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Under the proposal, Kalshi wants to list two new so-called political event contracts based on whether Democrats or Republicans will take control of each chamber after the midterms. Investors could bet up to $25,000 on the election results.
Officials at the Commodity Futures Trading Commission, the regulator responsible for overseeing U.S. derivatives markets, have long been reluctant to open up trading in the election. In 2012, the CFTC rejected a similar offering by the North American Derivatives Exchange, or Nadex. The regulator was concerned that the products did indeed represent a form of gambling, that they could influence the results of the races themselves and were ultimately not in the public interest.
Now he must decide if Kalshi’s proposal will meet the same fate.
“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?” said former CFTC commissioner Jill Sommers, who voted against Nadex’s proposal. “It’s not something we want to introduce into federally regulated capital markets.”
Americans are not new to election markets, with betting dating back more than 150 years, according to Koleman Strumpf, an economics professor at Wake Forest University who studies prediction markets. In the 1916 presidential election alone, the equivalent of more than $276 million in today’s dollars was wagered, according to a paper by Strumpf and Paul Rhode, professor of economics at the University of Michigan.
In the modern era, the appeal of political prediction markets has only swelled, and not just with Wall Street traders, political junkies and bettors. Academics, journalists and pollsters themselves have hung on to space for any clues about how Americans are leaning into the voting booth. As a result, a number of different venues have sprung up to offer ways – not all of them legal – to negotiate elections as important as the race for the White House and as local as contests to take control of the mayor’s mansion.
Ireland’s now-closed prediction market Intrade did so for years before the CFTC brought charges against it in 2012 for allowing US clients to trade options products in the form of prediction contracts with US clients despite the regulator’s ban on over-the-counter options trading.
Others, such as the academic-backed marketplaces PredictIt and the Iowa Electronic Markets were able to offer political event contracts within the limits set by the CFTC for them in exchange for not having to register with the agency. However, in August, the commission determined that PredictIt violated those terms and essentially ordered it to retire by February 2023.
“People have been interested in betting on elections as long as the country has had elections,” Strumpf said. “There has always been an underground tradition in the United States”
Kalshi says he wants to change that by spotlighting political prediction trading.
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 basket as legacy derivatives exchanges like the CME Group-owned Chicago Mercantile Exchange and the former New York Board of Trade, now known as ICE Futures US
Kalshi executives therefore argue that political trading on its site would mean better oversight, protection and safeguards than current incumbents – perhaps opening the political betting markets to many more people.
Launched in 2021, Kalshi, which counts Sequoia Capital among its investors, the eponymous founder of Charles Schwab and private equity legend Henry Kravis, presents its eclectic range of markets as a new wave of hedging tools, however unusual they may be. .
Think of a local restaurant, for example. Owners, perhaps worried about facing another pandemic-induced shutdown, could use Kalshi’s Covid-19 contracts to hedge against a possible loss of business. Its push into political markets is no different, CEO Tarek Mansour said.
“Everyday Americans are still at election risk,” Mansour said, citing fiscal policy as an example of how the makeup of Congress hits investors big and small. “We try to bring these tools to the masses. Basically, you’re financially covering a variety of different things in your life instead of just sitting around and thinking, “OK, this will only make my next four years worse.”
Questions about the extent to which Kalshi’s contracts can be used as hedges will be front and center for the CFTC as it weighs the proposal.
The regulator is looking specifically at two key issues, said Willkie Farr & Gallagher partner Neal Kumar. The first is whether the products involve any form of gambling, classification of event contracts that is prohibited by CFTC rules as well as other types of illegal activity.
The second is that if the contracts are determined to reference gambling, is there an economic purpose behind them, such as providing investors with a way to hedge risk, Kumar said.
It’s a similar calculation the regulator made a decade ago when reviewing Nadex’s political event contracts, which it said were both a form of gambling and not in the public interest. . But a lot has changed in 10 years.
Voter turnout has skyrockets. Misinformation is now rampant online. And sports betting has proliferated across the country.
Additionally, in 2012, the regulator became concerned about the possible effect Nadex’s political prediction markets could have on elections. But PredictIt has faced little concern along these lines despite being eight years old and handling about 110 million negotiated contracts on issues of political control since the 2018 election cycle alone, said Tim McDermott, board member of Kalshi.
“The landscape is really asking for even more now that these types of contracts are available on a regulated exchange than was the case in 2012,” said McDermott, who previously led Nadex as CEO and acted as legal counsel. when he attempted to list politics. event contracts.
For Mansour, “a truthful mechanism of what is going to happen [is] more important than ever. That could be Kalshi’s mid-term contracts in 2022, as hoped by investors and speculators who are already meddling in event markets and political predictions.
“The country is ready. Investors are ready. Bettors are ready,” Strumpf said. “It’s a question of whether regulators are ready.”
The CFTC, after recently launching a review of the contracts, is expected to issue a ruling by Oct. 28, about a week before voters head to the polls.
A spokesperson for the agency declined to comment.
Commissioner Caroline Pham expressed her dissent on decision in August to review Kalshi’s political event contracts. In a statement, the commissioner, who is one of the two top Republican CFTC officials, argued that the activity underlying the contracts – political control – does not represent prohibited activity and that because the he agency has never established a clear test for what is contrary to the public interest through a prescribed rule, no public interest test is required.
Pham also questioned why the agency was willing to allow PredictIt to offer midterm political event contracts, but has yet to rule on Kalshi’s plans, which she says are under discussion within the organization. the agency for almost a year.
Mansour doesn’t seem worried.
Asked about the tight lead time Kalshi could face to launch his political event contracts, should the CFTC take until the end of October to decide, the chief executive said, “We will be ready.”