Americans (Seemingly) Aren't Allowed to Put This Economic Theory to the Test

The CFTC keeps putting fences around prediction markets, which some say are better way to aggregate information.

AccessTimeIconSep 22, 2023 at 7:19 p.m. UTC
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Prediction market Kalshi is once again being hamstrung by U.S. regulators. According to a closely watched decision, the U.S. Commodity Futures Trading Commission (CFTC) will not let the licensed betting market offer users a chance to wager on the future makeup of the House of Representatives and Senate this election cycle (or any, for that matter).

There will be no gambling on the future of democracy, it seems.

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In a 3-1 vote, the three Democratic commissioners rejected Kalshi’s proposal to introduce “a first-of-its-kind derivative contract” tied to congressional elections, which had been opposed by some lawmakers and other onlookers as something that might tarnish the U.S. elections process.

And to be fair, there’s justification for the CFTC’s decision here.

CFTC Chair Rostin Behnam reportedly said he was concerned the agency was ill-equipped to become an “election cop.” The CFTC regulates derivatives contracts and commodities – like wheat, soybeans and cattle – to foster capital formation in those often hyper-critical markets and occasionally polices fraud and manipulation of the assets under its charge.

The CFTC is not exactly deep pocketed, and it would be a turn of departure for the agency to begin adjudicating something like election fraud had Kalshi’s proposed “events contracts” gone into play. Plus, over a dozen states expressly forbid gambling on elections.

Meanwhile, CFTC Commissioner Caroline Pham, who abstained from the vote, didn’t seem to have much of a defense of the proposal when writing in June. Pham, a Republican nominated by Biden, may be a familiar name to some readers of The Node for her punchy dissenting opinion on the recent Stoner Cats case.

Instead of an impassioned defense of markets or waxing philosophic on the economic theory behind information markets, Pham argued that because the U.S. Court of Appeals had allowed PredictIt, an elections-focused prediction market, to remain operating after the CFTC ordered it to halt operators, then Kalshi should be allowed to let people gamble on elections, too.

“[It] is only fair for either both exchanges to list the political control contracts, or neither of them should,” she wrote.

Fairs fair. But if Pham isn’t going to rep the prediction market-loving crypto bros here, then I will.

First, I want to start off by saying that it makes sense the CFTC oversees this nascent sector. Prediction markets let people bet on the likelihood of future outcomes in a way that almost perfectly matches the CFTC’s working and workable definition for “binary options.” A question is posed, and those who think they can guess correctly bet either yes or no.

It also makes sense that the watchdog doesn’t want to get involved in “gaming.” Even putting aside the disastrous effect that would have on casinos as well as the nascent, tax-generating sports betting industry for states, it simply isn’t befitting for the agency that plays such an important role in the process of price discovery and offsetting price risk.

I also recognize that the CFTC has been remarkably (or at least mostly) consistent on the question of elections betting. For instance, in 2012, the CFTC rejected the North American Derivatives Exchange’s application to list “political event contracts.” And I’m sure similar rulemaking goes back decades, if you’re willing to put aside the years the Iowa Electronic Markets and PredictIt operated under “No Action” letters from the CFTC.

It goes without saying there is a major difference between a corporate entity like Kalshi, which was registered by the agency in 2020, and nonprofits like PredictIt and the Iowa Electronic Market, which are both run by universities and so more likely to pass the smell test for providing “educational” value. Especially considering the checkered history or for-profit prediction markets (not even counting the crypto-based ones).

However, all that said, there's something to the idea that the CFTC is using the levers of regulation to essentially wipe out predictions markets as an industry before it can even get going. There may or may not be something to the psychological and economic theory behind betting markets, but it is significant that a number of academics, corporations and even DARPA have at one point or another seen potential in the idea of crowdsourcing truth.

The so-called “wisdom of the crowd” is basically as accepted an idea as irrational exuberance — with some version of aggregate knowledge standing as the cornerstone to the efficient-market hypothesis that underlies much of modern finance.

And if you want less of a haughty reason, then you can be sure that prediction markets for elections would provide extremely useful data for political scientists. That would be true whether or not Kalshi’s reasoning for launching the service was accurate: allowing companies and individuals to bet upwards of $100 million on congressional elections to hedge against political risks.

I can see why organizations like Better Market and Public Citizen filed public comments against Kalshi’s plans, arguing that bringing more money into U.S. elections would cheapen the practice at a time when trust in our shared democratic institutions is at a low. And can see why some may think that allowing people to bet on the outcome of current events would seemingly contribute to the mass financialization of reality.

See also: The CFTC vs. the Truth | Opinion

I’m not going to invoke the “age of AI” or the spread of fake news as a defense of some to wager on whether Kanye will have another mental breakdown this year, but it does suck that there is a theory out there that apparent Americans aren’t even allowed to test.


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Daniel Kuhn

Daniel Kuhn is a deputy managing editor for Consensus Magazine. He owns minor amounts of BTC and ETH.

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