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The Revolving Door Project, a Prospect partner, scrutinizes the executive branch and presidential power. Follow them at therevolvingdoorproject.org.
On Monday night, former President Donald Trump and 18 co-conspirators were criminally charged over their efforts to overturn Joe Biden’s victory in Georgia in 2020. Trump was charged with 13 counts, including violating Georgia’s racketeering act and soliciting a public officer to violate their oath. Despite this and his three other indictments adding to 91 felony counts, Trump is still the front-runner in the Republican Party’s 2024 presidential primary process. His closest contestant, Florida Gov. Ron DeSantis, is equally comfortable assaulting the democratic process in his state.
Fulton County District Attorney Fani T. Willis’s indictment of the Trump crew is a necessary corrective, but also a reminder that the foundation of the American republic is still under severe threat. As long as one party remains totally united behind a man who attempted to overthrow the government by force, was the most corrupt president in American history, and undermines the public’s faith in elections at every turn, the future of American democratic self-government is at risk.
Sounds scary. But what if I told you this was a great opportunity for fun and profit? Silicon Valley–backed startup Kalshi is attempting to expand the amount of gambling on the country’s elections with the introduction of an “event contract” centered around congressional elections. Simply put, the firm aims to allow traders to bet on the event: Which party will win control of Congress?
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Now, the company PredictIt has long allowed for betting on the outcome of certain races, but the amounts are capped at $850 per bet and 5,000 punters per market. The Commodity Futures Trading Commission (CFTC) also attempted to shut down the site this year, but the ruling is being litigated. Kalshi’s scant proposal, by contrast, would open the cash floodgates: Individuals would be able to bet as much as $250,000, while entities and eligible contract participants would be able to hedge as much $10 million and $100 million, respectively.
It’s practically a reductio ad absurdum of the wasteful financialization of the American economy. As noted, the CFTC oversees these markets, which may sound strange. It was founded to bring order to necessary futures trades in agricultural markets, but it has expanded its work beyond that in ways both wise and unwise.
Jurisdiction questions aside, there is no possible legitimate argument for unleashing sophisticated gambling on elections, which as we’ll see raises major opportunities for fraud and corruption for no public benefit. That’s why, in typical industry fashion, Kalshi—which boasts of support from Sequoia Capital, Charles Schwab, and infamous private equity pioneer Henry Kravis—has recruited a team of former CFTC officials to make its case before the agency. One of them is Brian Quintenz, a CFTC commissioner from 2017 to 2021 who now sits on Kalshi’s board. While serving as commissioner, Quintenz played a key role in approving Kalshi’s application as the first financial exchange to trade event contracts, just one day after the 2020 elections. Wouldn’t you know it, a year after playing a leading role in Kalshi’s approval as a Designated Contract Market, Quintenz joined Kalshi’s board.
The second former CFTC official is Eliezer Mishory, who served as Quintenz’s special counsel, and is now Kalshi’s chief regulatory officer and general counsel. The third is Jeff Bandman, who previously led the Division of Clearing and Risk and the Office of International Affairs at the agency, and now leads regulatory strategy at Kalshi. Bandman also served as special counsel to previous CFTC chairman Timothy Massad, and as fintech adviser to “Crypto Dad” Christopher Giancarlo, launching LabCFTC, the agency’s fintech innovation hub.
Kalshi’s attempt at regulatory capture is not unlike crypto fraudster Sam Bankman-Fried’s ploy to secure favorable regulations from the CFTC.
Other former government officials have voiced their support for the company in the public comment process, including two ex-CFTC general counsels, Jonathan Marcus and Dan Davis, and Jason Furman, who chaired the Council of Economic Advisers.
Kalshi’s attempt at regulatory capture is not unlike crypto fraudster Sam Bankman-Fried’s ploy to secure favorable regulations from the CFTC by hiring former agency officials and spending big on campaign contributions. The similarities do not end there. In a curious bid to present as a progressive democratizing entity, Kalshi also recently touted the support of Sean McElwee, the disgraced pollster who advised Sam Bankman-Fried’s political donation strategy.
According to federal prosecutors, Bankman-Fried allegedly spent close to $100 million in stolen FTX customer funds on political campaign contributions before the 2022 congressional elections. In addition to this accused theft, Bankman-Fried also allegedly directed FTX executives to evade contribution limits and conceal the source of funds with “straw donor” schemes.
