Politico
The CFTC is seeking to send its strongest message yet that election betting has no legal place in its markets.
A top Wall Street regulator has proposed outlawing election betting in the U.S. derivatives markets, with officials warning that the activity poses a threat to the sanctity of American elections.
The Commodity Futures Trading Commission, which is charged with regulating the vast and complex derivatives markets, voted 3-2 on Friday to issue a new rule proposal that would ban so-called event contracts that effectively act as wagers on political elections. The plan would also prohibit those contracts related to sporting events and even awards ceremonies like the Oscars.
For more than a decade, the CFTC has rejected applications to offer day traders, political junkies and sophisticated investors the chance to bet on elections including for the White House, Congress and even some local contests. But the regulator is now moving to send its strongest message yet that election betting has no place in its markets.
“Contracts involving political events ultimately commoditize and degrade the integrity of the uniquely American experience of participating in the democratic electoral process,” CFTC Chair Rostin Behnam said. “Allowing these contracts would push the CFTC, a financial market regulator, into a position far beyond its Congressional mandate and expertise. To be blunt, such contracts would put the CFTC in the role of an election cop.”
Behnam was joined in supporting the proposal by fellow Democratic Commissioners Kristin Johnson and Christy Goldsmith Romero. Commissioners Summer Mersinger and Caroline Pham, the panel’s Republicans, voted against the proposal. Mersinger, who said she is not a “fan” of all event contracts, expressed concern that the proposal reaches beyond the CFTC’s authority.
The plan escalates what is already an intense battle over the future of political betting markets in the U.S. Behnam’s agency has significantly ratcheted up its scrutiny in recent years, moving to shut down the popular platform PredictIt and rejecting an election-betting bid by derivatives exchange startup Kalshi. But both PredictIt and Kalshi have fired back with lawsuits challenging the agency’s decisions.
John Aristotle Phillips, co-founder and CEO of PredictIt, called the proposal “ill-conceived” and “a mistake.”
“Instead of attempting to shut down and restrict event contract markets, we urge the Commission to embrace innovation and formulate a reasonable regulatory framework that keeps Americans in regulated U.S. markets and not push this valuable activity offshore,” Phillips said in a statement.
Event contracts are effectively designed to provide investors a way to bet on any range of outcomes. Kalshi, for instance, offers markets related to whether the U.S. will ban TikTok within the year, Costco membership rates and how many times the Federal Reserve will cut interest rates. PredictIt offers election-specific contracts, including ones related to the November election.
The products are intended to offer companies and investors a new tool to protect their businesses and portfolios from geopolitical risks, economic downturns or, in the case of election-betting contracts, policy swings, backers say. If someone with heavy exposure to electric vehicle stocks is also bracing for a second Trump administration, for example, they may turn to an event contract to offset the risk of Biden losing in November.
Data created by election-betting markets can also be used by economists, journalists and Washington insiders looking to gauge where voters stand.
Markets are showing increased interest in the products. More event contracts have listed for trading in the last three years than in the previous 15 combined, Behnam said.
But the CFTC has found over the years that election-betting proposals would run afoul of the law. Currently, event contracts cannot relate to certain categories including war, terrorism, assassination and gaming. They are also not allowed to run contrary to the “public interest” or be tied to activity that would violate federal or state law.
Still, the law has what Behnam calls “ambiguities” that the agency is looking to fix. The agency’s proposal, for instance, defines “gaming” for the first time to cover political contests, awards contests and sporting events, Behnam said.
Johnson said the CFTC’s proposal is also needed for “the preservation of the protection and integrity of our electoral Democratic processes.”
“Free and fair elections have served as a foundational cornerstone of power in Democracy and the decision-making process underlying our elections must remain sacrosanct,” she said.
The CFTC’s plan is still likely months away from finalization, which would require another vote by the commissioners. In the meantime, the proposal appears bound to become the subject of a lobbying blitz in Washington.
Kalshi CEO Tarek Mansour said following the vote that the company will be engaging with the CFTC and Congress about the plan. Its aim is “to ensure that our customers can participate in legitimate trading with legitimate use cases on a legitimate, regulated exchange and not on offshore and illegal markets where there is no customer protection or market integrity,” he said.
Some lawmakers like Rep. Dusty Johnson (R-S.D.) urged the CFTC to proceed with caution in the run up to Friday’s vote. In a letter last week, Johnson and six other lawmakers on both sides of the aisle similarly raised concern about pushing the event contracts market out of the U.S.
But many Democratic lawmakers and critics have raised concern about the idea of election products. Last year, Sen. Jeff Merkley of Oregon called Kalshi’s proposal “a clear threat to our democracy and elections.”
Cantrell Dumas, director of derivatives policy at Better Markets, said the financial reform advocacy group is still reviewing the proposal but applauded the aim of the CFTC’s plan.
“If sufficiently strong and clear, today’s proposed rulemaking will not only safeguard the core values of our democracy but also act as a barrier against the gamification of our democratic outcomes, ensuring that speculative betting doesn’t tarnish the integrity of our electoral processes or the CFTC,” Dumas said.
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