As the U.S. heads toward its next presidential and congressional elections, a significant legal battle has developed around US election betting in the United States.
On October 2, 2024, a federal appeals court ruled that prediction market platform Kalshi could resume offering election betting contracts on the US election, rejecting a stay request from the Commodity Futures Trading Commission (CFTC). These so-called “event contracts” allow users to wager on the outcome of political events such as “Next President” and “Party to Control Congress.” The CFTC had argued in its “No Action” letters that these event contracts constituted gambling.
The ruling judge, Patricia Millet, stated that the CFTC failed to prove that the public would face irreparable harm if the stay request were not granted. Instead, she ruled to dissolve the stay while keeping the door open for the CFTC to pursue extended legislation that could ban election betting contracts in the future.
Until further notice, Kalshi can continue offering its “yes/no” contracts, which allow users to put down money based on predictions related to the Presidential election and other political events—effectively making US election betting legal for all Americans.
What is Kalshi?
Kalshi is the first CFTC-regulated exchange where Americans can trade on the outcomes of real-world events to mitigate risks, a process called hedging.
The exchange was founded in 2018 and backed by prominent investors like Sequoia and Charles Schwab.
On the Kalshi trading platform, event contracts allow users to take yes or no positions on events like the US election, inflation changes, and Supreme Court decisions. Users can hedge personal risks related to economic and social events, while Kalshi earns a small fee per trade and associated transactions.
What are Event Contracts?
Event contracts are an asset class that allows investors to trade directly with other investors on opinions about specific yes/no questions.
Kalshi’s event contracts mainly cover real-world events, giving direct exposure and options to hedge various risks, including:
- Who Will Win the Presidential Election?
- Electoral College Margin of Victory?
- Popular Vote Margin of Victory?
- Who Will Win the Popular Vote?
- Who Will Win the House, Senate, and Presidency?
- Number of Rate Cuts in 2024?
- Next FED Rate Hike?
- Inflation in 2024?
- Gas Prices in the US This Month?
Event contracts are traded between Kalshi’s users. Users buy contracts based on what they believe to be the answer to the market question: YES or NO.
The Kalshi exchange typically charges trading fees for general markets. However, there are no trading fees for event contracts related to the US election.
Difference Between Event Contracts and Sports Betting
Key distinctions between event contracts and sports betting relate to legal definitions, mechanics, and regulations for trading exchanges (investing) and sportsbooks (gambling).
Kalshi (Event Contracts) | Sports Betting (Sportsbooks) |
---|---|
Capital is invested to generate profit. | Money is wagered on an outcome intending to win more money than was wagered. |
Money is invested for profit by the investor, where both the investors and the exchange can be profitable over the long term. | Money is wagered by bettors, and sportsbooks profit in the long run. |
Investors trade against the liquidity of other traders on the exchange for minimal exchange fees (often 1-2%). | Bettors wager against the sportsbook at a statistical disadvantage because they charge a fee on each bet to ensure a profit (often 4-8%+). |
Federal regulations. | State-level regulations. |
Nationwide access to all Americans. | State-by-state access. |
US election is legal. | US election betting is not legal. |
Legal Definitions: Investing Versus Gambling
- Investing: allocating capital to generate income and obtain a profit.
- Gambling: wagering money on an event with an uncertain outcome intending to win more money than was wagered.
Mechanics of Investment Platforms and Sportsbooks
A fundamental aspect between investments through event contracts and sports betting is the expected return:
- Investors are supposed to profit over the long run when using trading platforms, where they only pay fees relating to transactions to cover administrative and platform costs.
- Bettors using sportsbooks are statistically at a disadvantage, where the sportsbook is supposed to make a profit over the long run by charging a fee for each wager (vig/margin/juice).
While skilled bettors can earn a profit over the long run by beating sportsbooks, they are at a significant disadvantage compared to investors trading on exchanges against other users’ liquidity.
At the same time, there are no guaranteed investments, but investors are likely to make positive returns. In the long run, both investors and issuers of event contracts can make a profit. In sportsbooks, this is impossible.
Regulations for Event Contracts and Sports Betting in the US
The Commodity Futures Trading Commission, the Federal regulatory agency for futures trading in the United States, regulates investing platforms such as Kalshi. Therefore, Kalshi is federally regulated and available nationwide, where event contracts make US election betting legal for all Americans.
Sportsbooks in the United States are regulated at the state level, and availability and regulations vary from state to state. No states allow licensed sportsbooks to offer odds on the US election.
PredictIt is Another Platform Where Americans Can Bet on the US Election
Kalshi is not the only platform allowing individuals to spend money on electoral predictions. PredictIt, launched in 2014, is another platform offering event contracts for the 2024 Presidential Election Winner and a basket of other political contracts under a No-Action Letter (NAL) pending a court decision. It’s an academic-run exchange managed by the Victoria University of Wellington.
PredictIt is still appealing to “No Action” letters from the CFTC. The case is pending before the Fifth Circuit Court, and in the meantime, traders on PredictIt continue to hold and trade existing contracts. Considering the recent ruling by the Circuit Court, it’s possible that PredictIt will be successful in its appeal since the situation is similar.
Other Platforms That Lost the Battle for Electoral Predictions in the US
- The CFTC issued No Action letters in 1993 to Iowa Electronic Markets (University of Iowa), another non-profit and academic-run exchange that offered US Election-related contracts.
- More recently, a third exchange, Polymarket, launched in 2020, did not register with the CFTC and faced a $1.4 million penalty in 2022, agreeing to restrict its US involvement and acceptance of American customers.