By his own account, McElwee is an enthusiastic political gambler, arguing that it forces analysts to think clearly about races, which explains his enthusiastic support for Kalshi’s proposal. But there are more nefarious possibilities. According to reporter Ben Terris, McElwee was paid to commission polls for the congressional campaign of Nina Turner, the results of which he used to make nearly $14,000 in successful bets against her victory. “I was polling for Nina Turner’s super PAC,” he reportedly said. “So I knew Shontel Brown was going to win.” He did the same thing in John Fetterman’s Senate campaign in Pennsylvania (though that bet blew up in his face).
The Center for Effective Altruism and Congressman Ritchie Torres (D-NY), who were also closely associated with Bankman-Fried, round out the universe of SBF-linked Kalshi backers.
While these connections should be an obvious red flag to any conscientious citizen, there are also clear legal reasons for the CFTC to reject Kalshi’s proposal. As Wall Street watchdog Better Markets observes, the CFTC has a rule for assessing event contracts: Regulation 40.11(a)(1). This rule implements the section of the Commodity Exchange Act (CEA) that prohibits the listing of a contract that relates to terrorism, assassination, war, gaming, or activity that is unlawful under state or federal law. Additionally, the agency’s Regulation 40.11(a)(2) empowers the CFTC to prohibit an event contract involving any activity similar to those spelled out in 40.11(a)(1) if the Commission determines that it is contrary to the public interest. It’s an authority the agency has relied on before, particularly in its April 2012 rejection of the North American Derivatives Exchange’s (NADEX) proposal to list five political event contracts. (NADEX’s former CEO Timothy McDermott is a public director on Kalshi’s board.)
In its rejection of NADEX’s proposal, the CFTC found that the contracts involved gaming and were contrary to the public interest under the Commodity Exchange Act. The agency also determined that these contracts cannot be reasonably used for either hedging purposes, due to “the unpredictability of the specific economic consequences of an election,” or price discovery purposes, since “there is no situation in which the Political Event Contracts’ prices could form the basis for the pricing of a commercial transaction involving a physical commodity, financial asset or service.”
Now, it’s true that commodity futures contracts can be abused. But properly regulated, they serve a useful function in the market by helping with price discovery or hedging risk. (A corn farmer, for example, might want to pick up a future sale contract in case the price collapses before the harvest.) Gambling on election outcomes serves none of these purposes. It is simply an avenue for Wall Streeters and gambling addicts to make a quick buck.
In addition to this legal context, the Kalshi contract would be easily susceptible to manipulation. As the McElwee example suggests, political insiders with access to privileged information such as internal polling or campaign finance data could easily wield this to their advantage, profiting at other users’ expense. Worse, bad actors could attempt to influence the election outcome—by rigging poll results, for instance—to make their bets pay out, like how players in the 1919 World Series conspired with a gambling syndicate to throw the match. And the allowance of contracts as huge as $100 million makes this possibility much more likely.
There’s another disturbing element to all of this. One public comment submission on the issue highlights whistleblower concerns about Kalshi’s ownership and operations. The whistleblower casts doubt on the exchange’s “capacity … to maintain public trust in regulated markets and the democratic process,” in light of its failure to clearly disclose beneficial ownership interests, which may be a foreign sovereign entity. The whistleblower further alleges that Kalshi has “a history of deceiving the Commission and investing little to no resources into core competencies such as market surveillance and regulatory compliance.”
It is up to the Commission to clarify the veracity of these claims, but they raise a very important question: Are any financial exchanges (even those free of these alleged issues) sufficiently equipped to safeguard the integrity of U.S. elections against a flood tide of money coming from God knows where? I think the answer is no—especially since the risks here are so much greater than the possible rewards from more gambling on elections. It goes without saying that the results of national elections in 2024 may determine if there are ever any more elections in future, and hostile foreign powers have already attempted to meddle in the democratic process.
Kalshi’s proposal is currently limited to the question of partisan control of Congress, but if its scheme is approved, it would certainly go further. The Commission’s approval would serve as a signal to Kalshi and its competitors that the CFTC is willing to become a de facto election cop—a position it is ill-suited for—and likely spur an industry push to expand wagering to other electoral contests, across all levels of government. Almost 40 percent of Americans currently lack confidence in the electoral process, a huge chunk of those being Republicans. Allowing Kalshi to proceed with this contract that would only further muddy the process is a surefire way to worsen the situation. The CFTC should deny this proposal. The electoral process is supposed to be a sacred political trust, not a way for slimy insiders to make easy money.
