CFTC Has No Authority to Second-Guess Election Contracts, Judge Says

The U.S. Commodity Futures Trading Commission didn't have the authority to "conduct a public interest review" that led it to block Kalshiex from listing political prediction markets in the U.S., a federal judge said in a formal opinion Thursday..

Judge Jia Cobb, of the District of Columbia, published her long-anticipated opinion nearly a week after ruling in Kalshi's favor in its lawsuit against the CFTC. The judge wrote that Congress had revoked the CFTC's ability to conduct public interest reviews of certain proposed derivative contracts, unless they fit within certain buckets, like terrorism or gaming.

The opinion may have implications for the CFTC's pending proposal to ban all exchanges on its watch from listing political prediction markets, .

"The district court's opinion and conclusions do appear to conflict with the CFTC's proposed rule, including with respect to the proper definition of 'gaming,'" said Daniel Gorfine, an adjunct law professor at Georgetown University and a former chief innovation officer at the agency.

"The court takes a far narrower interpretation than the CFTC does in its Kalshi order and proposed rule," Gorfine said. "It is accordingly hard to see how the proposed rule would square with the court's reasoning."

Although Kalshi won the case, it remains unclear how soon the company can list election markets. The CFTC has filed an emergency motion asking the judge to stay her order while the agency figures out whether to appeal. A hearing on that motion is scheduled to take place Thursday at 10:30 a.m. Eastern time (14:30 UTC).

Read more: U.S. Election Betting: What's at Stake in Final (?) CFTC-Kalshi Showdown

The CFTC has argued for several months now that political prediction markets fall under the "gaming" category, including in its proposal to ban them in the U.S. outright. In the Kalshi case, the judge disagreed.

"The CFTC’s order exceeded its statutory authority. Kalshi’s contracts do not involve unlawful activity or gaming," the judge wrote. "They involve elections, which are neither."

The judge cited the Supreme Court's Loper Bright ruling that overturned the previous Chevron deference precedent, in explaining how she came by her order.

Much of the judge's ruling walks through how she interpreted Congress's intent in modifying the Commodity Exchange Act, including how it and the CFTC defined words like "involves" and "gaming."

The CFTC defined "gaming" as something that could include "gambling," which in turn involves making wagers, the judge noted.

But, this logic could let the CFTC review any event contract where people put money on an outcome, which the Commodity Exchange Act already prevents it from doing, the judge said.

Judge Cobb said Kalshi's proposed contracts – which would let users take positions on which major political party might control each house of Congress at a given time – do not involve "unlawful activity or gaming," which alone is sufficient to overturn the CFTC's rejection of Kalshi's contracts – and the judge can't consider if there's a public interest angle as a result.

"That question involves (relates to, entails, has as its essential feature, or any other iteration of the word) elections, politics, Congress, and party control; but nothing that any Party to this litigation has identified as illegal or unlawful activity," the judge wrote. "Nor does that question bear any relation to any game – played for stakes or otherwise."

She emphasized that this decision was based on law, not policy preferences.

"Although the Court acknowledges the CFTC’s concern that allowing the public to trade on the outcome of elections threatens the public interest, this Court has no occasion to consider that argument," the judge wrote. "This case is not about whether the Court likes Kalshi’s product or thinks trading it is a good idea. The Court’s only task is to determine what Congress did, not what it could do or should do. And Congress did not authorize the CFTC to conduct the public interest review it conducted here."

Whether or not the CFTC appeals this case or finalizes its proposed rule, it may find other ways to stymie political prediction markets, which its hairman Rostin Benham has said would put the agency the untenable position of becoming an election cop.

"It is worth noting that the CFTC has additional authority it could invoke to create new rules around contracts that involve activities that are 'similar' to the enumerated list of activities the Commission can find to be against the public interest," said Gorfine, who is also the founder of Gattaca Horizons LLC, an advisory firm. "Of course, that would take time and be subject to potential challenge."

UPDATE (Sept. 12, 2024, 14:15 UTC): Adds comments from law professor .