So the CFTC frames Kalshi as a financial derivatives exchange for the financial instrument category of event contracts, dismissing NYs characterization of it as a gambling/betting platform. Interesting.
There are a thousand of exchanges that have no risk on my life, but that doesn’t mean they don’t impact others.
In a similar vein, companies that run skill competitions (hole-in-one prizes, half-court shots, etc.) can and regularly do buy insurance on those events.
Under this theory, Kalshi is arguably not trading in commodities, but insurance, which is state-regulated.
In the case of those “make a free throw from half court and win a car” competitions, the risk is a known value: the prize sponsor’s wholesale vehicle cost. The sponsor pays a premium for each contest, which is calculated based on the likelihood of someone winning.
This is a very well established insurance market. You as an individual can go out and buy hole-in-one insurance. It’s more popular in Korea and Japan where there is a strong societal expectation of throwing a lavish party if one hits a hole in one. Here in the States, it’ll cover a round of drinks for the clubhouse.
In the case of the bar, the Kalshi bet is functioning as an insurance policy against a potentially open-ended loss. The bar could be packed, the U.S. wins and everyone drinks the bar dry. So Kalshi is fulfilling a legitimate business role here.
But insurance is boring and highly regulated. The bar could likely have bought an equivalent policy from an underwriter in the Financial District. Or frankly from a rich regular. Kalshi wants to make insane amounts of money from degenerate gamblers, and to be immune from state regulators who are more answerable to citizens than the CFTC commissioners. Hence adopting the fig leaf of “futures contracts.”
If you thought I’m on Kalshi’s side here, I’m definitely not.
Kalshi is clearly not an insurer. But the commercial role they filled in this very specific situation is the same as a prize indemnity policy.
Versus when you’re financially wagering that your neighbor’s house burns down. (I.e whether you get paid back if the misfortune impacts you, vs you getting paid if misfortune visits someone else.)
Employees were often unaware the policy exists, or only gave only vague consent buried in onboarding paperwork. Companies used it partly as a tax shelter, since the death benefits are generally received tax-free and cash value can grow tax-deferred.
It does still exist, though more tightly regulated, requiring explicit consent and only really able to be used on "extremely highly compensated employees" (executives).
The better analogy would be if it was insurance for someone completely unrelated dying - like saying we will pay you if x unrelated person dies.
(IANAL. In the US this seems to largely be a state law issue. California’s law, to my quick non-expert skimming, is really quite clear on this point.)
Which can provide much needed liquidity to the market.
The point overall is that the "prediction markets" don't act as real insurance, it's just a tangential side effect for a minority of participants.
And, in fact, there is a concept called an “insurable interest” that is intended to prevent this kind of thing.
If I buy an insurance contract that will pay me if your house burns down and then I burn down your house, then I’ve obviously committed arson, but I have also likely purchased that insurance contract illegally. And I don’t even need to burn down your house for that contract to be illegal.
(IANAL)