WEBVTT - Kalshi's Brian Quintenz Talks Lifetime Ban

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<v Speaker 1>Bloomberg Audio Studios. Podcasts.

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<v Speaker 2>Radio.

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<v Speaker 3>News.

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<v Speaker 1>It is a day that ends in Y, so there's

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<v Speaker 1>a lot going on with prediction markets. The latest is

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<v Speaker 1>that ex-Congressman George Santos won't be able to place another

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<v Speaker 1>wager on Kalshi after the platform banned him for life

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<v Speaker 1>for allegedly manipulating wagers on his attendance at this year's

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<v Speaker 1>State of the Union address. Brian Quintenz joins us now.

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<v Speaker 1>He's a former CFTC commissioner. He's former head of policy

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<v Speaker 1>for A16Z Crypto. That's the VC firm Andreessen Horowitz. He's

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<v Speaker 1>now advising finance and tech companies. He's a board member

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<v Speaker 1>at Kalshi Exchange. So this is the CFTC regulated derivatives market.

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<v Speaker 1>It's a position he's held since 2021. He joins us

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<v Speaker 1>here in the Bloomberg Businessweek studio. Brian, welcome.

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<v Speaker 2>Thank you. Thanks for having me.

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<v Speaker 1>So this is the first such ban by Kalshi. The

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<v Speaker 1>company announced the action on Monday, along with a fine

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<v Speaker 1>of over $ 71, 000. What does it take to get banned

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<v Speaker 1>by the platform?

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<v Speaker 2>Well, I think in this case, what we saw was

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<v Speaker 2>a deliberate lack of cooperation. I mean, it's one thing

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<v Speaker 2>to violate the rules, and you always want to see

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<v Speaker 2>an exchange enforce those rules. We can't live in a

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<v Speaker 2>minority report society where we just expect nothing bad to

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<v Speaker 2>ever happen. Something bad will happen, but it's important that

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<v Speaker 2>the exchange prosecutes that, surveils it, finds it, discovers it,

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<v Speaker 2>refers it to the CFTC. But in this case, what

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<v Speaker 2>we saw was a complete lack of cooperation after being caught.

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<v Speaker 2>And if you're not going to respect the enforcement process

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<v Speaker 2>after you've been caught doing something bad, why should we

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<v Speaker 2>think that you're going to respect the market integrity if

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<v Speaker 2>you're allowed to trade again? So in this case, I

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<v Speaker 2>think a lifetime ban was very appropriate. And the more

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<v Speaker 2>examples we see of these kinds of things happening, hopefully

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<v Speaker 2>the more of a prophylactic impact it has to prevent

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<v Speaker 2>it from happening again in the future.

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<v Speaker 3>Yeah, I mean, how effective do you think it's going

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<v Speaker 3>to be as a precedent? Is it a strong enough

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<v Speaker 3>signal to, as you say, other potential elements or people

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<v Speaker 3>who might attempt something like this? Do you think that

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<v Speaker 3>will give them pause now that this is the first

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<v Speaker 3>such example of a lifetime ban?

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<v Speaker 2>Yeah, I think as a former regulator and now being

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<v Speaker 2>a part of the Couch Exchange Board, you never want

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<v Speaker 2>to see bad things happen. You never want to see

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<v Speaker 2>people violate the rules or unethical people you know, try

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<v Speaker 2>to compromise market integrity. But the reality is, is that

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<v Speaker 2>it happens. And so, you know, the flip side, you know,

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<v Speaker 2>to having these things reported on and, you know, possibly

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<v Speaker 2>indicating some kind of, you know, negative issue with the

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<v Speaker 2>market is that there are being caught and they do provide,

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<v Speaker 2>you know, that story that if you do something bad,

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<v Speaker 2>you know, we're going to come after you.

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<v Speaker 1>From a civil perspective, not from a criminal perspective.

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<v Speaker 2>Well, yeah, CAUSHI can enforce the rules on its own exchange.

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<v Speaker 2>The CFTC, as the regulator, can enforce civil penalties, but

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<v Speaker 2>it would be up to the DOJ to prosecute criminally.

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<v Speaker 1>Do you think we start to see that? It's possible.

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<v Speaker 2>I mean, I think when I was at the CFTC,

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<v Speaker 2>it always depended upon the impact of the behavior.

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<v Speaker 1>Meaning the number of people who are affected, the amount

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<v Speaker 1>of money, that sort of thing? Exactly.

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<v Speaker 2>And obviously fraud is a lot easier to prosecute than manipulation.

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<v Speaker 2>But certainly manipulation cases were brought by DOJ. So I

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<v Speaker 2>think it's based on an order of magnitude.

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<v Speaker 1>Of the impact. So you would refer something to the CFTC.

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<v Speaker 1>The CFTC would then decide whether or not to refer

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<v Speaker 1>it to DOJ? That's correct. I want to talk a

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<v Speaker 1>little bit about some other news that we got late

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<v Speaker 1>last week. And this is the Ninth Circuit opinion that

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<v Speaker 1>we got on Friday. Kalshi took a hit when the U.S.

