CFTC Puts a Stop to Binary Options Involving Political Events
Binary options are an all or nothing investment in which one side wins and the other side loses depending on a yes/no outcome at expiration. The payoff to a winning investment is a fixed monetary amount or an announced percentage of the initial investment. A losing outcome results in the total loss of the investment. Binary options are legal and available to trade in the U.S., but they must be traded on a regulated U.S. exchange.
One such CFTC-regulated exchange is Kalshi, which allows users to trade (bet) on real-world event outcomes, ranging from weather forecasts to pop culture trends. In November 2023, Kalshi filed a lawsuit against the CFTC, challenging the regulator’s decision to bar it from listing contracts related to political outcomes, specifically which party will control each chamber of Congress. The lawsuit argued that the CFTC’s actions were unjustified and hindered Kalshi’s operations under its regulated framework. The CFTC argued the contracts involved “gaming” and were potentially a national security threat. Last week, the U.S. District Court for the District of Columbia sided with Kalshi, and for a moment, the land of the free was indeed free. However, immediately following the ruling, the CFTC appealed and moved to stay in the U.S. Court of Appeals. The federal court granted the stay, and trading of the election outcome binary options was halted.
The outcome of this legal battle has broader implications for the future of political prediction markets in the U.S. Currently, PredictIt is the only company in the country legally operating political prediction markets, and it is doing so under a narrow regulatory exemption. Other platforms operate outside of U.S. jurisdiction, offering betting opportunities through cryptocurrency-based contracts. Kalshi’s entry into the market represents a shift towards more regulated and accessible political betting platforms. Unlike PredictIt, which has strict limits on the number of participants and bet sizes, Kalshi aims to attract institutional investors with positions up to $100 million.