Comment Text:
I write to address the following questions.
Question 14. Are the contracts contrary to the public interest? Why or why not?
Question 22. Should the Commission be responsible for surveilling, and enforcing against, possible manipulative and/or false reporting activity involving the price forming information for the contracts, while the contracts are trading?
Question 23. Could trading in the markets for the contracts obligate the Commission to investigate or otherwise become involved in the electoral process or political fundraising? If so, is this an appropriate role for the Commission?
Question 24. What other factors should the Commission consider in determining whether these contracts are “contrary to the public interest?”
These questions are not without their biases. From question 22 and 23 it is clear that the CFTC does not consider itself competent to perform the functions contemplated therein, and that the “right” answer to both, if you support the contract, is “no”, and if you oppose the contract the right answer is yes.
Put that on hold for a minute.
Questions 14 and 24 are about the public interest. It would be incorrect for the CFTC to even reach this question, for the obvious and cogent legal arguments that two of its most recent general counsel set forth. But ignoring the law, as Chairman Behnam, Commissioner Johnson, and Commissioner Goldsmith-Romero have unwisely chosen to do, we come to the question of what the CFTC should consider in determining the public interest.[fn1]
And here you have a conundrum. Many commenters have, ignoring the actual issue before the CFTC, announced their opposition to “gambling” on elections. They have given roughly six different catastrophic results that can flow from gambling on elections, ranging from outright corruption to no actual impact, but a loss in the public’s confidence in free and fair elections. On the other side, supporting the contract, there are many comments regarding the importance of prediction markets and the importance of the market data. [fn2]
Both sides are wrong. The public interest that the Commission can legitimately consider is limited to what the Commission is competent in determining. This is obvious, but I’ll walk you through the steps.
First, it is obvious that there is a limit to the CFTC’s competence to determine public interest. Could they determine what type of music is in the public’s interest? Could they determine that a contract on crude oil is contrary to the public interest because of climate change? What about a contract on sugar; is that contrary to the public interest because of obesity? What about a contract on electricity consumption? Is that contrary to the public interest because screened devices run on electricity and screen time is harmful, in their opinion, to society and the public?
The answer to all of these is of course not. The CFTC has no competence in determining musical or artistic worth. The CFTC, at least as of yet, has not found crude oil futures to be contrary to the public interest and indeed, they work very hard to ensure that they work and function. Does the CFTC’s majority for a second think that crude oil use is contrary to the public interest? Obviously not. Look at the Chairman’s history of being at the forefront of financial regulators fighting climate change. Look at the Commissioners’ efforts in this regard. But that is not the charge nor the competency of the CFTC.
In other words, the CFTC acknowledges that it is not the appropriate body to be telling people what to do about most things.
It is without question not the CFTC’s competency to determine what is in society’s interest with regard to preserving democracy. The CFTC Commissioners, esteemed as they are and doubtlessly wise, have no particular knowledge, competency, and certainly no right to determine the course of American democracy. It boggles the mind that anyone would think for a second that Congress was telling the CFTC in the CEA, that the CFTC should now be presumed the competent Federal authority on the public’s interest in every facet of the public’s life just because there is an event contract on that facet. That is a laughable assertion and is contradicted by every doctrine of statutory interpretation and good governance principle in the book that could be even mildly relevant.
Let’s be clear, the CFTC is not in a position to determine the relative worth, impact, or effect that a contract will have on anything that is outside of their core competency. Therefore, the CFTC cannot determine the public interest of these contracts based on the perceived or imagined impact, now matter how loudly or vociferously they are proclaimed.
What then is the CFTC allowed to consider in the public interest?
The answer is, factors that the CFTC is expert in. These include hedging and price formation, competition, and innovation. These are the factors that the CEA enumerates or has traditionally enumerated. Now, of course, these are not absolute. For example, should the CFTC tell a market participant how to hedge? Of course not. That is not the CFTC’s job, and it is not their competence. What the CFTC is charged with is making sure that the hedging tools are there in the marketplace so that market participants can make their own choices and decisions regarding how to hedge. So the public interest factors that the CFTC should be considering are factors like:
Can (not will) the contract be used to hedge a risk?
Can (not will) the contract be used to price an event?
Will the contract represent innovation in American markets?
Will the contract promote or harm competition in American markets?