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<v Speaker 1>Court of Appeals for the Ninth Circuit said that sports

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<v Speaker 1>bets are not swaps. Here's what Judge Ryan D. Nelson said, quote,

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<v Speaker 1>For Kalshi to deny its sports event contracts or sports

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<v Speaker 1>bets under a reasonable person's understanding is disingenuous. That sports

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<v Speaker 1>events contracts are in reality sports bets is not just

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<v Speaker 1>an I know it when I see it. Rather, everyone,

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<v Speaker 1>including Kalshi, knows it when they see it. How do

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<v Speaker 1>you respond to that?

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<v Speaker 2>Well, unfortunately, in my view, I mean, I think the

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<v Speaker 2>Ninth Circuit opinion provided more confusion than clarity. If You

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<v Speaker 2>really look at the issue, and you look at what

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<v Speaker 2>the casino industry and the states that have allied with

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<v Speaker 2>them in prosecuting these cases have charged or claimed. It's

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<v Speaker 2>that states can control or dictate what kinds of contracts

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<v Speaker 2>are listed on federally regulated exchanges, and U.S. law does

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<v Speaker 2>not preempt that. And number two, as that opinion described,

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<v Speaker 2>these events aren't actually events, and therefore they don't qualify

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<v Speaker 2>as swaps. I think the interesting part about the Ninth

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<v Speaker 2>Circuit opinion is that on that first point, it actually

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<v Speaker 2>agreed with the Third Circuit, which ruled in Cauchy's favor,

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<v Speaker 2>that the CEA, the Commodity Exchange Act, does preempt states

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<v Speaker 2>from regulating or dictating what kinds of contracts can be

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<v Speaker 2>listed on federally regulated exchanges. But then again, it made the,

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<v Speaker 2>in my view, I think confusing determination that, for instance,

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<v Speaker 2>whether or not the Super Bowl occurs is an event.

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<v Speaker 2>but who wins the Super Bowl is not. And I

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<v Speaker 2>can't necessarily comport those two things. Ultimately, this is going

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<v Speaker 2>to come down to the Supreme Court, and it's going

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<v Speaker 2>to be an issue that requires their intellectual firepower and

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<v Speaker 2>patience and discipline and attention to the law, as opposed

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<v Speaker 2>to working backward from a result.

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<v Speaker 3>Yeah, well, I guess one of the questions that the

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<v Speaker 3>decision brings up, right, is that whether it does undermine

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<v Speaker 3>the basic legal foundation for offering sports markets nationwide, that

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<v Speaker 3>making that determination between sports bets and distinguishing them from swaps.

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<v Speaker 3>What do you think?

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<v Speaker 2>So I view betting as something you do against the house,

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<v Speaker 2>where the house always wins, it sets the odds, its

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<v Speaker 2>incentives conflict with its customers, right? Not a marketplace where

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<v Speaker 2>traders are engaging with each other and there are market

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<v Speaker 2>prices for outcomes. And I think the other important thing

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<v Speaker 2>to mention is that the states and casinos are pursuing

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<v Speaker 2>a zero-sum outcome here. They're saying that the only place

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<v Speaker 2>these kinds of financial activities can occur is in a

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<v Speaker 2>casino or a state-regulated sports book. Kalshi and the CFTC

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<v Speaker 2>are saying, well, that's fine. You can do that. But

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<v Speaker 2>if they also qualify as derivatives, they can be listed

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<v Speaker 2>on federally regulated exchanges subject to CFTC rules.

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<v Speaker 1>It seems like the sports question is a real headache

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<v Speaker 1>for everybody except the lawyers who are working on this. Truly.

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<v Speaker 1>I mean, it seems like it's a game of whack-a-mole

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<v Speaker 1>between Kalshi and different states that are... coming up with

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<v Speaker 1>this that are working on these cases. Do you guys

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<v Speaker 1>ever talk about saying, okay, we'll, we'll put sports on

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<v Speaker 1>the back burner because it is so contentious and we'll

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<v Speaker 1>kind of focus on everything else.

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<v Speaker 2>I think the thing that I think about is what

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<v Speaker 2>does the law allow for and why? And the law

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<v Speaker 2>was written very deliberately to say that an event that

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<v Speaker 2>has any financial commercial or economic consequence can have a

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<v Speaker 2>valid derivative listed upon it because it poses risk. And

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<v Speaker 2>the whole purpose of derivatives markets is to allow for

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<v Speaker 2>risk management and price discovery. I think one of the

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<v Speaker 2>points of your question is that it's a perception issue.

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<v Speaker 2>And I think that's what the quote that you just

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<v Speaker 2>read from the judge kind of indicated. But if you

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<v Speaker 2>go back in time, corn contracts were traded in bucket

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<v Speaker 2>shops in Chicago. And they sued when corn contracts ultimately

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<v Speaker 2>got listed on federally regulated exchanges also. And they called

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<v Speaker 2>it gambling. So whenever you take a product, that was

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<v Speaker 2>traded in the dark rooms and in bucket shops and

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<v Speaker 2>in casinos, and you bring it onto a federally regulated

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<v Speaker 2>exchange that poses a threat to that business model, you

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<v Speaker 2>will see these kinds of dynamics.

