WEBVTT - CFTC Chairman Talks Prediction Markets

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. It seems like anything

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<v Speaker 1>everybody wants to talk about, or everything any you know,

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<v Speaker 1>anyone wants to talk about, is prediction markets right now.

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<v Speaker 1>Why do you think that is what is unique about

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<v Speaker 1>this moment in time?

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<v Speaker 2>Well, I think we're really at this unique pivotal moment

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<v Speaker 2>in our history where many have lost faith in traditional

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<v Speaker 2>news media and traditional information sources. People are trusting and

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<v Speaker 2>relying on social media, prediction markets, Twitter, so you know,

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<v Speaker 2>all sorts of new media.

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<v Speaker 3>Sources, and that's not a bad thing.

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<v Speaker 2>I think as Americans we need to explore different avenues

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<v Speaker 2>for getting our information. But prediction markets aren't new. They've

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<v Speaker 2>been around for a long time. New exchanges are offering

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<v Speaker 2>all manner of new informational products, from predicting sports to

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<v Speaker 2>political events to the price of oil with all the

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<v Speaker 2>activity going on in the golf, so I think that's

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<v Speaker 2>a good thing for society.

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<v Speaker 1>You wrote this interesting op ed in the Wall Street

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<v Speaker 1>Journal last month about how event contracts serve legitimate economic functions.

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<v Speaker 1>They allow businesses and individuals to hedge even driven risks,

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<v Speaker 1>enable investors to manage portfolio exposure, provide the public with

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<v Speaker 1>information about the outcome of future events. I think that

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<v Speaker 1>makes a lot of sense for people when they look

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<v Speaker 1>at certain elements of prediction markets, when they look at

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<v Speaker 1>the price of oil, or they look at interest rates.

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<v Speaker 1>But things that are sort of more consumables, more entertainment,

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<v Speaker 1>like who's going to win Season fifty of survivor for example,

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<v Speaker 1>like what's the legitimate economic function of a contract like that?

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<v Speaker 2>Well, look, people are hedging all sorts of different risks.

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<v Speaker 2>As a regulator, it's not my job to tell them

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<v Speaker 2>what's a hedge and what not to a hedge. That said,

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<v Speaker 2>some of these products maybe are more for speculation, more

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<v Speaker 2>for you know, entertainment. The markets aren't designed just for

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<v Speaker 2>hedgers or just for certain things that have you risk

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<v Speaker 2>management aspect to them.

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<v Speaker 3>Derivatives or derivatives.

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<v Speaker 2>We have broad authority over derivatives and we regulate the

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<v Speaker 2>markets for derivatives. Each exchange, as an SRO, has the

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<v Speaker 2>responsibility to evaluate the products that it lists. It has

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<v Speaker 2>to ensure that those products are not readily susceptible to manipulation.

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<v Speaker 2>It certifies that to us as a regulator, and we

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<v Speaker 2>review that application to go and list in self surify

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<v Speaker 2>a product, So a lot of the responsibility.

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<v Speaker 3>Of course, is on the exchange is to evaluate products.

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<v Speaker 2>We're not doing that as a kind of merit based

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<v Speaker 2>regulator where we're picking winners and losers, but it is

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<v Speaker 2>important that each product has integrity and that they're not

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<v Speaker 2>susceptible to insider trading and manipulation.

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<v Speaker 1>Are there certain products or certain contracts that could be

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<v Speaker 1>more susceptible to insider trading and manipulation.

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<v Speaker 2>Well, certainly there's a range of different products out there,

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<v Speaker 2>and certain products. We just saw with call she listing

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<v Speaker 2>a product related to mister Beasts and it brought an

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<v Speaker 2>enforcement action against an employee of mister Bees who had

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<v Speaker 2>information about when the videos would be posted and contents

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<v Speaker 2>of the videos and was able to predict certain things

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<v Speaker 2>and trade ahead of that. And insider trading is certainly

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<v Speaker 2>a crime under our authority.

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<v Speaker 3>That said, other products, right, you have controls.

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<v Speaker 2>And you ensure that there's not the ability to misappropriate

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<v Speaker 2>insider information and trade on it. You block certain, for example,

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<v Speaker 2>players from trading in their own contracts or people with

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<v Speaker 2>information about an employer that they can trade ahead on.

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<v Speaker 3>So it's important to enforce that in our markets.

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<v Speaker 2>We have the same risks in our securities markets, and

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<v Speaker 2>you know you could have someone insider trading on a broker,

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<v Speaker 2>trading ahead of a customer, for example.

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<v Speaker 3>So we do set rules and we enforce them.

