“Tokenized” versions of Kalshi contracts are testing the limits of how regulated U.S. derivatives can intersect with decentralized finance abroad.
A number of crypto-first “DeFi” (decentralized finance) platforms, such as Jupiter, Solflare, and Phantom, either launched or announced plans to go live with “tokenized” versions of Kalshi’s contracts in December.
These platforms offer exposure to Kalshi contracts for non-U.S. customers, with seemingly limited know-your-customer (KYC) checks. While the platforms specifically note that they have no formal affiliation with the prediction market, they appear to receive fee rebates in return for buying and selling Kalshi contracts that correspond to tokens bought and sold on their platforms.
The tokens represent an attempt to bridge the gap between the world of contracts registered by the Commodity Futures Trading Commission (CFTC) and the world of decentralized finance, as well as an international expansion effort. While the CFTC-regulated world exists within a federally regulated structure, the crypto-led DeFi world operates without centralized regulation, offering greater privacy but at the expense of certain kinds of oversight.
The ability to combine the two worlds may offer a way of encouraging more volume from crypto-native customers — traditionally seen as more of a core constituency for Kalshi competitor Polymarket’s global site.
As the tokens are only available outside of the U.S., they also represent new ways to attract more global liquidity to the Kalshi exchange, particularly as Kalshi avoids directly marketing its product internationally. Kalshi opened its exchange to non-U.S. traders in October, initially to those in 140-plus countries. It has gradually added countries to its list of prohibited territories, meaning residents of less countries are permitted to trade on the exchange.
What are tokenized predictions?
A tokenized prediction is a token on the Solana blockchain, created by the DeFi platform and corresponding to an event contract on Kalshi. The blockchain is a ledger that records transactions that happen on its network. In blockchain terms, a token is a piece of data that proves you own a certain asset or have a right to a payout.
The token itself is not an event contract or another CFTC-regulated asset, but it pays out in the USDC stablecoin (a cryptocurrency pegged to the dollar) when the contract pays out in dollars.
Small print at the bottom of Jupiter’s predictions page notes that it acts as a “registered member” of Kalshi — that is, a trader who buys and sells contracts.
That suggests that when a user buys the token, the DeFi platform buys actual contracts on Kalshi, in order to always have funds to pay out tokenized prediction winnings. Because tokenized predictions pay out in the same way as actual event contracts, the purchase of event contracts on Kalshi will naturally offset potential payouts from the tokenized predictions.
However, the platforms do not directly say they always buy contracts that correspond exactly to the tokenized predictions that they issue.
The small print adds that Jupiter “has no contractual or legal relationship with Kalshi.”
Other DeFi platforms have similar disclaimers, suggesting similar relationships. Though platforms say their prediction markets are “powered by” Kalshi, they say there is no formal affiliation with the prediction market.
If an exchange like Kalshi has an actual legal agreement with an intermediary, CFTC rules say it must “ensure compliance with existing statutory and regulatory requirements.”
With no legal agreement between the Kalshi and the DeFi platforms, the requirements are less clear.
Checks appear limited
An InGame reporter, while outside the U.S., transferred money from another crypto wallet to Jupiter and used it to purchase “tokenized predictions.” While the payment provider for the first crypto wallet requests user information, Jupiter cannot see the information that was provided to the payment provider for the first wallet.
The apparently limited KYC checks are in contracts to the CFTC requirements for buying actual Kalshi contracts. Buying contracts on Kalshi itself, or a futures commission merchant (FCM) like Robinhood, typically requires information such as a full name, date of birth, address, and social security number. The CFTC says an FCM like Robinhood’s “written policies and procedures must enable it to form a reasonable belief that it knows the true identity of each customer.”
For many who are used to operating within a crypto-first environment, an apparent lack of KYC checks appears to be a selling point. Social media users have noted the lack of KYC checks for Kalshi’s “tokenized predictions.”
A lack of KYC checks had previously been cited as a difference between Polymarket’s global site — built on the Polygon blockchain — and Kalshi, and a selling point for Polymarket for many users.
