The U.S. Commodity Futures Trading Commission (CFTC) is challenging a recent court decision that would allow prediction market platform Kalshi to offer contracts related to U.S. election outcomes. The ongoing legal battle has raised concerns about the integrity of election betting and the extent of the CFTC’s regulatory authority.
Court Hearing Pits CFTC Against Kalshi
At a hearing before the U.S. Court of Appeals for the District of Columbia Circuit, CFTC General Counsel Rob Schwartz and Kalshi’s counsel Yaakov Roth argued as to why the firm should be allowed to operate political prediction markets. The hearing was held after a district court decision that said the CFTC cannot stop it from offering contracts based on which party will control both the houses of the Congress.
Soon after the decision, the CFTC went for an application for a temporary stay which was granted by the appeals court.
Appeals court judge: “is there any evidence, as opposed to ‘reason to believe’ or hypothesizing … that short term manipulations of election betting markets do affect election process or outcome?”
CFTC gc: “I don’t have that.”Hearing in Kalshi case: https://t.co/2mPz6P2M7F
— m/arc
(@MarcHochstein) September 19, 2024
The three judges, Patricia Millett, Cornelia Pillard and Florence Pan, challenged both the arguments and appeared rather skeptical of the reasoning provided. The judges questioned the CFTC about its view on the Commodity Exchange Act, as well as the consequences of permitting the opportunity to place a bet on the electoral outcome.
Concerns Over Market Manipulation and Election Integrity
The U.S. Commodity Futures Trading Commission’s concerns included threats to market integrity and manipulation of election-related prediction markets. Schwartz pointed out that the political prediction markets are more susceptible to false information and manipulation as compared to other event markets.
He stated that permitting these contracts could lead to misperceptions among the public and thus erode the already weak confidence in the U. S. elections, particularly during a time when more citizens doubt the validity of the electoral system.
Schwartz also noted that while traditional futures contracts are based on factual and accurate information, political markets could be skewed by fake polls, fake news, and other agenda-driven media. He noted that the CFTC cannot adequately monitor these underlying events and therefore it remains challenging to promote fairness and transparency in the markets.
Kalshi Defends Market Viability and Regulatory Compliance
Kalshi’s attorney, Yaakov Roth, pushed back against the concerns surrounding Kalshi’s compliance measures, noting that regulated prediction markets are more transparent and provide more oversight than less regulated foreign platforms. Roth argued that markets that are supported by a robust and comprehensive legal regime are less likely to be manipulated than the unregulated foreign markets that Kalshi seeks to compete with, while operating in a regulated environment.
According to Roth, the firm has also incorporated ‘Know Your Customer’ measures to ascertain that only approved market players transact and recommended that there should be a local regulated market to overcome the dependency on overseas markets with less transparency. He maintained that permitting these regulated prediction markets would offer better protection to the participants and minimize the chances of distortion by foreign elements.
Hence, in the upcoming 2024 U. S. elections, the appeals court is expected to make a ruling as soon as possible. The CFTC has been working on a regulation that is likely to prohibit the trading on political events as the commission says that such contracts are detrimental to the public interest. Legal experts have argued that the courts or the legislature may have to step in and offer guidance on the future of election-related prediction markets.
CFTC Chairperson Rostin Behnam has also expressed concerns over the likelihood of the financial regulator being involved in election contracts, saying that such actions may be outside the scope of the agency.
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