By Laura Matthews

WASHINGTON (Reuters)

A U.S. federal appeals court on Wednesday upheld a lower court’s order allowing New York derivatives trading platform KalshiEX LLC to list contracts that let Americans bet on election outcomes.

The U.S. Court of Appeals for the D.C. Circuit ruled that the Commodity Futures Trading Commission (CFTC), KalshiEX’s regulator, failed to demonstrate how the agency or public interest would be harmed by KalshiEX’s “event” contracts. The CFTC declined to comment.

This ruling enables Kalshi to trade in such contracts, potentially opening the door for other companies to offer similar derivatives in the future, just weeks before the U.S. presidential elections.

The ruling stated, “Ensuring the integrity of elections and avoiding improper interference and misinformation are undoubtedly paramount public interests, and a substantiated risk of distorting the electoral process would amount to irreparable harm.”

However, the court noted, “The problem is that the [CFTC] has given this court no concrete basis to conclude that event contracts would likely be a vehicle for such harms.”

Kalshi requested approval from the CFTC in June 2023 to list contracts allowing Americans to bet on which party would control the House of Representatives and Senate.

Yet, the CFTC prohibited Kalshi from listing these cash-settled political event contracts due to concerns about unlawful gaming and other activities that it believed were not in the public’s interest. In response, Kalshi sued, claiming the CFTC exceeded its authority.

A D.C. District Court judge sided with Kalshi in September, asserting that its contracts do not involve unlawful activity or gaming but pertain to elections, which are not. This decision allowed Americans to trade political event contracts ahead of the closely contested Nov. 5 presidential election.

The CFTC subsequently appealed, asking for an emergency stay on the lower court’s order, with the case testing the limits of the CFTC’s regulatory authority.

CFTC Chairman Rostin Behnam mentioned that these event contracts might turn the agency into an “election cop,” stressing that such contracts do not serve the public’s interest.

Critics argue these contracts pose a risk to election integrity and could undermine democracy by being treated as a gaming activity. Conversely, supporters claim they present a new financial tool providing insight into future outcomes.