Around the time of the 2024 presidential election, some stock trading apps started offering the option to buy contracts on who would win.
Predictive contracts let people with a hunch try to cash in on that hunch for guesses about all kinds of things, like who might be the next Nobel Peace Prize winner or how many tornadoes will hit the U.S. this month.
Kalshi, a predictive market company, now pairs with online brokerage platform Robinhood to offer these contracts.
“We do think that this is going to be one of the largest financial instruments that's out there,” said Sara Slane, head of corporate development for Kalshi.
Trade prices fluctuate on demand, but the payout is always $1 per contract. So, traders could buy 10 contracts predicting which team will win the NBA final. And if they’re right, they get $10. If they’re wrong, they get nothing.
According to Slane, Kalshi processed more than $1 billion in prediction trades this year for just two events: the Super Bowl and March Madness. It’s capitalizing on predictions that traders have already been making for years.
“Like GDP, growth rates, inflation levels, unemployment, weather derivatives,” said Johnny ElHachem, a partner at Holland and Knight who specializes in gaming regulation. “What is happening now is that we could say we're, like, at a crossroads, where financial innovation and public regulation are colliding.”
They’re colliding because six states now say the contracts are essentially bets and not properly regulated or taxed. They’ve issued cease and desist letters to Kalshi and Robinhood.
It’s a classic battle of state versus federal jurisdiction.
John Martin, the director of Maryland Lottery and Gambling, which sent a cease and desist letter to the companies in April, says the issue revolves around public safety and financial interest for the state.
In a statement, Martin said sports betting companies go through a rigorous registration process to ensure the geolocation and age of bettors.
Also, licensed sportsbooks are required to contribute fifteen percent of their proceeds to the state’s education programs.
“At the end of the day. This is a federalism fight,” said Andrew Kim, a partner specializing in gambling at the law firm Goodwin. “Congress left it unclear as to what kind of role that the state regulators should play in this space.”
As of now the states seem to be losing. The federal Commodity Futures Trading Commission gave Kalshi approval for trades last year, and state attempts to challenge that in court have, so far, failed.
Kalshi secured a preliminary injunction against both New Jersey and Nevada in their attempts to restrict contract trading.
Additionally, The CFTC said it wouldn’t be filing an appeal challenging a court ruling in favor of Kalshi for election contracts.
That’s particularly concerning for some critics, who say contract trading on political events may breed more misinformation about elections as people try to profit off of them.
However, the courts seem to be setting a precedent that the contracts are allowable under federal law and not subject to state regulation.