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<v Speaker 2>And some products, of course, are more susceptible than others,

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<v Speaker 2>and maybe those shouldn't be listed by exchanges as they're

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<v Speaker 2>evaluating what's susceptible to manipulation.

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<v Speaker 1>When you're in school, when you were doing a training,

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<v Speaker 1>did you ever think you'd be talking about mister based.

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<v Speaker 3>I did not. That was not you know, on the

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<v Speaker 3>big go cred for sure. Hey what about sports?

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<v Speaker 1>Because our analysts a Bloomberg intelligence, they note that on

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<v Speaker 1>these platforms like Kalashie, like polymarket, about ninety percent of

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<v Speaker 1>what happens there eighty eight percent of US activity on prediction.

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<v Speaker 1>It still sits squarely in sports markets. Why is betting

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<v Speaker 1>on sports prediction market and not gambling.

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<v Speaker 2>Well, we've got all sorts of different products out there.

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<v Speaker 2>You start with insurance, you have securities, you have derivatives,

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<v Speaker 2>and yes there's gambling at the state level. They're all

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<v Speaker 2>structured differently. These are different activities, different products. I can

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<v Speaker 2>design an insurance contract that looks a lot like a

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<v Speaker 2>derivatives contract, but there's different you know, economic variables that

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<v Speaker 2>are at play, and the way that it's structured is

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<v Speaker 2>documented differently.

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<v Speaker 3>All of that.

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<v Speaker 2>When you go into a casino and you make a

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<v Speaker 2>bet with a bookie, the house usually wins. There's a

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<v Speaker 2>different model of course, where the bet is price based

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<v Speaker 2>on the house's own decisions and analytics, and of course

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<v Speaker 2>you get paid out.

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<v Speaker 3>We lose. He wins too much. You often get kicked out.

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<v Speaker 3>With derivatives.

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<v Speaker 2>We have a very standardized system where you have a

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<v Speaker 2>contract that allows here for a binary option where you

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<v Speaker 2>are paid out based on an outcome and you can

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<v Speaker 2>get out of your position.

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<v Speaker 3>You can sell it.

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<v Speaker 2>You know, if the value of your contract goes up,

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<v Speaker 2>you can liquidate, get out, recrup some of the costs,

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<v Speaker 2>you can hold your position to the end, whatever you

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<v Speaker 2>want to do. But we have certain rules around these

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<v Speaker 2>products and their structure, very differently from for example, gambling.

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<v Speaker 2>The underlying asset, I think is what you're pointing to, right,

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<v Speaker 2>You've got a sports event at as the underlying to

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<v Speaker 2>the derivative, as opposed to let's say pork.

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<v Speaker 3>Bellies as the underlying of the derivative. To us, we're agnostic.

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<v Speaker 2>We have a very broad definition of commodity under our statute,

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<v Speaker 2>and so we're not picking. Okay, these sports products are

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<v Speaker 2>gambling because they're you know, the underlying sports. We treat

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<v Speaker 2>them the same. The underlying fundamentals of the contract are

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<v Speaker 2>the same. The asset at the underlying base is different,

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<v Speaker 2>but that doesn't mean it's treated differently under our regulatory framework.

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<v Speaker 1>I think a lot of people out there right now

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<v Speaker 1>might be thinking it's kind of crazy that I can't

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<v Speaker 1>use fan duel or DraftKings in every state in the US.

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<v Speaker 1>I have to be twenty one to do that, But

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<v Speaker 1>I can do the same thing to a certain extent

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<v Speaker 1>on Calshi when I'm eighteen and anywhere. How do you

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<v Speaker 1>make sense of that?

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<v Speaker 2>For like a normal person, It really is no different

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<v Speaker 2>than I can go and you have a state regulatory

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<v Speaker 2>regime for insurance. I can go get an insurance contract

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<v Speaker 2>in my home state. I can go otherwise, go to

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<v Speaker 2>the federal system and get a derivatives contract that gives

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<v Speaker 2>similar economic protection risk management to myself as a company

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<v Speaker 2>or as an individual. I really don't see any difference there.

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<v Speaker 2>There are different regulatory regimes for different products, and we

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<v Speaker 2>have a federal system for derivatives, and so it does

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<v Speaker 2>allow for those products to cross state lines and be

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<v Speaker 2>access in places where maybe you couldn't access it otherwise.

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<v Speaker 2>Just like with an insurance contract, they typically can't be

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<v Speaker 2>offered across state lines. There's different regimes for insurance in

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<v Speaker 2>each state, and we've got the same with gambling versus derivatives.

