Kalshi’s Legal Battle With CFTC Over Political Betting Markets
KalshiEX LLC v. Commodity Futures Trading Commission[1] (CFTC) revolves around KalshiEX’s (Kalshi) attempt to offer political event contracts on its exchange. These contracts would allow individuals to bet on the outcome of congressional control, specifically whether a particular political party would control a chamber of Congress for a given term.
On September 12, 2024, the CFTC filed an Emergency Motion for Stay Pending Appeal[2] after the District Court of Columbia granted Kalshi’s motion for summary judgment and denied the CFTC’s cross-motion for summary judgment, vacating the CFTC’s order prohibiting Kalshi from offering its congressional control contracts. The D.C. Circuit Court of Appeals issued an administrative stay, temporarily halting the District Court ruling, however the Court emphasized that the stay is intended only to provide time for the panel to consider whether to grant a longer stay in response to the CFTC’s emergency motion for a stay pending appeal. On October 2, 2024, the Circuit Court issued its decision denying the stay pending appeal (without prejudice) finding that the CFTC has failed to demonstrate that it will be irreparably injured absent a stay.[3]
How did this all start? Taking it back to 2020, the CFTC authorized Kalshi (a financial services company) to list event contracts for public trading as a designated market contract (DCM). The contracts Kalshi has offered on its exchange have involved a broad range of events—from the number of major hurricanes that will form over the Atlantic during a given year, to whether China’s GDP growth will exceed a certain rate, and even whether a particular nominee will win in their category at the Oscars. The dispute between the Parties concerns a specific product that Kalshi attempted to offer that it refers to as “congressional control contracts.” Kalshi’s congressional control contracts allow buyers to predict which political party will control the U.S. House of Representatives or Senate on a specific, future date.
On June 12, 2023, Kalshi submitted these congressional control contracts for approval, pursuant to 7 U.S.C. § 7a-2(c)(1). The CFTC, after a thorough review, rejected the contracts in September 2023. The agency cited concerns over legality, as these contracts resembled gambling and could be considered contrary to public interest under both federal and state laws. The decision was based on the Commodity Exchange Act (CEA) and CFTC regulations, which prohibit contracts that involve gaming or wagering. The agency referenced concerns over the contracts fostering a speculative market based on political outcomes, which could undermine trust in democratic processes.
Kalshi subsequently challenged the CFTC’s order by filing suit in DC District Court arguing that the CFTC’s order is arbitrary, capricious, and contrary to law under the Administrative Procedure Act. Kalshi supported its case by arguing that the contracts were legitimate financial instruments designed for market participants to hedge risks related to political changes.
In reaching its determinations to allow Kalshi to proceed with these contracts on September 12, 2024, the court’s rationale was based on its interpretation of the definition of “gaming” which the CFTC equates to “gambling,” but the Court disagreed. Because the CEA does not define “gaming,” under the law, the Court must give the undefined term its ordinary meaning.[4] To discern that meaning, the Court conducted a survey of dictionary definitions[5], which define “gaming” as “the practice or activity of playing games for stakes” and “the practice or activity of playing games.”[6] Because Kalshi’s congressional control contracts involve elections and not gaming or illegal activities, the Court determined that the “special rule”[7] is not triggered, which makes it unnecessary to determine whether the CFTC was right that these event contracts are contrary to public interest.
The legal battle highlights broader questions about the regulation of novel financial products, particularly those intersecting with sensitive political events. This case remains ongoing and is currently pending appeal before the D.C. Circuit Court of Appeals.
[1] See Kalshiex LLC v. CFTC, Civil Action No. 23-3257 (JMC)
[2] https://business.cch.com/srd/KalshiexvCFTC-EmergencyMotion.pdf
[3] https://www.courtlistener.com/opinion/10128675/an-opinion-was-released-in-case-24-5205-kalshiex-llc-v-cftc/?q=kalshi
[4] See Taniguchi v. Kan Pac. Saipan, Ltd., 566 U.S. 560, 566 (2012).
[5] See Id. at 569.
[6] See Gaming, Merriam-Webster.com, https://perma.cc/9JZW-SRS2 ; see also Gaming, Oxford English Dictionary, https://perma.cc/R99K-A2HD
[7] The special rule authorizes the CFTC to review, and prohibit, event contracts that it determines are contrary to the public interest if, and only if, they involve specific activities, including “activity that is unlawful under any Federal or State law” and “gaming.” See 7 U.S.C. §§ 7a-2(c)(5)(C)(i)(I),
