Many around the country have been asking for five years if election betting ever will become legal in the United States.
While PredictIt and the University of Iowa offer small-stakes betting exchanges with not-insignificant followings, many hoped the Commodity Futures Trading Commission (CFTC) would open the path for election betting with fewer restrictions.
A recent CFTC decision to deny the latest application was expected, though it had been a long time coming. The CFTC began reviewing applicant Kalshi‘s contracts in June, but it was not the company’s first effort to get election betting, or political event contracts, authorized by the financial regulator.
Kalshi’s application may have partially been a victim of bad timing, as the CFTC is still currently locked in litigation in Texas over its withdrawal of a no-action letter that allows PredictIt to operate. The decision likely means that Americans looking to put some money behind their political opinions in a regulated market for the 2024 election cycle will need to do so at one of the two permitted exchanges.
What did the CFTC do?
On September 22, CFTC denied a request from KalshiEX to offer derivative contracts on the outcome of the 2024 for the control of Congress. Kalshi was seeking to allow traders the ability to put their money behind whether Democrats or Republicans would control Congress after the election.
The CFTC denied the application, referencing the contracts in the same breath as unlawful gaming and contrary to the public interest. Political betting has long attracted attention from bettors, regulators, media, and the public.
After the June application, there was a public comment period where a number of prominent academics who studied market behavior chimed in to support the application. However, the public comment period also received a fair bit of public opposition from numerous interest groups and members of Congress, including Jamie Raskin and Senator Amy Klobuchar.
End of the road?
Kalshi previously sought permission to offer similar contracts in August 2022; however, the company withdrew the application in the days before a decision was expected. There had been speculation that approval was unlikely. Despite the previous withdrawal, the company resubmitted an application the following month.
The denial answers a question that had been hanging out for some time regarding whether the CFTC was ready to modernize around less-traditional derivative contracts. The CFTC’s denial of derivative contracts based on elections follows not only the previous withdrawal by Kalshi but also the withdrawal of an application by a company dubbed ErisX that would have allowed for some qualified groups to hedge risk by trading contracts on NFL futures.
Election betting a long-held taboo
Betting on elections has long been viewed as taboo in the US despite its popularity in many places. Professors Paul Rhode and Koleman Strumpf wrote about the history of betting on elections and found that betting on elections was quite popular here prior to the 1860’s.
After the Civil War, in some places election betting was so commonplace and engrained that newspapers would publish the names of winners of both the elections and of parimutuel election pools. After World War II, election betting fell out of favor and there was a general crackdown on wagering activity.
A number of states maintain statutory prohibitions against wagering on elections, and the CFTC has taken a leading role in policing against political betting as a form of prohibited binary options contract. The University of Iowa would get permission to offer a low-stakes election betting exchange in the early 1990’s and would gain a cult following. During the early 2000’s, the Defense Advanced Research Projects Agency would explore the usefulness of political markets, but after negative press, the projects were shut down.
More recent election betting history
Prediction markets would continue to gain negative attention, with some markets getting a special mention in the Dodd-Frank Act.
Some of the fears of politicians were highlighted when someone, or a group of people, were using a prediction market to make it appear that Mitt Romney has an inflated likelihood of winning the 2012 presidential election. In 2014, the CFTC would issue a second no-action letter, to Victoria University in New Zealand. The Victoria University letter would eventually turn into the PredictIt market.
What is next in election betting case?
In the immediate term, all eyes will turn to a federal district court in Texas where we wait to find out what will happen to PredictIt. While PredictIt has received an injunction, its long-term future remains far from clear.
In the most recent update to the case, the CFTC filed a motion to transfer the case to the District of Columbia, where the CFTC is located. The plaintiffs already notified the district court of their intent to oppose the motion. There is a good chance we will know by the end of the year whether the case will play out in an Austin federal courthouse or a federal courthouse in DC, but the case itself is likely to stretch on for some time.
There is a desire for political markets. Whether the underlying activity is called betting, trading, or investing, people clearly have an interest in doing it. Like with regulated sports betting, the question seems to be when not if political markets will eventually emerge.
Companies looking to offer political contracts need to begin a plan for the long-term to educate not only the CFTC as to the value of the markets, but also to educate Congress that there is value beyond simply betting on who will control Congress.