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<v Speaker 1>So I want to talk a little bit about sort

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<v Speaker 1>of some recent events because there's this conversation happening about

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<v Speaker 1>what should be constitute like a death market or not.

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<v Speaker 1>In your speech yesterday, you said that regulated you're regulating

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<v Speaker 1>philosophy is simple, Like the practice of medicine, our focus

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<v Speaker 1>should be on finding and then administering the minimum effective dose.

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<v Speaker 1>How do you apply that minimum effective dose to geopolitical

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<v Speaker 1>risk bets that seem to quickly devolve into death markets

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<v Speaker 1>or death bets.

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<v Speaker 2>Well self FLA Regulatory organizations like exchanges have the obligation

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<v Speaker 2>to evaluate the contracts that they're listening to make sure

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<v Speaker 2>that they meet our standards. One of those standards, as

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<v Speaker 2>I mentioned earlier, is not being readily susceptible to manipulation.

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<v Speaker 2>Another is our requirement that they have to be not

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<v Speaker 2>on things like assassination or terrorism and so on and

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<v Speaker 2>so forth, which are all restricted under our statute, and

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<v Speaker 2>we as a regulator do have some authority to when

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<v Speaker 2>it's in the public interests allow certain types of contracts.

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<v Speaker 2>When you have a contract around a political event that

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<v Speaker 2>isn't tethered or tied to, for example, an election, that

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<v Speaker 2>does create a lot of risks that you could back

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<v Speaker 2>into becoming in aassination market, or a terrorism market, or

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<v Speaker 2>a war market. That's something the exchangers have to think about.

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<v Speaker 2>That's not you know, we're not in the business of

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<v Speaker 2>going and rejecting contracts when we believe there's a potential

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<v Speaker 2>risk if the exchanges are telling us they believe that

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<v Speaker 2>these are consistent with our standards, but we have course

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<v Speaker 2>exercise our enforcement authority where we think exchanges are violating

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<v Speaker 2>the laws.

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<v Speaker 3>So it's an important question. It's one that the exchangers

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<v Speaker 3>have to think about.

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<v Speaker 2>We may have a role in providing guidance there, and

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<v Speaker 2>that's something I think folks should stay tuned on. But

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<v Speaker 2>of course it's very important to tether some of these

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<v Speaker 2>political contracts to an actual political event, and that cabins

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<v Speaker 2>the risk of something turning into an assassination market. If

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<v Speaker 2>you look at, for example, the twenty twenty four election contracts,

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<v Speaker 2>there were assassination attempts on President Trump. There was a risk,

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<v Speaker 2>for example, that could have turned into an assassination contract.

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<v Speaker 2>I think this risk is underlying with a lot of contracts.

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<v Speaker 2>That doesn't make them assassination contracts themselves, but if you

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<v Speaker 2>have one that's very open ended and isn't tied to

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<v Speaker 2>a specific collection, that's really what they in theory, could become.

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<v Speaker 2>And that's something that we as a regulator thinking about,

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<v Speaker 2>and I encourage the exchanges to think about as well.

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<v Speaker 1>People often lump CALSHI and poly market together, but they

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<v Speaker 1>are regulated differently. How is Polymarket International not covered by

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<v Speaker 1>US regulatory oversight? It is an overseas platform, of course,

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<v Speaker 1>but executives are here in the US. It's headquarters are

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<v Speaker 1>in New York City. Americans can still access the platform

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<v Speaker 1>with a VPN. Why is it not regulated by the US?

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<v Speaker 2>Well, the Biden administration actually drove poly Market out of

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<v Speaker 2>the US through enforcement, had an action against the company,

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<v Speaker 2>and as part of that enforcement action agreed with Calli

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<v Speaker 2>Markets to keep the blockchain and the kind of the

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<v Speaker 2>underlying exchange offshore. Now we've seen them come into the

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<v Speaker 2>US and have a registered exchange with US under the

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<v Speaker 2>Trump administration. That said, their offshore platform does not directly

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<v Speaker 2>offering to the United States. You know, I can't speak

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<v Speaker 2>to whether the people are accessing it through a VPN

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<v Speaker 2>or that sort of thing. As you point out, I'm

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<v Speaker 2>not aware of this, but the platform itself is not

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<v Speaker 2>available to the United States. Whereas the regulated platform, which

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<v Speaker 2>we are the overseer of, is a self regulatory organization

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<v Speaker 2>and has to meet our standards.

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<v Speaker 1>But is there a chance that we're sitting here maybe

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<v Speaker 1>a year from now in polymarket is regulated by the CFTC.

