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.
What exactly is the difference between a financial derivatives exchange and a gambling platform? Both involve placing bets on uncertain future outcomes.
Traditional derivatives can be used to trade the risk that would already exist with or without the existence of the derivatives market. Prediction markets create risk out of thin air.
If you consider not just money, but utility, then there is already a lot of pre-existing risk that sports derivatives could hedge. Theoretically, fans should short their team to be utility-neutral whether their team wins or loses. However in practice fans tend to double down by adding monetary risk to their pre-existing emotional risk...
Insurance protects life and property (including future income). Until you wagered $100 on the Knicks winning, none of your property was threatened by them losing.
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.
There is a (possibly apocryphal) story of a man who bought an amazingly expensive Cuban cigar, insured it as it sat in his home, then smoked it... and filed an insurance claim for its loss. After back and forth with attorneys, the insurer paid the claim. And then sued him for their loss.
Of course not. If a building exists, there is a risk it burns down. Insurance just moves that risk around. The only way to eliminate the risk is to not build anything anywhere.
So what would be the difference between buying insurance against downtime of a service you depend on (eg. Cloudflare) vs making a bet on the prediction market that there will be downtime? Even without these markets there is risk that the service goes down. The existence of the prediction market doesn't cause it to be possible.
The difference seems to be that it’s insurance if you’re buying protection against your own home burning down.
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.)
How about Dead Peasant's Insurance, sorry, COLI (corporate-owned life insurance)? Policies that a company takes out on its employees with itself as a beneficiary, not the employee's family.
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).
This is a framing that obscures rather than illuminating. Perhaps in this specific case, the prediction market bet acts as insurance (and even then, only for those market participants who are actual Cloudflare customers; many others are simply taking a bet). But the prediction market allows bets of many other kinds, many of which do not act as insurance against anything. Sports bets are the most obvious, but also election bets, bets on wars, bets on celebrities' lives, bets on show durations, bets on Jesus returning, bets on aliens existing - none of these can be construed as insurance. When the vast majority of actual bets traded on this betting market can not be construed as insurance, you can't defend the market as offering insurance.
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.
Insuring against loss. I just looked up the official name; it’s called prize indemnity insurance.
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.
Insurance against loss due to ... paying for insurance? The language of the thing is compelling at first glance, but it doesn't actually parse. Sharing your gambling wins with patrons to attract more patrons is not insurance.
Not quite. The two cases are "team loses, everyone goes home and doesn't buy loads of drinks" in which case you get the payout from having bet (sorry, purchased insurance) on that team losing, offsetting your loss from not getting the money from drinks. Alternatively, the team wins, you lose your bet (insurance pay) but everyone gets loads of drinks and you make your money that way.
I’m not a lawyer, so I can’t give you an authoritative explanation of the difference between insurance and gambling. But I would guess one factor is that the insurance payout is somehow tied to the actual loss.
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.
Well my broker (fidelity) requires certain degrees of experience and wealth before allowing certain types of risky trading. Perhaps sports-betting should fall under that category -- e.g. must be an accredited investor.
The gambling platforms are buddies with Tish James and the state, while the prediction markets are buddies with the CFTC and the feds. That's the important difference in this case