These are the factors that the CFTC is equipped and expert in answering. And I have to stress that the first two questions are “can”, not “will”. Telling the market how to hedge is not, has never been, and hopefully never will be the CFTC’s job. The question about price basing is very much in the CFTC’s ambit. But again, the question is not how it will be used, or even whether or not itt should be used, but can it be used.
The point is that only factors that the CFTC is competent to address can be considered in the public interest, this is not a free for all, and the CFTC’s competency is limited. Does the CFTC’s competency extend to matters of democracy? Obviously not. That is way beyond the CFTC’s ken. In fact, this is the very point that Chairman Behnam made on the Odd Lots podcast, and is the obvious motivation behind questions 22 and 23. The CFTC is not competent to make any decision, either pro or con, regarding what is best for democracy.
Until now, I hope that the CFTC and the objective impartial observer will agree. These are obvious points that anyone, regardless of being pro or con on the contract, should agree.
I move now to voice my opinion that the contracts should be allowed. The factors that the CFTC should be considering all favor the contract. It can be used for hedging. The CFTC’s statement in Nadex to the contrary is specious and frankly moronic. I don’t think anyone in the CFTC’s majority really takes it seriously. Don’t repeat the same mistake. The contract can also be used for price basing. Again, this is obvious and so axiomatic the mind again bogles how the CFTC majority can ignore it. The contract will promote innovation. These risks are hedged OTC all the time. Bringing the activity on-exchange will enhance transparency, and protect against manipulation, and increase accessibility, all of which are important innovations. And finally, the contract will promote competition. This will open up the market to all exchanges, not just Kalshi.
In short, the answer here is clear. But more importantly, the question is equally clear. And the CFTC was not given carte blanche by Congress to decide the public’s interest on any and all facets of public life. It would be the height of hubris for the CFTC majority to tell us how to safeguard democracy. Is that the job of the CFTC commissioner or Chairman? How many of them were questioned about this by Congress during their confirmations? Were any of them asked about their views on democracy? Of course not. What about election integrity? Is that the CFTC’s job? Is the CFTC the arbiter or protector of fair elections? No they are not, and they were not asked about them because that is not their job.
Whose job is it then? What should the CFTC majority do if they actually are so concerned that these contracts will break democracy? The answer is the same thing that everyone should do. Call your congresswoman. Congress can certainly prohibit a contract they don’t want. They did not prohibit any contract [fn3] and it is not the job of the CFTC to fix what they perceive as Congress’s mistake in judgment. And if the CFTC majority really thinks that Congress made them the competent body to consider collateral ramifications to contracts well outside of their competency, they need to speak this out and be transparent on this.
[fn1. It is not surprising perhaps, the Chairman Behnam and Commissioner Goldsmith-Romero have chosen to ignore the law in favor of their political expedient of preventing election markets at all costs, either to curry favor with progressive groups or to prevent anything that could potentially shakeup the CFTC being given authority over crypto spot markets and the impact that can have on influence or even more cynically, on future employment. But Commissioner Johnson hails from academia where you would hope to find more of a fealty to the law and to personal ethic. It is very disappointing as an observer to see the fealty is to the party line, instead.]
[fn2. I fully expect that the CFTC’s conclusion was drawn before it even asked for comments. It was clear from the last go-around, and from the CFTC’s shutdown of PredictIt before that, that the CFTC is waging a war on election markets. Accordingly, I, and most industry folks that I’ve spoken to, know that the CFTC’s request for comments is nothing but a poorly drawn charade with the hope of garnering a better record than the first round. I don’t think it worked, because the thousand or so astroturfed comments should not outweigh comments with actual analysis and reason, which are roughly weighted in the same 80-20% in favor of the contracts. Regardless, I doubt the three in the CFTC’s majority care much, because they don’t care about what the commenters say.
I assume that there is at least a chance that Kalshi will sue when the CFTC inevitably prohibits the contract. I therefore note in the record that the evidence regarding the value to society of prediction markets is much stronger than the parade of horribles that the opponents to the contract put forth. Accordingly, reasoned rulemaking and decision making should give those considerations far more impact.]
[fn3 There is a misconception that the 5c(c)(5)(C) prohibits contracts. In fact, Chairman Behnam has said this on the Hill. It is a mistake and simply not true. The rule, on its face, does not prohibit any contract. This point is obvious and incontrovertible.]