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<v Speaker 2>Well, the poly Market US platform is regulated by the

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<v Speaker 2>CFTC today, but.

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<v Speaker 1>What about polymarket international.

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<v Speaker 2>Well, I'd love to see blockchain based exchanges here in

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<v Speaker 2>the United States. I think the potential of on chain

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<v Speaker 2>markets is huge, and if you combine the decentralized truth

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<v Speaker 2>aspects of a blockchain and prediction markets, I think that's

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<v Speaker 2>going to be a really exciting thing to have here

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<v Speaker 2>in the United States.

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<v Speaker 1>Well, speaking of the blockchain, what can you do further

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<v Speaker 1>when it comes to digital assets? If Congress just cannot

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<v Speaker 1>get through the Clarity Act.

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<v Speaker 2>The CFTC has got a lot of authority where going

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<v Speaker 2>to continue to make sure that we're prepared for Chaine markets,

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<v Speaker 2>and we're modernizing and upgrading our rules and regulations so

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<v Speaker 2>that the exchange that wants to put their markets on

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<v Speaker 2>a blockchain can do so here in the United States.

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<v Speaker 2>It's really unacceptable to be pushing all this stuff offshore

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<v Speaker 2>simply because it's different type of technology. The Clarity Act

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<v Speaker 2>is really, I think a powerful piece of legislation because

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<v Speaker 2>it'll help future proof our crypto markets by ensuring that

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<v Speaker 2>things are in statute, and the Supreme Court said very

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<v Speaker 2>loud and clear that if things aren't explicit in statute,

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<v Speaker 2>there's a risk that the agency doesn't have the same

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<v Speaker 2>sort of difference on some of the authority of the

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<v Speaker 2>agency that said to be a very broad authority over

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<v Speaker 2>our derivative markets, of course, over anti fraud and anti manipulation,

0:11:42.400 --> 0:11:45.120
<v Speaker 2>the spot markets, and then to the extent in exchange

0:11:45.160 --> 0:11:48.560
<v Speaker 2>is offering margin trading that's also within our authority. So

0:11:48.600 --> 0:11:50.960
<v Speaker 2>there's a lot we can do with without legislation.

0:11:51.120 --> 0:11:53.160
<v Speaker 1>I think a lot of people are thinking about just

0:11:53.240 --> 0:11:58.360
<v Speaker 1>person power at the CFTC, and I'm wondering enforcement staff.

0:11:58.360 --> 0:12:01.160
<v Speaker 1>The Chicago office doesn't have any enforcement stuff. I know

0:12:01.160 --> 0:12:04.800
<v Speaker 1>they resigned before you were even chair. What's the status

0:12:04.840 --> 0:12:08.120
<v Speaker 1>of hiring people there or other commissioners to be appointed.

0:12:08.280 --> 0:12:10.360
<v Speaker 2>Well, I just brought on a new enforcement director and

0:12:10.440 --> 0:12:13.679
<v Speaker 2>he's quickly staffing up and building out that capability. And

0:12:13.760 --> 0:12:16.960
<v Speaker 2>it's very important to have, you know, folks in each

0:12:17.000 --> 0:12:19.200
<v Speaker 2>office and throughout the building. But of course we're not

0:12:19.360 --> 0:12:21.640
<v Speaker 2>operating kind of like a Starbucks model where you have,

0:12:22.000 --> 0:12:23.000
<v Speaker 2>you know, an office on.

0:12:22.960 --> 0:12:24.480
<v Speaker 3>Every block with with people in it.

0:12:24.520 --> 0:12:27.880
<v Speaker 2>We've got a critical mass in DC and that's where

0:12:27.960 --> 0:12:30.400
<v Speaker 2>a lot of our enforcement attorneys are housed. We've got

0:12:30.440 --> 0:12:33.080
<v Speaker 2>a number of attorneys in New York of course as well,

0:12:33.120 --> 0:12:35.959
<v Speaker 2>and in Kansas City. So we'll continue to build out

0:12:35.960 --> 0:12:38.560
<v Speaker 2>personnel and each office. But we're also in a world

0:12:38.600 --> 0:12:42.160
<v Speaker 2>where AI and automation are allowing us to do so

0:12:42.240 --> 0:12:45.600
<v Speaker 2>much more with less individuals. So I'm not concerned about

0:12:45.640 --> 0:12:48.520
<v Speaker 2>being able to fill our obligations. But I'm always excited

0:12:48.559 --> 0:12:51.000
<v Speaker 2>to bring on people that are willing to help support

0:12:51.040 --> 0:12:51.440
<v Speaker 2>the mission.