CFTC Efforts to Regulate Election Betting

As election season peaks, derivatives trading platforms are listing “election contracts,” which enable purchasers to bet fiat and crypto on the outcome of U.S. presidential and other elections. Election contracts are a type of political “event contract,” or a binary options contract, where the payoff is based on a binary outcome of a contingent event. The CFTC regulates such contracts as a type of derivative.

Under the Commodity Exchange Act (CEA), an entity seeking to list an event contract must register with the CFTC either as a “designated contract market” or DCM or as a “swap execution facility” or SEF. Although DCMs and SEFs have long offered investors event-based binary option contracts, for example, based on weather events, the CFTC has taken the position that election contracts are unlawful under the CEA.

At least one federal court judge has rejected the CFTC’s position, paving the way for DCM KalshiEX, LLC (Kalshi) to continue to offer political event contracts to U.S. purchasers. The CFTC has appealed this case, captioned KalshiEX, LLC v. CFTC, to the U.S. Court of Appeals for the District of Columbia, which has yet to rule on the merits. Separately, the CFTC has proposed amendments to certain regulations promulgated under the CEA to prohibit election contracts, but a final rule (if forthcoming) could take months or longer. With election day looming, election betting is here to stay, at least for now.

Key Takeaways

• A federal judge has rejected the CFTC’s argument that election contracts violate the CEA’s “special rule” governing event contracts. According to the CFTC, election contracts are contrary to the public interest because they involve two prohibited categories under the special rule: unlawful activity and gaming. In particular, the CFTC has interpreted “gaming,” currently an undefined term under the special rule, to include gambling. For her part, the judge found that “gaming” and “gambling” have different definitions.
• Although the CFTC’s proposed amendments to the CEA, if finalized, would render election contracts unlawful, the long term outcome is uncertain. Agency rulemaking can be a lengthy process and it may be months or longer before a final CFTC rule is promulgated, if ever. And if a final rule is promulgated, the Supreme Court’s decisions in Loper Bright Enterprises v. Raimondo and CornerPost, Inc. v Federal Reserve System expand the opportunities for legal challenges to agency rulemaking. Under Loper Bright, which ended Chevron deference, federal courts must independently interpret statutes and regulations and cannot defer to agency interpretation. Under Corner Post, the six-year statute of limitations for challenging agency regulations under the APA does not begin to run until the plaintiff is injured by the final agency action, which could greatly increase the length of time during which litigants can challenge CFTC rules and regulations. Finally, depending on the election’s outcome, the five CFTC Commissioners—and their current split of three Democrats to two Republicans—could change.

KalshiEX, LLC v. CFTC Summary

In September 2023, the CFTC prohibited Kalshi from offering congressional control contracts, which let buyers bet on which political party will control the U.S. House of Representatives or Senate on a specific date. Kalshi challenged the CFTC’s order in the U.S. District Court for the District of Columbia (DDC) as arbitrary and capricious under the Administrative Procedure Act (APA).

In September 2024, Judge Cobb of the DDC ruled that Kalshi’s election contracts did not violate the CEA’s special rule. In what appears to be the first district court review of the CFTC’s interpretation of the CEA after the Supreme Court’s Loper Bright decision —reversing the principle of Chevron deference—Judge Cobb sided with Kalshi. Among other things, she rejected the CFTC’s interpretation of “gaming” under the special rule, relying on dictionary definitions of “gaming” to mean to play games and “gambling” to mean to place bets by staking something of value on the outcome. She further concluded that if “gaming” included gambling, all event contracts would be subject to CFTC review under the special rule because they all involve risking money on a contingent event in the hopes of getting a payout.

The CFTC filed an emergency motion to stay Judge Cobb’s ruling with the D.C. Court of Appeals, arguing that allowing election contracts could have an adverse effect on election integrity. In October 2024, the Court of Appeals denied the CFTC’s request for stay, concluding that the agency failed to demonstrate that harm was likely. The court then issued a fast appellate briefing schedule to consider the merits of the CFTC’s appeal, with all briefing due by early December, well after the election is over.

CFTC Proposed Amendments to Expand the Definition of “Gaming”

Meanwhile, in May 2024, the CFTC proposed amendments to certain regulations promulgated under the CEA to clarify the definition of “gaming” under the special rule. The CFTC’s two Republican commissioners dissented from the proposed amendments. The amendments, if adopted, would define “gaming” to include staking or risking something of value on the “outcome of a contest.” The amendments include illustrative examples of activities that constitute “gaming,” including betting on “the outcome of a political contest, including an election[.]”

The future of election betting will depend on two developments: the D.C. Court of Appeals’ ruling on the merits in the KalshiEX, LLC v. CFTC litigation and likely legal challenges to any final CFTC rule expanding the definition of “gaming” under the CEA’s special rule. For now, election betting remains available via many platforms that have seen an explosion in trading volumes as Nov. 5 looms.