The Commodity Futures Trading Commission sought to convince a panel of judges to consider its emergency motion to stay a district's previous ruling, while predictions market Kalshi argued that the agency's view is overly broad.

During a hearing on Thursday, judges Patricia Millett, Cornelia Pillard and Florence Pan in the U.S. Court of Appeals for the District of Columbia Circuit heard from both sides on whether it should stay a previous district court ruling in Kalshi's favor. 

"These are important issues and the district court issued a seriously flawed decision that if it goes into effect, lets Kalshi immediately open its futures exchange to high stakes betting on the congressional elections in November," said Rob Schwartz, general counsel at the CFTC, at the hearing.

Event markets, such as Kalshi, allow users to bet on the outcome of future events, including on the upcoming U.S. elections or even when certain Taylor Swift albums may be released. CFTC Chair Rostin Behnam has warned about a "significant uptick" in event contracts listed for trading on exchanges registered with the CFTC since 2021.

The CFTC and Kalshi have been in a lawsuit since late last year after the agency said that Kalshi could not offer contracts related to "congressional control contracts." Then last week, Judge Jia M. Cobb for the U.S. District Court for the District of Columbia ruled that the CFTC exceeded its authority when it pushed back against prediction market Kalshi's move to list contracts tied to U.S. elections. The CFTC then tried to get to stay Judge Cobb's order during a hearing last week but was denied. The agency then quickly appealed the ruling in the circuit court. 

If election contracts were to be allowed, there could be harm done to election integrity, Schwartz said. Betting on elections will undermine election integrity, he added.

"I don't want to be too dramatic, but we live in a country where tens of millions of Americans believe the last presidential election was stolen," Schwartz said. "Last week there was an assasination attempt, the second in three months."

A good portion of the hearing revolved around why the CFTC believes that election betting differs from other types of betting.

The judges asked Schwartz on how the agency defined gambling and the "contest of others," a phrase said often throughout the hearing. An election, sporting event or an award show is a "contest of others," Schwartz said. 

The judges then asked whether other situations would constitute a contest, like voting on who will be the next U.S. Speaker of the House. One of the judges also asked Schwartz how betting on elections differs from wagering on other things.

"We're trying to figure what's in and what's out," the judge said.

It was then Kalshi's turn to answer the judges' questions. The judges asked questions about what constituted gambling and gaming. Chair Behnam has previously said betting on elections meets the definition of gaming.

"Buying a future to hedge against your farm, exposure to weather is not typically thought of as gaming, but the Super Bowl… and your products strike them as things that are different," the judge said. 

The Super Bowl is a game, Kalshi's lawyer said.

One judge also asked Kalshi whether protections were in place to know who was buying event contracts. Kalshi's lawyer said they have "know your customer" procedures implemented. 

"Do you have any way of ensuring that that individual is on there isn't actually doing it as a front for a foreign government?" the judge asked. "What are your protections against these concerns?

Lawyers at WilmerHale say they expect the Circuit Court to decide quickly, given that U.S. elections are around the corner. 

"Kalshi and the CFTC have already submitted their respective response and reply briefs, and given the short time until the U.S. elections that are the subject of Kalshi’s Congressional Control Contracts, we expect the Circuit Court will make a decision on an expedited timeline," they said in a post on Wednesday ahead of the hearing. 

Clear guidance is needed for election-prediction markets, the lawyers said in the post. 

"Unless there is meaningful congressional action to expressly delegate discretionary authority to the CFTC, there will likely continue to be challenges to the CFTC’s authority, particularly with respect to novel products and markets," they said.  

The CFTC has been working on rulemaking to ban bets on political events. The agency voted in May to propose that rulemaking that if adopted, would mean that event contracts involving gaming, war, terrorism and assassination would not be allowed to be listed for trading or accepted for clearing and are "contrary to the public interest." 

Earlier this week, Chair Behnam warned of the risks associated with the CFTC overseeing election contracts at Georgetown University's Financial Markets Quality Conference. 

"I just don't think that Congress or the general public wants a financial federal regulator policing elections. That, in my mind, is really … a bridge too far," Behnam said.

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