Speaker 1: Bloomberg Audio Studios, podcasts, radio news. It seems like anything
Speaker 1: everybody wants to talk about, or everything any you know,
Speaker 1: anyone wants to talk about, is prediction markets right now.
Speaker 1: Why do you think that is what is unique about
Speaker 1: this moment in time?
Speaker 2: Well, I think we're really at this unique pivotal moment
Speaker 2: in our history where many have lost faith in traditional
Speaker 2: news media and traditional information sources. People are trusting and
Speaker 2: relying on social media, prediction markets, Twitter, so you know,
Speaker 2: all sorts of new media.
Speaker 3: Sources, and that's not a bad thing.
Speaker 2: I think as Americans we need to explore different avenues
Speaker 2: for getting our information. But prediction markets aren't new. They've
Speaker 2: been around for a long time. New exchanges are offering
Speaker 2: all manner of new informational products, from predicting sports to
Speaker 2: political events to the price of oil with all the
Speaker 2: activity going on in the golf, so I think that's
Speaker 2: a good thing for society.
Speaker 1: You wrote this interesting op ed in the Wall Street
Speaker 1: Journal last month about how event contracts serve legitimate economic functions.
Speaker 1: They allow businesses and individuals to hedge even driven risks,
Speaker 1: enable investors to manage portfolio exposure, provide the public with
Speaker 1: information about the outcome of future events. I think that
Speaker 1: makes a lot of sense for people when they look
Speaker 1: at certain elements of prediction markets, when they look at
Speaker 1: the price of oil, or they look at interest rates.
Speaker 1: But things that are sort of more consumables, more entertainment,
Speaker 1: like who's going to win Season fifty of survivor for example,
Speaker 1: like what's the legitimate economic function of a contract like that?
Speaker 2: Well, look, people are hedging all sorts of different risks.
Speaker 2: As a regulator, it's not my job to tell them
Speaker 2: what's a hedge and what not to a hedge. That said,
Speaker 2: some of these products maybe are more for speculation, more
Speaker 2: for you know, entertainment. The markets aren't designed just for
Speaker 2: hedgers or just for certain things that have you risk
Speaker 2: management aspect to them.
Speaker 3: Derivatives or derivatives.
Speaker 2: We have broad authority over derivatives and we regulate the
Speaker 2: markets for derivatives. Each exchange, as an SRO, has the
Speaker 2: responsibility to evaluate the products that it lists. It has
Speaker 2: to ensure that those products are not readily susceptible to manipulation.
Speaker 2: It certifies that to us as a regulator, and we
Speaker 2: review that application to go and list in self surify
Speaker 2: a product, So a lot of the responsibility.
Speaker 3: Of course, is on the exchange is to evaluate products.
Speaker 2: We're not doing that as a kind of merit based
Speaker 2: regulator where we're picking winners and losers, but it is
Speaker 2: important that each product has integrity and that they're not
Speaker 2: susceptible to insider trading and manipulation.
Speaker 1: Are there certain products or certain contracts that could be
Speaker 1: more susceptible to insider trading and manipulation.
Speaker 2: Well, certainly there's a range of different products out there,
Speaker 2: and certain products. We just saw with call she listing
Speaker 2: a product related to mister Beasts and it brought an
Speaker 2: enforcement action against an employee of mister Bees who had
Speaker 2: information about when the videos would be posted and contents
Speaker 2: of the videos and was able to predict certain things
Speaker 2: and trade ahead of that. And insider trading is certainly
Speaker 2: a crime under our authority.
Speaker 3: That said, other products, right, you have controls.
Speaker 2: And you ensure that there's not the ability to misappropriate
Speaker 2: insider information and trade on it. You block certain, for example,
Speaker 2: players from trading in their own contracts or people with
Speaker 2: information about an employer that they can trade ahead on.
Speaker 3: So it's important to enforce that in our markets.
Speaker 2: We have the same risks in our securities markets, and
Speaker 2: you know you could have someone insider trading on a broker,
Speaker 2: trading ahead of a customer, for example.
Speaker 3: So we do set rules and we enforce them.
Speaker 2: And some products, of course, are more susceptible than others,
Speaker 2: and maybe those shouldn't be listed by exchanges as they're
Speaker 2: evaluating what's susceptible to manipulation.
Speaker 1: When you're in school, when you were doing a training,
Speaker 1: did you ever think you'd be talking about mister based.
Speaker 3: I did not. That was not you know, on the
Speaker 3: big go cred for sure. Hey what about sports?
Speaker 1: Because our analysts a Bloomberg intelligence, they note that on
Speaker 1: these platforms like Kalashie, like polymarket, about ninety percent of
Speaker 1: what happens there eighty eight percent of US activity on prediction.
Speaker 1: It still sits squarely in sports markets. Why is betting
Speaker 1: on sports prediction market and not gambling.
Speaker 2: Well, we've got all sorts of different products out there.
Speaker 2: You start with insurance, you have securities, you have derivatives,
Speaker 2: and yes there's gambling at the state level. They're all
Speaker 2: structured differently. These are different activities, different products. I can
Speaker 2: design an insurance contract that looks a lot like a
Speaker 2: derivatives contract, but there's different you know, economic variables that
Speaker 2: are at play, and the way that it's structured is
Speaker 2: documented differently.
Speaker 3: All of that.
Speaker 2: When you go into a casino and you make a
Speaker 2: bet with a bookie, the house usually wins. There's a
Speaker 2: different model of course, where the bet is price based
Speaker 2: on the house's own decisions and analytics, and of course
Speaker 2: you get paid out.
Speaker 3: We lose. He wins too much. You often get kicked out.
Speaker 3: With derivatives.
