By Aaron Brogan of Brogan Law PLLC, and Matthew Homer, a VC investor and advisor to crypto founders.
As professionals in the space we believe Judge Cobb’s ruling could be among the most important in the history of prediction markets.
The CFTC, chaired by Rostin Benham, has taken an aggressive posture toward prediction markets. First, in January 2022, the Commission ordered the crypto-based prediction market Polymarket to pay a $1.4 million penalty and “cease offering access to trading in markets” in the United States. Next, In August 2022, the CFTC withdrew the more traditional, fiat-based prediction market PredictIt’s no-action letter — an agreement not to sue a company— in an attempt to shut down the platform.
Kalshi was next, but it had protection because it was registered legally as a regulated exchange (technically a designated contract market or DCM). Within this framework, Kalshi is entitled to self-certify “event contracts,” and the CFTC may only prohibit them where they are contrary to public interest and involve specific activities, including “war," “terrorism," and “gaming.”
In September 2023, Kalshi attempted to certify a market concerning which party would control each house of Congress. The CFTC quickly issued an order disapproving the contract and effectively prohibited Kalshi from listing event contracts based on political outcomes.
The CFTC argued that Kalshi’s political contracts involve gaming. This week, in a memorandum opinion, Judge Cobb, a Biden appointee, disagreed.
The CFTC did not accept this loss. Instead, at a hearing on Sept. 12, it argued repeatedly that this motion should be stayed pending appeal (a stay would mean that the contracts remained offline).
The CFTC argued that despite Kalshi’s win, the court should grant it a stay because “even a short listing of Plaintiff’s contracts” would cause “irreparable harm.” Late Thursday, the D.C. Circuit Appeals Court granted the CFTC a stay.
Why is the agency so worried about these contracts being listed for even a moment? The answer is that the Commission is engaged in so-called “midnight rulemaking.”
Perhaps recognizing the weakness of its arguments, the CFTC began hedging its bets in May — issuing a proposal to define “gaming” through its rulemaking power. In the notice, the Commission attempts to broaden the scope of gaming.
Agencies like the CFTC are “independent," meaning they do not answer directly to the President. However, the President is entitled to appoint the majority of the five commissioners from within his or her party, and it is typical for the Chair to resign when a new President takes office, as previous Chair Heath P. Tarbert did in 2021. This means that the Benham Commission became a lame duck when Biden dropped out of the election on July 21.
A Republican CFTC would take a less hostile stance to prediction markets than the current Commission. Kamala Harris, should she win, will have an opportunity to set her own direction at the Commission.
The current CFTC knows this. If it conceded that Kalshi’s contracts are legal under the current rule, and waited for its proposed rulemaking, then the next administration could take a different stance. Instead, it is pulling every stop to prevent these contracts from ever being offered while it still can.
This is a problem. The Congressional Research Service has recognized that some consider midnight rulemaking concerning because “an outgoing administration has less political accountability compared to an administration faced with the possibility of re-election.”
There is a bright spot, though. The CFTC’s efforts may be in vain. Under Judge Cobb’s ruling, the proposed rule may not prohibit event contracts involving elections at all.
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