It may have seemed like a longshot that a Biden-appointed federal judge would side with a startup trying to offer Americans a way to bet on the upcoming elections, but that’s just what happened earlier this month, when D.C. District Court Judge Jia Cobb handed Kalshi, a financial exchange and prediction market, a victory in its suit against the Commodity Futures Trading Commission. Judge Cobb overturned the CFTC’s ban on Kalshi contracts that pay out depending on which party controls Congress after the November elections. While the appeals court has yet to weigh in, the decision paves the way for this important hedging instrument to return, in a regulated manner, to American financial markets.
Prediction markets may seem like pointless gambling at first, but they’re actually useful financial tools, enabling individuals and companies to manage risk caused by uncertain events. Hurricanes, for example, affect businesses in different ways: hotels or restaurants would be hurt by more hurricanes; construction or generator rental companies would benefit. But hotels and construction firms don’t want to be in the business of predicting the future; they want to focus on hospitality and building, respectively. So, the firms buy a contract paying out if the adverse position occurs: no-hurricane contracts for the construction companies, and yes-hurricane contracts for the hotels—meaning they’ll get a payout if the event that hurts their business occurs. They sacrifice some profit potential to hedge against an uncertain future.
In a world where Congress can kill or coddle industries with a single law, election-outcome contracts take on greater significance for businesses of all kinds. A natural gas company might buy Democrats-to-control-Congress contracts to hedge its negative political exposure, just as a Chinese solar company might buy Republicans-to-control-Congress contracts for the same reason.
“The court decision is a victory for free markets and for all Americans who recognize the implications of this November’s election and all future elections,” said Kalshi CEO Tarek Mansour. “Until now, Americans have sat back as the world accessed tools to hedge election uncertainties. With this ruling, Americans—those most directly affected by U.S. elections—now have access to a legal and regulated means of managing these risks.”
The Democratic commissioners of the CFTC primarily opposed these contracts on the belief that they erode Americans’ faith in the integrity of our elections and create perverse incentives to affect the election outcome. Individuals could be incentivized to vote for candidates in order to win money, rather than as a reflection of their views; speculators could be incentivized to influence elections—for example, by spreading false stories—in order to win their bets.
These objections don’t hold up. First, candidates’ political stances, the fuel that puts money into elections, arguably create an even greater perverse incentive. The amount of money at stake in, for instance, energy exploration and production rules set by Congress far outweighs the size of prediction markets. And political actors don’t need the extra incentives created by prediction markets to spread lies about politicians.
Second, bad actions—namely, attempts to manipulate elections illegally—can be policed and deterred by means of rules that do not stifle useful economic activity. Third, making bets on elections in America has a long and storied history, but this has not caused anyone to question the legitimacy of presidents like FDR or Theodore Roosevelt, both elected in periods when betting on elections was legal. “Americans have a deep history of wanting skin in the game in politics,” says Nick Tomaino, a venture capitalist and one of the early investors in Kalshi competitor Polymarket. “In 1916 there was more money wagered on the U.S. presidential election than total campaign finance. Regulators prevented these markets for the past hundred-plus years without much explanation. It’s exciting to see the issue now coming to light with the court ruling in favor of Kalshi.”
Considering the logic and history of the CFTC’s position, a likelier explanation for the CFTC commissioners’ stance is that they believe they have a paternalistic duty to keep Americans from gambling. Unfortunately for them, Congress does not empower the agency to make these kinds of significant moral and political determinations.
Former CFTC chairman Heath Tarbert puts this principle plainly: “The CFTC’s job is to execute the will of Congress, not to subvert it. Prediction markets have tremendous potential to be a vital source of information to make everyday economic decisions. Unless Congress specifically prohibits certain contracts, the job of the CFTC is not to outlaw them but to ensure they are soundly regulated.”
Judge Cobb’s decision aligns with both Tarbert’s views and recent court rulings expressing growing skepticism toward regulatory overreach by the federal government. Whether it was the Supreme Court’s decision overturning Chevron and curtailing judicial deference to agency decisions, or a lower court blocking the SEC’s bid to prevent Americans from accessing a regulated bitcoin ETF, the courts seem newly reluctant to let unelected bureaucrats make law.
Judge Cobb’s opinion, citing the Supreme Court’s decision in Loper Bright Enterprises, which overturned Chevron, involves a careful statutory analysis that relies on the traditional canons of construction. The case essentially turns on whether “gaming” and “gambling” are fully synonymous. The Commodity Exchange Act, which grants the CFTC power over these contracts, gives the agency power to regulate “gaming” contracts with more oversight. The CFTC tried arguing that, because the results of elections are uncertain, they are gambling, and gambling is “gaming” under the statute. This is obviously incorrect, and Judge Cobb said as much when she ruled that “gaming requires a game.” It is also worth noting that Judge Cobb expressed personal skepticism regarding these markets, which makes her ruling even more significant.
In the United States, Congress still makes the laws, and if it wants to ban election contracts, it should do so explicitly. Judge Cobb’s ruling is a win not only for prediction markets but also for our constitutional structure and the rule of law.
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