A Kalshi spokesperson said: “We require third parties offering on-chain layer products to comply with all applicable laws and regulations. They have committed to geo-fence the U.S.
“We also continue to work closely with our regulators, outside counsel, and third-party partners to ensure Kalshi remains a leader in trading integrity.”
A Jupiter spokesperson did not respond to a request for comment.
Token platforms appear eligible for rebates
While there may not be a formalized legal agreement, it appears that tokenized prediction providers still benefit from a fee rebate arrangement with Kalshi. Kalshi has also publicly promoted the fact that DeFi firms offer tokenized predictions.
On Dec. 1, the same day that Kalshi announced the launch of tokenized predictions, it registered a new rule with the CFTC: a “Large Volume OTC Swap Hedging Rebate Program.”
The program allows for traders “who are offsetting risks from trading over-the-counter swaps contracts” to receive money back for their fees. Participants must “regularly attest to their specific volume qualifying as a result of hedging risks from trading OTC swaps.”
rules12012533891The rebate system is similar to the incentives given to institutional market makers on Kalshi’s exchange. Market makers receive rebates for providing trade offers — usually on both sides of a contract — for other Kalshi traders to accept.
“Over-the-counter swaps” refers to swaps that are traded outside of a registered exchange.
Kalshi says in the filing that the program was introduced because it would increase volume on the exchange.
The rebates start at 3% for the first $50 million worth of contracts per month, then rises to 30% for trades of $300 million or more.
The system works incrementally, meaning that a member trading $300 million worth of contracts would receive a “blended-rate” rebate, which would be significantly less than 30% of their overall trading volume.
If an eligible member traded $500 million worth of contracts in a month, they would receive a rebate of roughly 20% of their fees. Kalshi’s fees vary depending on the odds of the contract, but assuming an average fee of 1.2%, this would result in a $1.2 million rebate — still small compared to the total amount traded, but coming with virtually no risk as all payouts for tokenized predictions correspond to losses on Kalshi and vice versa.
Without fee rebates, it appears impossible for the arrangement to be profitable for Jupiter, at least. Jupiter is not charging fees to customers and its line about not having a legal arrangement with Kalshi indicates that it would not receive a fixed payment to offer tokenized predictions.
“A small trading fee is charged for each order. This fee is charged by the venue,” Jupiter’s prediction market explanation page reads. “We do not collect any additional fees beyond those charged by venue itself.”
The Kalshi spokesperson did not comment on the rebate program.
Only available outside US
The CFTC prohibits companies from offering off-exchange derivatives that mirror a CFTC-regulated contract within the U.S.
However, if the contracts are offered outside of the U.S., without another strong link to the country, it would generally fall outside of the CFTC’s purview.
Sites offering tokenized predictions all appear to have blocked off access from the U.S. via geofencing. However, users outside the U.S. — or with access to a VPN — can still buy or sell the contracts.
InGame made its transaction from a country that Kalshi’s rulebook says users must not be “domiciled in, organized in, or located in.” The purchase was made by a U.S. resident. In October, a Kalshi spokesperson told InGame that users who are already verified as residents within the U.S. are allowed to use the platform “while traveling or temporarily located elsewhere.”
Some crypto companies are CFTC-registered
Some crypto-related Kalshi partners may have other paths to offer access to Kalshi contracts.
Kalshi earlier this month announced a partnership with Coinbase, which is registered with the CFTC and National Futures Association as a FCM, the same status as Robinhood. Based on a leak of its prediction market source code, Kalshi appears to be using that status to offer event contracts to customers.
As an FCM, Coinbase would be able to offer users access to Kalshi contracts directly and charge fees for doing so, like Robinhood, the source of more than half of Kalshi’s trading volume.
Some companies that do not offer tokenized predictions may also be able to make the case for eligibility for the OTC hedging rebate program. Sports betting or daily fantasy providers that wish to use Kalshi to “lay off” some of their risk could argue that they also are hedging the risk of exposure from “OTC swaps.”
