How we convinced the US Government to allow event trading

In this interview, Tarek Mansour, co-founder and CEO of Kalshi, explains how he built the first federally regulated exchange for trading directly on event outcomes. He walks through the insight behind event contracts, the multi-year push to win CFTC approval after being told by dozens of lawyers it was impossible, and how Kalshi builds liquidity and keeps traders coming back. He closes with his view on risk, regret, and what founder-stage entrepreneurship actually requires.

I'm Tarek Mansour, I'm the CEO and one of the founders of Kalshi, first federally regulated exchange where people can trade on the outcome of events. We are a Series B company. We're currently transacting around 30 million contracts a month.

Invention is you're kind of creating a new category, a new market. Airbnb is an invention, I think, in my opinion. The plane, when it was invented, was an invention. And the fundamental difference with that is that you're seeing a vision of the world, of how the world could work, that is not actually aligned with how the world works today.

It's not something that people are doing today, and that's a very fundamentally different type of product. People did not stay at other people's homes when they traveled before, now they do. You don't have a good playbook for how to make the market adopt it. You have to relearn or discover the playbook yourself. And that's the most difficult part I think, about building Kalshi, is that there's a lot of unknowns, a lot of first principles thinking required, because think of it as like we're a little bit like an uncharted territory.

We're in an ocean that no one has explored before, and we don't have a good map for it. And we need to basically discover the map as we're navigating those territories. A lot of trading activity right now stems from an opinion on events. In some ways, all trading is event driven trading. So you think that COVID is going to go worse or better and you go buy a Marriott stock.

So a lot of it is actually driven by events. A lot of trading is actually event driven trading. And this is what the core insight early on, it's like, why do we need to use another asset to trade on the event? What if we just took the event and created an event contract, a tradable asset that's directly tied to the event?

And that was really the core insight. It's like if all trading activity, if all traditional financial instruments, the activity that is actually event driven, what if we just created a financial instrument that is the event itself, the event contract, which would be the most elegant formulation of that trade? I think that was the core insight of Kalshi early on.

I think a lot of trading is actually event contract trading. It's just done indirectly today, and with Kalshi we can do it directly. When I was trying to get regulated, people were like, oh, there's no chance you're going to get regulated. One day, I called 65 lawyers, all of which said, no way this is going to get regulated.

We don't want to do this. And I felt very anxious. I was going to go to a very stable job that was paying a lot in hedge funds. My philosophy, like, at the end of the day, you're taking risks. Even if I had gone to the hedge fund, even if you go to a safe job, you're still taking a risk.

You're taking the risk of regret. And that's actually a very expensive type of risk, because one day when you know, I'm old, when I'm 60 and 70 and I think about what I would really not like to be in, what's the biggest risk that I'm worried about is actually having a lot of regrets.

So I don't know. I don't think it's that easy to get the license that we got. There wasn't a playbook for this because no one had gotten it, even the big companies hadn't gotten it before. I mean, and so, so like, why did we get it when others have failed? I mean, I would say three things. I think we had a really great strategy.

We had really great execution. But the most important of all of these things is like, I think we were the ones that were most stubborn. So think about like, you know, walking through a desert, but you never know when it's going to end. Most people would give up. We kept on walking. We're just like, we'll keep on walking until either we finish the desert or we die.

And what happens when you do that is like, you know, think of it as a kinetic ball of energy, like you push, you push, you push. The ball is not moving. You keep pushing, you keep pushing. It starts moving slowly, slowly, slowly, slowly. And then at some point it starts moving faster. Once a ball of energy has built up momentum, then it starts going really fast.

And it was a little bit like that, but it was so hard to get it off the ground first. Okay, we need to become the ultimate experts on financial regulation, on the Commodities Exchange Act, which we did. For a month, I just did nothing else, and just reading, reading, reading, reading, like knowing everything, all financial history, how things got regulated, everything.

Then second, we need to like figure out who we need to talk to. Then all like all lawyers that are related to this in the US, scrape through all of them and then we figured out the top few. We kept on selling and everyone was saying no until we found the one, Jeff, who was like, okay, I'm going to help you.

He saw how crazy obsessed we are with this, and he's like, maybe these guys are onto something. So I'm going to help them and then other lawyers. Then they got us the first meeting with the CFTC or the federal government. So we went to DC, and we prepared a whole presentation and we explained the concept, etc., and they were very skeptical.

There wasn't a lot of excitement early on. And then after that we kept on showing back up like they would say, oh, but we're concerned about X, Y, and Z. So we would take X, Y, and Z and write long memos, do another presentation, come back, and it's like, okay, here's how we would solve X, Y, and Z. And then they would repeat, repeat, repeat.

They would keep throwing more and more issues at us and we would keep like resolving them. It's a bit like you're drowning in paperwork a bit. Until there were no more issues. At some point they ran out of issues and they're like, yeah, I mean, you thought about everything and it seems like we could actually make this happen.

So again, we slowly went from a no to a yes. And then, you know, we got a call one day from the chairman of the CFTC who told us that we got approved and that we finally own one of the rare exchange licenses in the US now. So that was a really great day.

