Kalshi Cleared to Offer Congressional Prediction Markets in Victory Against CFTC

Kalshi, a U.S.-regulated prediction market platform, won its federal lawsuit against the Commodity Futures Trading Commission over a plan to offer contracts on which party will control each house of Congress after the November election.

Although the CFTC could appeal, Kalshi, which had been locked out of this year's election betting boom while the case was pending, can now grab a sliver of that action in the last two months before the election.

"We did it!" the company said in a notice on its website Friday. "U.S. election markets are coming to Kalshi."

More broadly, the ruling represents a victory for advocates of prediction markets, in which traders bet on the outcomes of real-world events ranging from elections to album sales to temperature increases. Prediction markets are popular in crypto circles, and although Kalshi does not use cryptocurrency, the crypto industry has been watching the case closely; VC firm Paradigm filed a friend-of-the-court brief supporting the plaintiff.

Last year, the CFTC forbade Kalshi from listing the Congressional control contracts, on the grounds that they would amount to unlawful gaming and would be "contrary to the public interest." Kalshi then sued, calling the regulator's decision "arbitrary [and] capricious."

In a ruling handed down Friday, Judge Jia M. Cobb, of the U.S. District Court of the District of Columbia, sided with Kalshi.

"For the reasons stated in the Court’s forthcoming memorandum opinion, the Court GRANTS Plaintiff’s motion for summary judgment ... and DENIES Defendant’s cross motion for summary judgment," Cobb wrote. "Defendant’s September 22, 2023 order prohibiting Plaintiff from listing its congressional control contracts for trading is hereby VACATED."

Proponents say prediction markets beat polls and pundits as a method of forecasting events and gauging sentiment, because participants have skin in the game and so are incentivized to do thorough research and express their honest opinions.

This year's prediction market breakout success, Polymarket, runs on crypto rails and is riding high on excitement about election betting. In August, the site logged over $470 million in volume, a record, according to Dune Analytics data; the lion's share of that was traded on election contracts.

Polymarket is reaping the benefits of the U.S. election despite being barred from doing business with U.S. residents under a regulatory settlement with the CFTC. Bets on Polymarket are written into smart contracts on a blockchain and settled in USDC, a stablecoin, or cryptocurrency that trades 1:1 for dollars.

Kalshi, by contrast, does business only in the U.S. and settles trades in normal greenbacks. However, every contract it lists is subject to approval or second-guessing by the CFTC, which is why it had to take the regulator to court over the Congressional control contract.

Another fight looms, as the CFTC weighs a proposed rule to bar any of the entities it regulates from offering contracts on political contests, in part over concerns they would undermine the integrity of elections.