Election Betting: A Wager on Democracy?
As the country prepares to learn who their new president will be in November, bettors with hundreds of millions of dollars on the line will also anxiously await the outcome of the race. Over the past several years, online betting on American elections has exploded, though not without controversy as federal agencies have sought to shut down betting markets. In September 2023, the Commodity Futures Trading Commission (CFTC), a government agency charged with regulating derivatives and futures markets, ordered the prediction platform Kalshi to halt election betting [1]. Further, the CFTC proposed a complete ban on election betting in the United States. Kalshi then sued the CFTC to open election markets. In September 2024, Jia M. Cobb, a judge for the U.S. District Court in Washington D.C., ruled that the CFTC reached beyond its statutory authority when it blocked Kalshi from hosting election betting, a decision that has since been frozen indefinitely by the Court of Appeals for the District of Columbia. Beyond the immediate issue of Judge Cobb’s ruling, election betting and its regulation have a long history in the United States. For instance, an 1841 law in Maine proposed banning election betting in the state. Currently, election betting operates in a legal gray area; many betting platforms, such as PredictIt and Iowa Electronic Markets, operate under the guise of academic research for universities, allowing them coverage to run their markets [2].
However, the Kalshi case centers on the legality of election betting through for-profit betting markets. Proponents of election betting argue that the CFTC does not have the power to take down election betting markets, while opponents argue that election betting is fundamentally dangerous to American democracy. Despite concerns about potential risks, election betting remains a useful tool for predicting elections and hedging outcomes, and banning election betting is an overstep that would force bettors into unregulated markets.
First, election markets should be legalized because the CFTC bans on election betting overstep the agency’s regulatory bounds. In Judge Cobb’s September 2024 ruling, she concluded that shutting down election markets was outside the statutory scope of the CFTC [3]. Under 7 U.S.C. § 7a-2(c)(5)(C)(i), the CFTC can close market contracts that are “contrary to the public interest” only if they involve “terrorism, assassination, war, gaming, or other similar activity.” Election betting does not involve any of these activities. As such, the Judge argued that if the contract does not relate to any of the listed activities or a “similar” one, then the CFTC has no power to shut the market [4].
The CFTC’s allegation that betting markets are “contrary to the public interest” also fails to hold weight. Election betting markets can accurately predict political outcomes, providing helpful information for voters and citizens. Some research has demonstrated that betting markets have greater predictive power than pundits or polling; for instance, the Iowa Electronic Markets were found to be “more accurate than polls 74% of the time” in presidential elections [5]. Since bettors have a financial incentive to correctly predict the election, they are not playing for an audience, as in pundits or polling. They instead assess the precise odds of a given event. In 2016, the online prediction market, PredictIt, gave Donald Trump a 36% chance of victory in the presidential election, a higher mark than most pollsters and pundits gave him. Though his odds subsequently dropped to 22% on election day, prediction markets had counted Trump’s election as a real possibility when many pundits considered it impossible [6]. In this way, prediction markets are a public good, offering more reliable forecasts than other prediction tools.
Despite CFTC allegations that election betting falls under the scope of “gaming,” this interpretation fails to consider that elections are not games, but rather, predictable events. As Judge Cobb wrote, “gaming requires a game [7].” From the letter of the law, the CFTC has no power to shut down election betting markets because they do not fall under the specific scope of “gaming.” With the Supreme Court’s 2024 overturn of Chevron deference, Judge Cobb’s ruling is further rendered correct. Though it could be argued that extending the definition of “gaming” to include political betting is within the scope of CFTC power, this interpretation is not written in the law; the activities explicitly listed in 7 U.S.C. § 7a-2(c)(5)(C)(i) are the only ones that the CFTC can regulate. Therefore, shutting down election markets is a clear overreach of the law by the CFTC, and election betting should be legal under United States Law.
