US CFTC Appeals Ruling in Kalshi Case, Claims Prediction Markets Susceptible to Manipulation
CFTC Argues Prediction Markets Are Vulnerable to Manipulation in Kalshi Case Appeal
The Commodity Futures Trading Commission (CFTC) lost a case against prediction market Kalshi over its offering of election prediction contracts to US citizens. However, the agency has filed a new motion, arguing that prediction markets are susceptible to manipulation, in an attempt to block the company from offering a prediction market for the November elections.
Last year, the CFTC said Kalshi could not offer contracts related to "control of Congress," prompting Kalshi to sue the agency in November 2023. Last week, Judge Jia Cobb ruled in favor of Kalshi, stating its prediction contracts do not involve "illegal activity or gambling" and pointing out that Congress has not authorized the CFTC to conduct public interest reviews of such contracts. However, the CFTC swiftly appealed the ruling to the U.S. Court of Appeals for the District of Columbia Circuit, forcing Kalshi to suspend its election contracts.
Now, the CFTC argues that the ruling should be stayed during the appeal process. The agency claims in a filing on Saturday that any financial losses Kalshi might face from missing this election season "…pale in comparison to the harm that would be done by allowing election gambling in the U.S. futures markets."
Disagreement Over the Nature of Election Prediction Markets
In its reply in support of its motion to stay the ruling during the appeal, the CFTC makes technical legal arguments around the definition of contested words like "gaming" and "gambling" and how these terms should apply in this case. The agency claims that because Kalshi's contracts involve putting valuable items at stake to bet on election outcomes, they fall under the general definition of "gaming," giving the CFTC jurisdiction.
Kalshi disputes this in its filing opposing the stay, arguing that "elections are not a game…they are not established for amusement or sport." The company states that "unlike the outcome of a game, the outcome of an election has wide-ranging external and economic consequences."
Both the CFTC and Kalshi seem to agree that unregulated prediction market trading has the potential for market manipulation. The CFTC contends in its filing that "documented instances of market manipulation have already arisen in the markets to which Kalshi points," and mentions Polymarket, claiming the prediction market "…suffered a ‘remarkable manipulation’ attempt involving a group of traders placing heavy bets on Vice President Harris."
Kalshi acknowledges the potential for wrongdoing but argues that unregulated markets are already in operation. Its filing reads:
"…other election prediction markets (including Polymarket and PredictIt) are currently operating without any federal regulation and are regularly cited by the media as a source of predictive data. A stay therefore does nothing to enhance election integrity; its only effect is to confine all election trading activity to unregulated exchanges. This would be harmful to the public interest."
However, the CFTC calls this argument "misplaced" in its filing, arguing that "a pharmacy cannot justify dispensing cocaine simply because there is a black market for it." The agency writes in its filing: "The Commission believes that election gambling on U.S. futures markets poses a serious threat to election integrity, and that another platform’s provision of such services without CFTC oversight does not constitute a reason to allow election gambling to proliferate."
