As a new election season gets underway, voters will once again have an opportunity to choose their political leaders. One thing they won’t be able to do—if Washington gets its way—is to bet on election outcomes.

So what, you might ask? Isn’t this all about gambling, and, if so, what public interest is there in allowing people to wager on elections? That certainly seems to be the view of many in Washington, who argue that “allow[ing] legal gambling on elections . . . is a clear threat to our democracy.”

While that may be the assessment of many inside the Beltway, it’s not that of most economists and academics, who argue that trading on anticipated election outcomes promotes the public interest in two important ways.

First, it facilitates the production of information and forecasts that are often more accurate and more reliable than that provided by polling.

Second, it allows firms to limit risk by hedging against adverse political and policy outcomes. According to this view, trading on the outcome of elections serves the public interest, because it “combine[s] the economic significance of a powerful risk reduction tool for small businesses with the social significance of a powerful forecasting tool for researchers and policy-makers.”

Notwithstanding this benign view of such trading, the prognosis for markets offering contracts on election outcomes is not very encouraging. Indeed, for those seeking to bet on the outcome of next year’s presidential and congressional elections, it appears that an array of regulators, politicians, and others stands in the way.

To illustrate, during the past two years, the Commodity Futures Trading Commission, the primary regulator of such trading, has spent much of its time trying to shut down one popular online electoral exchange known as PredictIt, while slow walking the application of another exchange, called KalshiEX LLC, to offer contracts on which party will control Congress after next year’s elections.

Reinforcing this trend, is a call from a group of congressional leaders (albeit all from one side of the political aisle), and at least one influential pro-regulatory advocacy group, for the CFTC to reject any initiative that allows “legal gambling on U.S. elections and their outcomes.”

Given these roadblocks, it’s is safe to say that markets allowing participants to bet on the outcome of elections operate in a regulatory environment that, as onescholar puts it, is “more skeptical than supportive.”

While the CFTC allows some platforms to offer contracts on the outcome of certain real-world events—such as the level of various economic indicators, the high temperature in New York, or even when the screen actors’ strike against Hollywood will end—those pertaining to election outcomes have been largely restricted to contracts offered by certain non-profit platforms where the financial stakes are low. And even here, it seems that the CFTC invariably endeavors to shut them down whenever they gain widespread popularity.

By contrast, those few CFTC-regulated for-profit markets that have been allowed to offer trading on events in general, have never been allowed to do so for election outcomes. While an endless array of events can be wagered on today, those pertaining to election results remain “the taboo frontier for prediction markets.”

Rationale for Regulation

Although the facts and circumstances surrounding the matters involving PredicitIt and Kalshi differ—while PredicitIt offers trading on electoral outcomes under conditions spelled out in a regulatory no-action letter, Kalshi, a fully regulated exchange, is restricted to trading on the outcome of largely non-political events—the underlying issue common to both remains unresolved. And that’s whether election contracts are—or should be—permitted under the Commodity Exchange Act.

When all is said and done, the issue at stake in these matters is whether political election contracts are for the purpose of gambling, or whether they serve a more compelling purpose.

To the CFTC, and to many politicians, the answer is simple: Such contracts are simply gambling and do not serve any real commercial purpose for the public at large. Indeed, this has been the consistent and view of the agency since they have been introduced, one that it expressed in 2012, when it held that political event contracts offered by the North American Derivatives Exchange were akin to “gaming or gambling,” and therefore, “contrary to the public interest.”

To academics, it’s also relatively simple. In their view, “[e]lections are not games,” as Professor Jason Furman, the former chairman of the Council of Economic Advisers under President Barack Obama, puts it, “and the outcome of political control of Congress has enormous public interest ramifications.” Or as another scholar suggests, allowing these markets to operate, and having this information available, creates “tremendous social utility.”

While most of Washington is aligned with the viewpoint of the CFTC, not all of it is. One outlier is the Department of Defense, which weighed in 20 years ago, saying, “Futures markets have proven themselves to be good at predicting such things as elections results; they are often better than expert opinions.”

As the CFTC weighs what to do next, it needs to decide whether its mission here is to foster innovation or paternalism. That is, whether it should encourage political election markets to flourish, or whether it will continue to relegate them to the “taboo frontier” of modern finance.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Robert Zwirb is an attorney who has advised market participants on financial regulatory and antitrust issues. He has served as counsel to two former chairpersons of the Commodity Futures Trading Commission.

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