Election Contracts and Sports Event Contracts: The Future of Regulated Event-Based Trading

The emergence of event-based trading platforms such as KalshiEX LLC and Crypto.com/Nadex has sparked a heated regulatory and policy debate over the boundaries of financial derivatives, speculation and gambling. Both platforms offer yes/no contracts on real-world events, allowing traders to speculate on whether a certain event will happen – from election outcomes to sports championships.

Although these contracts are marketed as regulated financial instruments, they face intense scrutiny from the Commodity Futures Trading Commission (CFTC), which has expressed concerns about their potential resemblance to gambling, the risks they pose to market integrity and their broader implications for public trust.

This Holland & Knight alert explores the legal, regulatory and economic considerations surrounding election contracts and sports event contracts, analyzing how the CFTC's evolving stance could shape the future of event-based trading.

The Legal and Regulatory Framework: Election vs. Sports Contracts

Both election contracts and sports event contracts operate as binary options with fixed payouts (i.e., $100 if correct, $0 if incorrect). However, the listing of those contracts by Kalshi and Crypto.com faces distinct legal challenges.

Election Contracts: A Test of Democracy

Election contracts, such as Kalshi's Congressional Control Contracts, allow traders to predict political outcomes (e.g., "Will Republicans control the Senate after the 2024 elections?").

• CFTC Regulation 40.11. The CFTC rejected Kalshi's election contracts under Regulation 40.11, arguing that they constitute "gaming," violate the prohibition on listing contracts that relate to illegal activity and could undermine public trust in elections.
• Public Interest Concerns. Regulators worry that large-scale speculation on elections could incentivize misinformation campaigns, market manipulation or conflicts of interest.
• Legal Battle. Kalshi has challenged the CFTC's ruling in court, arguing that election contracts provide hedging opportunities for businesses and serve as superior forecasting tools compared to traditional polling. Kalshi prevailed at the district court level on summary judgement, and the CFTC appealed. While Kalshi is currently listing political event contracts, the CFTC's appeal of the district court's ruling is still pending.

Sports Event Contracts: Financial Markets or Gambling?

Crypto.com/Nadex has introduced sports event trading, allowing users to trade contracts on outcomes such as "Will Team X win the championship?"

• CFTC Oversight. Unlike traditional sportsbooks, Crypto.com's sports contracts are marketed as derivatives products regulated by the CFTC rather than state gambling commissions, effectively bypassing and potentially preempting state gaming laws.
• Recent CFTC Review. On Jan. 25, 2025, the CFTC began a 90-day review period of the listing and trading of Crypto.com/Nadex's "Title Event" and "Hometown Celebration" contracts, questioning whether their listing was consistent with CFTC Regulation 40.11. The CFTC asked Crypto.com to suspend its listings of contracts, but Crypto.com has refused to halt its operations. Subsequent to Crypto.com's listing of these contracts, Kalshi listed similar contracts.
• Gambling vs. Trading Debate. Critics argue these contracts are indistinguishable from sports betting, while proponents claim they provide valuable market-based pricing of real-world probabilities.

Key Similarities Between Election Contracts and Sports Event Contracts

Despite their differences, both contract types raise fundamental questions about the scope of CFTC regulation, definition of gambling and role of speculation in financial markets.

The Core Legal Debate: Are These Contracts Financial Derivatives or Gambling?

The CFTC's opposition to both election contracts and sports event contracts centers on a few key legal arguments.

Gambling vs. Financial Markets

• CFTC Position. Contracts that do not serve an economic purpose and resemble traditional gambling should not be treated as federally regulated derivatives.
• Industry Position. These contracts provide valuable market insights and should be regulated like other financial products.
• Industry Counter-Position (States and Gaming Entities). These contracts should not be permitted to bypass state gambling laws.

Public Interest Considerations

• Elections. The CFTC argues that election contracts could incentivize fraud, misinformation and unethical behavior by market participants.
• Sports. Sports event contracts raise concerns about match-fixing and their resemblance to state-regulated sports betting.

Risk Management vs. Speculation

• Proponents' View. Just as businesses hedge against commodity price fluctuations, election contracts allow them to hedge against regulatory risks, and sports event contracts allow stakeholders to gain predictive insights.
• Regulators' View. Unlike commodity futures, these contracts do not serve a clear economic function beyond speculation. However, this view may change under the new administration.

The Future of Event-Based Trading: Key Questions and Potential Outcomes

The CFTC's rulings on election contracts and sports event contracts will shape the future of event-based markets. The following are some key questions moving forward.

Will the Courts Rule Against the CFTC?

• If Kalshi wins its legal challenge or the CFTC withdraws its opposition to such challenge, election contracts will likely become federally regulated financial instruments.
• If the CFTC prohibits the listing of sports-based event contracts, it is an open question whether the agency can successfully defend that position court. If the CFTC permits the listing of such contracts or Crypto.com/Nadex successfully challenges the CFTC denial of the listing, sports event contracts may become federally regulated financial instruments.

Will the U.S. Congress or CFTC Issue New Laws and Regulations?

• The CFTC could establish clearer criteria for permissible event contracts via a rulemaking and has attempted to do so in the past, but was unable to pass a final rule on the issue.
• Congress could intervene to set explicit legal boundaries.

Could These Markets Shift to State Gambling Regulation?

• If blocked at the federal level, platforms could pivot to state gambling licenses, although this would subject them to fragmented regulation.
• If permitted at the federal level, these platforms could be a new source of competition to state-regulated gambling companies. In addition, federal regulation could preempt state regulation of certain sports event contracts.

Will Other Countries Set Precedents?

• Several countries, including the United Kingdom and Australia, already allow sports betting and election markets under their gambling laws.
• The U.S. may eventually adopt a hybrid model, permitting these markets with stricter oversight.

Conclusion

Election contracts and sports event contracts are at the frontier of regulated event-based trading, testing the boundaries between financial markets and gambling. Though proponents argue these markets provide valuable predictive insights and risk management tools, regulators fear they could undermine public trust and resemble gambling. The recent notice of review of Crypto.com/Nadex's sports event contracts by the CFTC highlights the ongoing regulatory scrutiny of event-based derivatives. The CFTC's order on the matter will likely influence whether election and sports markets are integrated into the broader financial system or relegated to the realm of gambling.

The court's upcoming decisions on Kalshi's election contracts and the CFTC's decision on Crypto.com/Nadex's sports contracts will set a precedent for how event-based derivatives are treated in the U.S. The outcome will determine whether these markets evolve into a legitimate new asset class or are restricted under traditional gambling laws. The CFTC will hold a public roundtable in approximately 40 days at the conclusion of its requests for information on certain sports-related event contracts. The author will monitor the developments and publish further alerts and updates.

In the meantime, businesses, traders and policymakers must navigate this uncertain regulatory landscape, balancing innovation, legal compliance and ethical considerations in the emerging world of event-based financial products.

If you have questions about event contracts and the potential impact to your business, please contact the author or another member of Holland & Knight's Gaming Practice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.