Kalshi’s Election Contracts Omission - A Quicksand Threat for States
Hedging for downside risk vs. strategic silence may define the jurisdictional fight
Sports and elections have long been treated as cousins in the world of speculation. Architzel (2006)1 made the point clearly:
But what of markets listing contracts in attendance at movies, or political or legal events or in sporting events? … [I]t is crucial that market organizers or potential market organizers are able to understand whether they are covered by CFTC requirements.
We also made a similar point in our 2017 amicus brief in Murphy v. NCAA (PDF):
A world without PASPA would be an uneven one: people would be able to speculate on the outcome of a sports game as they wish, but not on the outcome of an election.
That asymmetry persisted until 2024, when Kalshi won its fight against the CFTC (we covered this in a detailed series starting with this preface).
The Missed Opportunities
Kalshi had multiple chances to put election markets front and center and chose not to:
October 16 - Letter Response to New Jersey (PDF) (Third Circuit)—Leaned on corn prices and credit default swaps (instead of elections):
Kalshi had the opportunity to bring up election markets in front of the Third Circuit when they were responding to the state bringing in the Nadex decision. They used a common-sense argument, but opted for more indirect examples: Corn prices relating to the outcome of a drought and credit default swaps relating to the outcome of a downturn.
October 31 - Nevada Motion to Dissolve (PDF)—Elections mentioned, but the event vs. outcome distinction wasn’t fully pressed:
Then they had the opportunity again, when fighting the motion to dissolve. To be sure, the election markets featured more prominently in this response. For example, Kalshi reiterated the very first sentence of the DC District Court opinion (PDF) from late 2024:
This lawsuit concerns the interpretation of the Commodity Exchange Act (CEA)’s special rule for the review of event contracts, a type of derivative contract whose payoff is based on the outcome of a contingent event.
Smart! But was the substantial line-drawing problem the “event vs. outcome” distinction front and center? We don’t think so.
December 2 - Letter Response to New Jersey (PDF) (Third Circuit): No mention of elections at all:
In this response they didn’t really hammer on the line-drawing problem from an outcome vs. event perspective (though they pointed it out from a financial, economic, or commercial consequence perspective). Election markets were not mentioned at all.
December 3 - Kalshi’s Connecticut Complaint (PDF): Kept arguments general, signaling inconsistency and avoided elections.
Finally, when they sued Connecticut, the opportunity came knocking once more. Kalshi decided to keep it general, signaling that they will later go after the inconsistency that the Connecticut position created in their cease and desist letter (PDF) (see #49 in the Kalshi complaint).
Given how intuitive election outcomes are–someone wins, someone loses–and how closely they mirror sports wagering, the omission is striking.
Why Elections Are the Best Comparator
Clarity: Election outcomes are simple, binary and easy to analogize to sports;
Novelty: Generally, election contracts weren’t historically allowed by the states.2 They only became viable after Kalshi’s court victory; and
Practitioner View: For decades, sports and elections have been paired analytically. Ignoring that pairing leaves a glaring hole.
So why would Kalshi avoid the strongest comparator?
The Two Possible Explanations
Risk Management
If Kalshi ties sports and elections too closely, states could argue for jurisdiction over both. Hedging by keeping them separate preserves at least part of the business if the sports contracts business unit fails. But that’s a risky hedge: Sports are ~90% of Kalshi’s business. Sacrificing the strongest arguments to protect ~10% seems misaligned with Kalshi’s aggressive DNA.
And if litigation sinks the sports unit, what happens to investor upside? Kalshi isn’t publicly traded, but its VC backers surely expect growth tied to sports. Has this risk been disclosed? Hmmm…
Strategic Silence
The more intriguing explanation: Kalshi is holding back deliberately. By not hammering the election comparator, they avoid alerting states and tribes to the line-drawing problem Judge Gordon’s analysis created. Then, at the right moment–perhaps during oral argument–they might deploy it as a knockout punch.
Returning to election markets, they seem the most obvious counterpoint to Judge Gordon’s fragile “event vs. outcome” distinction—a vulnerability we unpacked in our “smoking gun” release last week. On appeal, the inquiry almost writes itself:
If sports wagers are not swaps under the event-outcome distinction,
what about election contracts?
That question hangs over the case like the Sword of Damocles. Andrew Kim flagged the same concern, noting that election contracts have always been about outcomes–not whether an election occurs, but who wins it. His point is simple but devastating: If the line between “event” and “outcome” is supposed to matter, election markets expose just how untenable that distinction really is.
Final Thoughts
Kalshi’s omission of election contracts isn’t an oversight. From our viewpoint, it appears to be a calculated move. By keeping this “ace up their sleeve,” they let the quicksand do its own work on their opponents. When the time comes, the election comparator could expose the fatal flaw in the event vs. outcome distinction: The lack of a limiting principle.
Kalshi may be playing the long game, and if so, the silence is strategic, not cautious.
Next up, we’ll tackle another important statutory component: “Financial, commercial, or economic consequence.” It’s another Jenga block in Judge Gordon’s tower and we just happen to have some unique insights to share with you. Stay tuned…
Event Markets Evolve: legal certainty needed, Futures Industry (March/April 2006).
See, e.g., footnote 24 in the 2023 Kalshi order (PDF).