Federal judge Jia M Cobb has overturned a Commodity Futures Trading Commission order to refuse US predictions marketplace Kalshi the ability to allow betting on election outcomes, but the release of her opinion is still pending.

In the order, the CFTC cited Commodities Exchange Act Section 5c(c)(5)(C), which states that event contracts cannot be listed if they “involve” “illegal activity, terrorism, assassination, war, or gaming” and were against the public interest. CFTC commissioners Caroline Pham and Summer Mersinger dissented, stressing that political bets themselves were not enumerated in the statute.

Kalshi fights back

In its complaint against the CFTC, Kalshi took specific issue with the use of the agency’s interpretation of the word “involve.” The CFTC took the constructive opinion that “involve” referred to the formation of the contract itself, and that betting on any “contingent event” could amount to gaming, relying on dictionary definitions and state statutes.

This opened the door for the agency to ban elections contracts as “gaming” that harms the public interest by creating extrinsic incentives for election outcomes, and reducing election integrity.

Conversely, Kalshi argued that “gaming” had to refer to the nature of an underlying event, because the formation of an event contract as such cannot be terrorism, assassination, or warfare. And because an election cannot be considered a “game,” it should therefore be free from the proscription against gaming. As Kalshi put it: “An election is not a game at all, let alone the equivalent of bingo or roulette. It is the foundational exercise of democratic governance. Unlike games, elections have independent and meaningful political and economic consequences.”

The company also noted that if the CFTC had its way, pretty much every event contract could be considered “gaming,” thus increasing the agency’s power far beyond what Congress could have intended.

Kalshi also defended the utility of political betting markets. It claimed that they gave the public access to more accurate polling, and allowed for industry participants to “hedge” against unfavorable legislation promulgated by an unfriendly administration.  

Crystal ball or casino?

Kalshi’s argument that prediction markets are useful is far from uncontroversial. Some experts have questioned whether betting markets are always a source of heightened predictive accuracy, citing the complex motivations for why people might place electoral bets.

In fact, Kalshi’s own appeal to the utility of hedging against an unfavorable result seems like a prime example of a bet motive that is only tangential, or even opposite to one’s confidence in an outcome. And in 2016, political betting markets gave Hillary Clinton a chance of victory ahead of what polls indicated. The CFTC also argued against the economic utility of political betting markets, claiming that the economic results of elections were “too diffuse and unpredictable” to affirmatively hedge against in the form of event contracts.

A need for clarity

In May, the CFTC proposed that the interpretation of “gaming” in Section 5c(c)(5)(C) be updated to specifically include betting on “sports” and “elections” as prohibited gaming contracts.

That move garnered the backing of several Democratic lawmakers, who expressed their support for the proposed rule in a letter to CFTC Chairman Rostin Behnam. The proposed rule defines gaming to include betting on:

• the outcome of a political contest, including an election or elections;
•  the outcome of an awards contest;
• the outcome of a game in which one or more athletes compete; or
• an occurrence or non-occurrence in connection with such a contest or game.

Pertinent to Kalshi’s argument, the update would have also clarified that it is the formation of these contracts that constitute “gaming,” rather than the underlying events specifically.

The proposed rule also states that the enumerated prohibitions are categorically against the public interest and will not be assessed on a case-by-case basis.

GRIP comment: What is a game anyway?

When betting becomes flippant or tangential to actual future value is a key definition at the core of recent popular trends in the commodities and securities markets. Valuation can spiral out of control when enthusiasm is directed through social media by influential voices.  

We’ve seen these trends play out in the proliferation of “meme stocks” and exotic cryptocurrencies, and now we’re seeing it in the arena of event contracts. Is election betting really that different? 

“Buying [an election contract] is nothing like betting on a game of chance or even the Super Bowl. Elections are not a game; they have real economic consequences,” Kalshi argued in its complaint.

Its argument contains two prongs. The first is that political bets aren’t gaming, because elections involve “independent and meaningful” outcomes.

The second is that if political bets are gaming, essentially all event contracts are gaming because it involves staking money on an independent outcome: if “illegal gaming includes staking money on any contingency, the CFTC could prohibit any event contract based solely on its view of the public interest,” as Kalshi has argued.

Game on

Point taken: but what is a “game” exactly? And is it really true that the outcomes of professional sports don’t have “real economic consequences”?

This question was famously addressed by linguistic philosopher Ludwig Wittgenstein, who observed that there is no common set of criteria shared among activities we traditionally define as “games.” Triviality might seem like the essence of what a game is, but we can also think of many games whose outcomes are far from trivial.

The shifting definition of “gaming” seems like a self-fulfilling prophecy that ultimately works in Kalshi’s favor. The very act of listing an event contract illuminates a latent economic incentive structure that would not have been immediately apparent.

We might not care if it rains heavily in Miami tomorrow, but we might care if we’re a property investor. And we really care if we’re a property investor hedging against flooding. And we might care even more if we’re a retail investor betting against an overvalued hedge.

The possibilities spiral out of control the second money is injected into the equation, producing myriad incentives and counter-incentives.

Agency overeach

This makes the CFTC’s conceptual position against “gaming” difficult to articulate in the absence of a positive rule, and may have led to the agency’s defeat in this instance due to overbreadth. It’s no surprise that the agency scrambled to update the rule to provide a concrete definition of “gaming” in May.

We will have more insight when the judge Cobb’s full opinion is released. The CFTC has argued for an emergency 14-day stay pending the release of her opinion.

And a lesson for legislators in the wake of Loper Bright: if philosophers can’t define it, it might be too broad!