Despite the legal challenges of CFTC regulation, some senators have expressed concern about the dangers of mixing election betting with democracy. In August, a group of senators, including Jeff Merkley and Elizabeth Warren, urged the CFTC to pursue a total ban on election betting. They argued that “election betting fundamentally cheapens the sanctity of our democratic process” and will “degrade public trust” due to possible market manipulation [8].
The rebuttal to this counterargument is twofold. First, the CFTC has no legal bandwidth under which to restrict the CFTC. Second, banning election betting forces bettors towards offshore election markets that are prone to market manipulation. Americans can access these markets with a VPN, as reflected in Polymarket, an offshore cryptocurrency betting platform, recording $473 million in trading volume in June [9]. This money is out of reach of the CFTC and is subject to market manipulation and insider trading. This is dangerous for the average American bettor, who risks losing money due to pump-and-dump schemes, concerted efforts to artificially increase contract prices that are illegal in American markets. In August, for example, there was a massive push by several well-funded bettors to boost Kamala Harris’ odds on Polymarket, and her odds increased by almost ten percent in one day [10]. This rapid flux reduces confidence in markets. Unlike in offshore markets, market manipulation has generally failed in American election betting markets. Attempted manipulations of the Iowa Electronic Markets in 2000 and 2004 were temporary, and market manipulators ended up losing the majority of the money that they had staked [11]. As such, when markets are legalized and kept under CFTC jurisdiction, they are less vulnerable to prolonged manipulation. Finally, Americans should be able to access the most accurate prediction tools available. Election betting sites generally have odds available to any visitor on their website, without requiring the creation of an account, increasing access to people who simply want to use them to learn about the election. Election betting, if done correctly, can restore confidence.
As betting becomes an increasingly large part of American life, so too will election betting. The question is whether it should be left to offshore markets or regulated in America. Regulators have overstepped federal statutes in their attempt to ban election betting, which has utility to the American people as an accurate prediction tool. The American public has a right to access the most accurate information possible about their elections, and election betting can help restore faith in elections as predictable, regular events. Further, federal regulators will have more power to regulate election betting if conducted onshore, restricting market manipulation and insider trading. Ultimately, Judge Cobb’s ruling was fundamentally correct in its assertion that election betting is not under the CFTC’s jurisdiction. This issue will likely remain unresolved through the November 2024 election, but questions about the legality of election betting will hang over American politics for many years to come.
Bibliography
[1] Before the United States Commodity Futures Trading Commission, “In the Matter of the Certification by KalshiEX LLC of Derivatives Contracts with Respect to Political Control of the United States Senate and United States House of Representatives,” September 22, 2024.
[2] Graeme Orr, "Betting on Elections: History, Law and Policy," Federal Law Review 42, no. 2 (June 2014): 309-332
[3] Kalshiex LLC v. Commodity Futures Trading Commission, Civil Action No. 23-3257
[4] Kalshiex LLC v. Commodity Futures Trading Commission, Civil Action No. 23-3257
[5] Adam Mann, “Market Forecasts,” Nature Vol. 538 (October 2016): 309.
[6] Predictit. Accessed October 15, 2024. https://www.predictit.org/markets/detail/1234/Who-will-win-the-2016-US-presidential-election.
[7] Kalshiex LLC v. Commodity Futures Trading Commission, Civil Action No. 23-3257
[8] Sarah Kessler. “Should Betting on Elections Be Legal?” The New York Times, September 14, 2024. https://www.nytimes.com/2024/09/14/business/dealbook/betting-elections-odds.html.
[9] “Merkley Leads Senate & House Colleagues to Call for No Gambling on U.S. Elections.” Office of Senator Jeff Merkley, August 5, 2024. Jeff Merkley. https://www.merkley.senate.gov/merkley-leads-senate-house-colleagues-to-call-for-no-gambling-on-u-s-elections/.
[10] Polymarket. Accessed October 15, 2024. https://polymarket.com/elections
[11] Koleman Strumpf; Paul Rhode, “Manipulating political stock markets: A field experiment and a century of observational data,” Federal Reserve Bank of St Louis, February 2006, 20.