Here's the beautiful part of this. Historically, every time there's a truly groundbreaking financial innovation, it has been called gambling on a consistent basis. So when insurance was brought and became sort of, you know, democratized, people started using it as a mass product. You know, people were like, oh, you're gambling on death and all these weird things. And sure, I mean, taking risks to make more money is a form of speculation, but that's a crucial part to make insurance a product that exists today.

And imagine if we all live without insurance today. It would be disastrous. And then after that, you know, in the 1900s when grain futures, so grain futures is considered one of the most standard type of financial product, also people decided, you know, this should be made illegal. This is gambling, this is bad. And there was a Supreme Court decision, you know, so it went all the way to the Supreme Court where they decided actually grain futures are fine because, yes, sure, a lot of people are speculating, but some people are hedging.

Some people are using them to protect themselves from bad outcomes that can happen in the future. And so it's the same concept when we think about event contracts. Yes, a lot of people are going to speculate and that's fine. It's a good thing because that brings liquidity, that brings activity, that brings volume. And you assure people, if people are like, you know, doing research on the weather or climate and they want to trade and make money off of it, that's a great thing, you know?

And we say that's a great thing. It's like a way to monetize your knowledge, the same way an Uber driver monetizes their free time by driving. If you have extra knowledge and you read the news, you can monetize it and speculate and that's okay. But then there's also a certain set of people that are actually hedging themselves, they're protecting themselves from.

I'm, for example, someone that is worried about student loans and I'm worried about how much I'm going to have to pay. We had a market about whether student loans are going to be forgiven or not this year. And so a lot of people were hedging using that market. And so if it wasn't forgiven, they would get paid some amount of money that they could use to basically pay the student loan.

And that's why this is very important. Now, the way that we build liquidity is that we basically work with market makers, think like, you know, when you trade a stock, you're usually trading against Citadel, which is an institutional market maker that's always making a two-sided market. And then you're trading against them. So it's the same thing on Kalshi.

So there are market makers and there are also like individuals that either they do it by themselves full time, or they've set up small trading shops that come and provide liquidity. They also market make. So there's always sort of like for especially the top events, there's always someone on the other side that's taking the other side of your trade.

And if there are too many people that want to take one side, what happens is the price goes up and so it recalibrates and then it goes back to equilibrium. Since the beginning of the year, Kalshi is growing approximately 30% month over month. A lot of the work is about how to, you know, if people come trade a specific event, get them to trade on other events and cross-sell them.

And how do we get them to come back? That's a cycle that's, you know, we focus a lot on. It's really hard to get, like, how do you recommend other markets? How do you make sure that they stay engaged? And a lot of it is how we think about it is like we need to be plugged into the news because the more people read news and the more they associate reading news to coming and trading on Kalshi, the more that flywheel basically ends up happening.

And so that's really a lot of where the focus goes. And so, yes, a lot of people are constantly coming to Kalshi to basically get informed about where the world is going. Like, when is ChatGPT five launching? Is TikTok going to be banned in the US? Is the government going to shut down? Where is the economy going?

Is climate change getting worse or better? All these questions that we're pretty much the source of truth for people to come and get informed about those questions. When we think about event contracts, we don't think just about yes, no, on specific events. When I think about event contracts, I'm thinking about something much broader, which is like, let's create tradable instruments out of anything that has economic or social value.

And that's very broad. So it could be, you know, binary events. It could be, you know, linear, like you just basically invest in something that goes up and down. And so definitely in terms of expansion, like what we see is that we want to be the marketplace for everything where you can come and trade on anything that has value over time.

And so that's really the long term vision. You can think of it as, the name Kalshi is in Arabic means everything. The name is part of the vision, essentially. The world doesn't want your startup to exist. It's not easy to build a startup. There are already big companies. They will, you know, they have much more resources than you, etc. When you start, you really need to force your will into the world to make your startup exist.

So fundamentally, it's a risky endeavor. Like you can never make a statement like we will succeed for sure. As a startup, you're taking a very risky bet, but you're taking a bet on your idea. But you're also taking a bet on yourself. And you just have to take the leap of faith. And, you know, at some point we let ourselves be anxious for some time, and then we're like, you know, screw it.

We're just going to take the jump and see what happens. I think as a founder, it's always good to pick the bigger vision in terms of effort to reward, because the difference between the bigger vision and the smaller one could be like a 10x to 100x difference in outcome, but the difference in effort is not 10x to 100x, it's maybe 2x.

So if you could 2x the effort to 10x your outcome, your output, it seems like something that's worthy to do. And I think that's how we thought about the vision of Kalshi. And we always try to think about like, always be bold in our ambitions. What do I think entrepreneurship is? Honestly, for me, the best way to truly define it is value creation.

And that's probably the easiest way to think about it. And maybe making it a little bit specific, like the 0 to 1. I think that's to me what I think, like what is true entrepreneurship. It's the 0 to 1. It's basically going into a market where there's a lot of unknowns. You don't really know exactly where the customer demand is yet, and going on an exploratory journey where you're constantly validating and invalidating your own biases, your own hypotheses to find the right answer.

You're constantly in the right answer truth seeking mode. I think that's the core of entrepreneurship. And then after that, there's scaling teams and all that. I bucket these types of things when the team becomes bigger as executive type functions, not core founder entrepreneur type functions, that's when you become a CEO rather than a founder. But what is a founder?

It's a person that's mostly like spending most of their time in exploration. And exploration is hard. Yeah.