The CFTC is working to ban political prediction markets. Its current goal: Get a federal appeals court to keep one from launching while it argues a judge was mistaken in overturning its rejection of Kalshi.

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It's unclear whether political prediction markets will launch in the U.S. before the election (I'm not counting Kalshi's 8-hour effort last week). The ball's in an appeals court to make a decision one way or another, and a 2.5-hour hearing on Thursday elicited few clues about where the judges may land.

While Kalshi's prediction markets aren't directly crypto-related, if Kalshi does win the ability to list and trade political event contracts, it may open the door for other providers to enter – or possibly re-enter – the U.S. market.

The Commodity Futures Trading Commission is in the middle of a rulemaking process to ban political prediction markets in the U.S. entirely by formally adding these types of event contracts to the definition of "gaming." That effort took a major blow last week, when District of Columbia District Judge Jia Cobb ruled against the regulator in Kalshi v. CFTC.

Some quick background: Kalshi tried to self-certify political prediction markets in 2023, but the CFTC ordered that the company could not list or trade those products. Kalshi sued, and on Sept. 6, the judge ruled that Kalshi won – though she didn't actually publish her opinion explaining the ruling until Sept. 12.

The full opinion goes into detail about how the judge assessed the CFTC's definition of "gaming" and "involves" as they pertain to the statute (the Commodity Exchange Act) the regulator used to reject the products.

The CFTC filed an emergency stay for appeal hours after Kalshi launched its new contracts, willing at least a temporary halt while the appeals court judges consider the emergency motion.

As of the time I'm writing this, the contracts are still halted. The appeals court scheduled a hearing for Thursday, giving each party 15 minutes to make its case – though ultimately it ran for some 2.5 hours. We'll presumably find out if the contracts can restart before the election happens after the hearing, but there's no firm timeline here. And of course, there's still the broader question about the appeal itself and how that may go.

The broader picture, of course, is the CFTC's ongoing rulemaking around the role of political prediction markets in the U.S. The CFTC's view is it shouldn't be responsible for overseeing these because it'd be too difficult for the regulator to police the underlying market – i.e. the results of the U.S. elections – for fraud and manipulation.

The markets themselves may be subject to manipulation through the use of misleading or false polling data, CFTC General Counsel Rob Schwartz argued in court Thursday. And manipulation on prediction markets may further undermine confidence in elections themselves.

Kalshi's view is these concerns are besides the point, because Congress authorized the CFTC to block certain types of event contracts and election markets aren't on the list.

"Their argument comes down to characterizing these event contracts as involving either gaming or unlawful activity," said Jones Day Partner Yaakov Roth. "The problem as to both is that the Commission's interpretations of how the statute works and how this link what this language means are so broad that they would sweep all event contracts, thereby rendering the other enumerated activity superfluous and flipping the whole structure of how this statute works. And they have not been able to give a limiting principle."

Roth represents Kalshi in its case against the CFTC.

Schwartz pointed to the Commodity Exchange Act and its preemption of state laws in his argument, noting that some states have laws banning election wagers. The CEA preempts state law, so allowing Kalshi to list political event contracts may run into conflicts with those laws, in one hypothetical.

The judges grilled both attorneys, seemingly unimpressed by either over the course of the 2.5-hour hearing (which was originally set to last 30 minutes). It remains to be seen how they'll rule on the temporary stay.

Tuesday

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Thursday

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