leave for employees amid allegations of misconduct highlights the need for enhanced oversight within the Commission as it navigates its evolving role in the gaming landscape.