Contract betting on elections: what are the dangers?

The US election is here and it’s now legal to bet on it. Last month, the courts cleared the way for Americans to buy event contracts, which is just a fancy way of saying “place a bet on the outcome of congressional elections.” Given the polarized political climate and election integrity issues we already face, allowing Americans to legally bet on the outcome of races is fraught with problems.

On Oct. 2, the U.S. Court of Appeals denied an emergency motion by the Commodities Futures Trading Commission for a stay to prevent election event contracts. The commission appealed last month’s initial decision allowing a fintech startup, Kalshi, to sell such contracts and asked the courts to halt the market until the appeal is heard.

Kalshi offers “Congressional Control Contracts” that allow American citizens to place an unlimited amount of money on the outcome of an election. These contracts specify which side will control the House of Representatives or the Senate. Now Kalshi also offers event contracts on presidential result.

The CFTC initially barred Kalshi, which is regulated by the commission, from offering contracts for election-related events because the commission argued that such contracts were akin to gambling or election games, which is illegal in many states. Kalshi went to court to argue that this was arbitrary and capricious and against the law. The District Court agreed and granted summary judgment for Kalshi on September 6, reasoning that elections are not games and therefore gambling does not apply to election contracts.

Once the courts legalized election betting, another brokerage, Interactive Brokers, immediately announced it would offer similar products. On October 28, Robinhood followed suit. This is significant because Interactive Brokers and Robinhood are both significantly larger and better known than Kalshi. Interactive Brokers has more than 3 million brokerage accounts, while Robinhood has almost 11 million, thus reaching a much larger number of customers. Other brokerages will surely follow suit.

There are many sources to place bets on the US election, such as Bovada, an offshore gambling platform, or Polymarket, a crypto-based world events betting platform that has made almost $3 billion from the presidential election alone from the USA. But Kalshi, Interactive Brokers and the other mainstream financial institutions likely to follow are bringing these bets to the masses.

The danger in all of this is the ability to use these betting markets to skew the election. Event contracts on an option do not serve the typical purpose of the derivatives and futures market. These markets were developed primarily as hedging techniques to offset the risks of such commodities. The CFTC has argued, in vain, that it does not have the resources or experience to play the role of “election police.” But we only have to remember the movie “Trading Places” to understand how frozen orange juice plays a useful role in our economy. What useful financial role do such political event contracts play?

The easy answer is probably neither. The easier answer is that this becomes yet another way to attack the credibility of our electoral process.

As if there isn’t already enough stake in the American election, now some of us may be trying to manipulate the election for potential financial gain. Instead of providing “real-time” polling data with indicative numbers that show who is favored to win the election, this type of information can cause voters to stay home and not exercise their right to vote in the same way that people would could not follow the elections. the end of a game when one team wins by a lopsided score.

Given that Kalshi alone will allow bets of up to $100 million, such bets could become not only huge odds, but also prophecies coming true. With current congressional control contracts, for example, if the “lines” show much more money bet on one political party than another, such information can affect not only possible voter turnout, but also election results.

While sports betting has become a booming business since becoming legal in 38 states and the District of Columbia, it appears that legal political betting is not far behind.

Melinda Roth is an associate professor at George Washington University Law School.