US Derivatives Markets Regulator To Decide On New Political Betting Proposal

US Derivatives Markets Regulator To Decide On New Political Betting Proposal

Kalshi, a prediction market operator backed by some of the biggest names on Wall Street and Silicon Valley, is reportedly planning to move towards political betting in the United States, if approved by regulators.

The platform currently allows investors and bettors to trade on everything from climate change to potential Moon landings. Now Kalshi seeks to list two new so-called political event contracts based on the question of whether Democrats or Republicans will take over each chamber after the midterms, Politico reports. Investors would be able to wager as much as $25,000 on the outcomes of the elections.

However, the decision will be in the hands of the Commodity Futures Trading Commission (CFTC), the regulator in charge of overseeing U.S. derivatives markets, which has long been reluctant to open up trading in elections. In 2012, the CFTC rejected a similar bid by the North American Derivatives Exchange, or Nadex. The regulator was concerned that the products effectively represented a form of gambling, that they could influence the outcomes of the races themselves, and were ultimately not in the public interest.

Americans are not new to election markets, with betting going back well over 150 years, according to Koleman Strumpf, an economics professor at Wake Forest University who researches prediction markets. Nowadays, the allure of political prediction markets has grown, with a number of different venues emerging as a result to offer ways — not all legal — to trade on elections as big as the race for the White House and as local as contests to take over the mayor’s mansion.

The now-shuttered Irish prediction market Intrade did so for years before the CFTC filed charges against it in 2012 for allowing U.S. customers to trade options products in the form of prediction contracts to U.S. customers despite the regulator’s ban on off-exchange options trading.

Last month, the CFTC revoked the regulatory letter and reversed its previous issuance of allowance for PredictIt, an online platform that offers wagering options on U.S. political results like the elections, arguing the site was no longer “a small-scale, not-for-profit, online market for event contracts in the U.S. for educational purposes.” PredictIt, which caps bets at $850, refuted the claim.

Since 2014, PredictIt has used the permission granted for research purposes to Victoria University of Wellington in New Zealand to let Americans bet on US elections, something that’s generally forbidden. The focus on politics thrust PredictIt into the forefront of an emerging asset class that easily lets people wager on the outcomes of real-world events using derivatives, Bloomberg reports. PredictIt is operated by Aristotle Inc., which provides technology, data and other services to political campaigns.

Kalshi says it wants to introduce a changing element in this landscape by bringing political prediction trading into the light. The New York-based startup is already registered with the CFTC as a designated contract market, a regulatory classification that puts Kalshi in the same bucket as historic derivatives exchanges like the CME Group-owned Chicago Mercantile Exchange and the former New York Board of Trade, known today as ICE Futures U.S.

Launched in 2021, Kalshi, which counts Sequoia Capital, Charles Schwab’s eponymous founder and private equity legend Henry Kravis among its investors, frames its eclectic array of markets as a new wave of hedging tools.

“Everyday Americans are always exposed to election risks,” CEO Tarek Mansour said, as reported by Politico, citing tax policy as an example of how Congress’ makeup hits investors big and small. “We are trying to bring these tools to the masses. You’re basically financially hedging a variety of different things in your life instead of just sitting down and thinking, ‘OK, this is just going to make my next four years worse.’”

Questions about the extent to which Kalshi’s contracts can be used as a hedge will be front and center for the CFTC as it weighs the proposal. The regulator is specifically looking at two key issues, Willkie Farr & Gallagher partner Neal Kumar said. The first is whether the products involve a form of gaming, a classification of event contracts that is prohibited under CFTC rules along with the other types of unlawful activity.

The second is if the contracts are determined to reference gaming, is there an economic purpose behind them such as providing a way for investors to hedge risk, Kumar said.