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<v Speaker 3>Do you think that decision then ultimately belongs to the CFTC?

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<v Speaker 3>What would constitute as an event contract that's economically useful

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<v Speaker 3>enough to belong under their jurisdiction as opposed to what

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<v Speaker 3>it currently is?

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<v Speaker 1>I mean, I believe so.

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<v Speaker 2>I believe that the CFTC is the ultimate arbiter of

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<v Speaker 2>what the CEA says when it comes down to you know,

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<v Speaker 2>an event that can qualify as a swap. And there

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<v Speaker 2>has never been kind of a, you know, a sufficiency

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<v Speaker 2>test of economic value for any derivative. You know, and

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<v Speaker 2>the law was written very broadly to allow for that

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<v Speaker 2>because it incentivizes innovation for exchanges. And there are thousands

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<v Speaker 2>of products that are listed by exchanges that don't get liquidity,

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<v Speaker 2>that don't find useful markets, and that ultimately get delisted.

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<v Speaker 1>You know, A lot of states restrict sports betting to

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<v Speaker 1>21 and up. Kalshi and other prediction markets platforms make

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<v Speaker 1>it available at 18. We did see an analysis from

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<v Speaker 1>CNN that showed users in the 18 to 21 age

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<v Speaker 1>group have traded $ 5. 4 billion on Kalshi just so far

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<v Speaker 1>this year. Novig recently launched its exchange. It said it

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<v Speaker 1>would be restricting to age 21 and up. Would Kalshi

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<v Speaker 1>consider following Novig's league?

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<v Speaker 2>So I can't speak for the founders or the board

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<v Speaker 2>at the company level on that. I think that's a

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<v Speaker 2>good conversation to have internally. I would note that you

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<v Speaker 2>did say not all states are uniform in how they

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<v Speaker 2>approach that age limit. And a lot of states have

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<v Speaker 2>made that decision because you combine casinos with liquor. And

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<v Speaker 2>the liquor drinking age is 21 and therefore enter into

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<v Speaker 2>a casino and gamble is also therefore 21. But states

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<v Speaker 2>like Rhode Island, D.C., where I live, Montana, Wyoming, all

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<v Speaker 2>have an 18-plus-year-old threshold for that kind of activity. So

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<v Speaker 2>it's not uniform right now.

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<v Speaker 3>As it is. Yeah. One of the other things that

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<v Speaker 3>we want to ask as well is mentioned markets, right?

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<v Speaker 3>So this is where users can place wagers on whether

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<v Speaker 3>a public figure will say certain words or phrases and speeches.

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<v Speaker 3>We did just get a White House teleprompter settling an

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<v Speaker 3>insider trading probe related to betting on President Trump's speeches.

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<v Speaker 3>What do you think of this niche area? Is this

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<v Speaker 3>so that should be reined in, can be reined in

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<v Speaker 3>at this point?

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<v Speaker 2>So again, I think that the breadth of these markets

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<v Speaker 2>reflects the breadth of the law. And so if they

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<v Speaker 2>need to be reined in, in my view, it's up

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<v Speaker 2>to Congress to decide where that line should be drawn.

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<v Speaker 2>I mean, the regulator might be able to try But

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<v Speaker 2>I think it might be hard to do that in

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<v Speaker 2>a way that isn't arbitrary and capricious, which is a

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<v Speaker 2>standard under the Administrative Procedures Act and how agencies can

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<v Speaker 2>make decisions. But to your point, I think when the

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<v Speaker 2>Fed chairman has a news conference, the entire stock market

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<v Speaker 2>turns into a mention market. So it is the case

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<v Speaker 2>that people that say certain things in a high-publicity way

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<v Speaker 2>can have a financial, commercial, economic impact into what words

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<v Speaker 2>they use and what they talk about. And ultimately, these

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<v Speaker 2>markets are gauges. They're gauges of opinion. They're gauges of sentiment.

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<v Speaker 2>And they provide useful data, in my mind, in terms

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<v Speaker 2>of what the impact of mentioning certain things are. If

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<v Speaker 2>President Trump only mentions Iran one time in a news

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<v Speaker 2>conference as opposed to the prior time where he mentioned

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<v Speaker 2>it 10, does that indicate anything? If then he mentions

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<v Speaker 2>it zero times in the next public appearance, does that

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<v Speaker 2>create an appearance.

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<v Speaker 1>Or a.

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<v Speaker 2>You know, a correlation that needs to be paid attention to.

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<v Speaker 2>So ultimately, it's hard to draw lines in this space.

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<v Speaker 2>I'd like to start broader than narrower, and then we

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<v Speaker 2>can let Congress come in and decide.

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<v Speaker 1>Brian Quintenz, you got to come back. We appreciate your time.

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<v Speaker 2>I'd enjoy it.

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<v Speaker 1>He advises finance and tech companies. He's a board member

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<v Speaker 1>of CalSheet Exchange. He's a former commissioner of the CFTC.

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<v Speaker 1>He joins us here in the Bloomberg Businessweek studio.