The CFTC is working to ban political prediction markets. Its current goal: Get a federal appeals court to keep one from launching while it argues a judge was mistaken in overturning its rejection of Kalshi.

You’re reading State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. Click here to sign up for future editions.

Prediction markets

The narrative

It's unclear whether political prediction markets will launch in the U.S. before the election (I'm not counting Kalshi's 8-hour effort last week). The ball's in an appeals court to make a decision one way or another, and a 2.5-hour hearing on Thursday elicited few clues about where the judges may land.

Why it matters

While Kalshi's prediction markets aren't directly crypto-related, if Kalshi does win the ability to list and trade political event contracts, it may open the door for other providers to enter – or possibly re-enter – the U.S. market.

Breaking it down

The Commodity Futures Trading Commission is in the middle of a rulemaking process to ban political prediction markets in the U.S. entirely by formally adding these types of event contracts to the definition of "gaming." That effort took a major blow last week, when District of Columbia District Judge Jia Cobb ruled against the regulator in Kalshi v. CFTC.

Some quick background: Kalshi tried to self-certify political prediction markets in 2023, but the CFTC ordered that the company could not list or trade those products. Kalshi sued, and on Sept. 6, the judge ruled that Kalshi won – though she didn't actually publish her opinion explaining the ruling until Sept. 12.

The full opinion goes into detail about how the judge assessed the CFTC's definition of "gaming" and "involves" as they pertain to the statute (the Commodity Exchange Act) the regulator used to reject the products.

The CFTC filed an emergency stay for appeal hours after Kalshi launched its new contracts, willing at least a temporary halt while the appeals court judges consider the emergency motion.

As of the time I'm writing this, the contracts are still halted. The appeals court scheduled a hearing for Thursday, giving each party 15 minutes to make its case – though ultimately it ran for some 2.5 hours. We'll presumably find out if the contracts can restart before the election happens after the hearing, but there's no firm timeline here. And of course, there's still the broader question about the appeal itself and how that may go.

The broader picture, of course, is the CFTC's ongoing rulemaking around the role of political prediction markets in the U.S. The CFTC's view is it shouldn't be responsible for overseeing these because it'd be too difficult for the regulator to police the underlying market – i.e. the results of the U.S. elections – for fraud and manipulation.

The markets themselves may be subject to manipulation through the use of misleading or false polling data, CFTC General Counsel Rob Schwartz argued in court Thursday. And manipulation on prediction markets may further undermine confidence in elections themselves.

Kalshi's view is these concerns are besides the point, because Congress authorized the CFTC to block certain types of event contracts and election markets aren't on the list.

"Their argument comes down to characterizing these event contracts as involving either gaming or unlawful activity," said Jones Day Partner Yaakov Roth. "The problem as to both is that the Commission's interpretations of how the statute works and how this link what this language means are so broad that they would sweep all event contracts, thereby rendering the other enumerated activity superfluous and flipping the whole structure of how this statute works. And they have not been able to give a limiting principle."

Roth represents Kalshi in its case against the CFTC.

Schwartz pointed to the Commodity Exchange Act and its preemption of state laws in his argument, noting that some states have laws banning election wagers. The CEA preempts state law, so allowing Kalshi to list political event contracts may run into conflicts with those laws, in one hypothetical.

The judges grilled both attorneys, seemingly unimpressed by either over the course of the 2.5-hour hearing (which was originally set to last 30 minutes). It remains to be seen how they'll rule on the temporary stay.

Stories you may have missed

• Sam Bankman-Fried Appeals Fraud Conviction, Requests New Trial: Sam Bankman-Fried filed his appeal of his criminal fraud conviction, arguing he did not receive a fair trial.
• UK Introduces Bill to Clarify Crypto's Legal Status: The U.K. Parliament is considering a bill to consider cryptocurrencies and non-fungible tokens to be property under U.K. law.
• Kraken Seeks Jury Trial in SEC Lawsuit, Presents Defense Arguments: Kraken argued it did not need to register as a broker, exchange or clearing agent with the U.S. Securities and Exchange Commission in its answer to the SEC's lawsuit alleging it violated federal securities law.
• EU Regulator Sees Official Journal Publication of Stablecoin Standards Before Year-End: The European Union expects to finalize regulations for stablecoin issuers near the end of the year, a European Banking Authority spokesperson told CoinDesk.
• Doors Open at Prometheum as Much-Disputed Firm Tests Crypto Tokens as Securities: Prometheum, the special-purpose broker-dealer, has formally opened for institutional clients offering OP, GRT, UNI, ARB and ETH custody services. It had previously soft-launched with the latter three tokens.

This week

Tuesday

• 13:00 UTC (9:00 a.m. EDT) Georgetown's Psaros Center for Financial Markets and Policy held its annual Financial Markets Quality Conference, featuring CFTC Chair Rostin Behnam, Rep. Patrick McHenry and Sen. Cynthia Lummis.
• 14:00 UTC (10:00 a.m. EDT) There was a status hearing in U.S. v. Keonne Rodriguez and William Lonergan Hill, the folks arrested tied to Samourai Wallet.

Wednesday

• 14:00 UTC (10:00 a.m. EDT) The House Financial Services Committee held a subcommittee hearing letting crypto industry participants gripe about the SEC's enforcement actions.
• 18:00 UTC (2:00 p.m. EDT) The House Financial Services Committee also held a subcommittee hearing on pig butchering scams. Cheyenne Ligon reports that it was "largely an informational hearing on pig butchering where [lawmakers] heard testimony from witnesses in law enforcement and government about the financial and emotional devastation that these increasingly-common crypto investment scams have on U.S. citizens.

Thursday

• 18:00 UTC (2:00 p.m. EDT) An appeals court heard arguments about the CFTC's emergency motion to stay Kalshi's political events contracts.

Elsewhere:

• (The Wall Street Journal) Vice Presidential nominee and Republican Ohio Senator J.D. Vance acknowledged "creat[ing] stories" about Haitian immigrants. Springfield, Ohio has seen more than 30 bomb threats against schools, hospitals, colleges and city hall, as well as the cancellation of its annual CultureFest.
• (Bloomberg) Zeke Faux and Muyao Shen profiled Chase Herro, one of the individuals helping develop the Donald Trump-linked World Liberty Financial system. "You can literally sell s--- in a can, wrapped in piss, covered in human skin, for a billion dollars if the story's right, because people will buy it," he apparently said about crypto a few years ago.
• (CNN) Apparently retailers are having a lot of success fighting shoplifting.
• (The New York Times) NJ Transit's straight up not having a good time right now.

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde.

You can also join the group conversation on Telegram.

See ya’ll next week!