Speaker 2: We have a very standardized system where you have a
Speaker 2: contract that allows here for a binary option where you
Speaker 2: are paid out based on an outcome and you can
Speaker 2: get out of your position.
Speaker 3: You can sell it.
Speaker 2: You know, if the value of your contract goes up,
Speaker 2: you can liquidate, get out, recrup some of the costs,
Speaker 2: you can hold your position to the end, whatever you
Speaker 2: want to do. But we have certain rules around these
Speaker 2: products and their structure, very differently from for example, gambling.
Speaker 2: The underlying asset, I think is what you're pointing to, right,
Speaker 2: You've got a sports event at as the underlying to
Speaker 2: the derivative, as opposed to let's say pork.
Speaker 3: Bellies as the underlying of the derivative. To us, we're agnostic.
Speaker 2: We have a very broad definition of commodity under our statute,
Speaker 2: and so we're not picking. Okay, these sports products are
Speaker 2: gambling because they're you know, the underlying sports. We treat
Speaker 2: them the same. The underlying fundamentals of the contract are
Speaker 2: the same. The asset at the underlying base is different,
Speaker 2: but that doesn't mean it's treated differently under our regulatory framework.
Speaker 1: I think a lot of people out there right now
Speaker 1: might be thinking it's kind of crazy that I can't
Speaker 1: use fan duel or DraftKings in every state in the US.
Speaker 1: I have to be twenty one to do that, But
Speaker 1: I can do the same thing to a certain extent
Speaker 1: on Calshi when I'm eighteen and anywhere. How do you
Speaker 1: make sense of that?
Speaker 2: For like a normal person, It really is no different
Speaker 2: than I can go and you have a state regulatory
Speaker 2: regime for insurance. I can go get an insurance contract
Speaker 2: in my home state. I can go otherwise, go to
Speaker 2: the federal system and get a derivatives contract that gives
Speaker 2: similar economic protection risk management to myself as a company
Speaker 2: or as an individual. I really don't see any difference there.
Speaker 2: There are different regulatory regimes for different products, and we
Speaker 2: have a federal system for derivatives, and so it does
Speaker 2: allow for those products to cross state lines and be
Speaker 2: access in places where maybe you couldn't access it otherwise.
Speaker 2: Just like with an insurance contract, they typically can't be
Speaker 2: offered across state lines. There's different regimes for insurance in
Speaker 2: each state, and we've got the same with gambling versus derivatives.
Speaker 1: So I want to talk a little bit about sort
Speaker 1: of some recent events because there's this conversation happening about
Speaker 1: what should be constitute like a death market or not.
Speaker 1: In your speech yesterday, you said that regulated you're regulating
Speaker 1: philosophy is simple, Like the practice of medicine, our focus
Speaker 1: should be on finding and then administering the minimum effective dose.
Speaker 1: How do you apply that minimum effective dose to geopolitical
Speaker 1: risk bets that seem to quickly devolve into death markets
Speaker 1: or death bets.
Speaker 2: Well self FLA Regulatory organizations like exchanges have the obligation
Speaker 2: to evaluate the contracts that they're listening to make sure
Speaker 2: that they meet our standards. One of those standards, as
Speaker 2: I mentioned earlier, is not being readily susceptible to manipulation.
Speaker 2: Another is our requirement that they have to be not
Speaker 2: on things like assassination or terrorism and so on and
Speaker 2: so forth, which are all restricted under our statute, and
Speaker 2: we as a regulator do have some authority to when
Speaker 2: it's in the public interests allow certain types of contracts.
Speaker 2: When you have a contract around a political event that
Speaker 2: isn't tethered or tied to, for example, an election, that
Speaker 2: does create a lot of risks that you could back
Speaker 2: into becoming in aassination market, or a terrorism market, or
Speaker 2: a war market. That's something the exchangers have to think about.
Speaker 2: That's not you know, we're not in the business of
Speaker 2: going and rejecting contracts when we believe there's a potential
Speaker 2: risk if the exchanges are telling us they believe that
Speaker 2: these are consistent with our standards, but we have course
Speaker 2: exercise our enforcement authority where we think exchanges are violating
Speaker 2: the laws.
Speaker 3: So it's an important question. It's one that the exchangers
Speaker 3: have to think about.
Speaker 2: We may have a role in providing guidance there, and
Speaker 2: that's something I think folks should stay tuned on. But
Speaker 2: of course it's very important to tether some of these
Speaker 2: political contracts to an actual political event, and that cabins
Speaker 2: the risk of something turning into an assassination market. If
Speaker 2: you look at, for example, the twenty twenty four election contracts,
Speaker 2: there were assassination attempts on President Trump. There was a risk,
Speaker 2: for example, that could have turned into an assassination contract.
Speaker 2: I think this risk is underlying with a lot of contracts.
Speaker 2: That doesn't make them assassination contracts themselves, but if you
Speaker 2: have one that's very open ended and isn't tied to
Speaker 2: a specific collection, that's really what they in theory, could become.
Speaker 2: And that's something that we as a regulator thinking about,
Speaker 2: and I encourage the exchanges to think about as well.
Speaker 1: People often lump CALSHI and poly market together, but they
Speaker 1: are regulated differently. How is Polymarket International not covered by
Speaker 1: US regulatory oversight? It is an overseas platform, of course,
Speaker 1: but executives are here in the US. It's headquarters are
Speaker 1: in New York City. Americans can still access the platform
Speaker 1: with a VPN. Why is it not regulated by the US?
Speaker 2: Well, the Biden administration actually drove poly Market out of
Speaker 2: the US through enforcement, had an action against the company,
Speaker 2: and as part of that enforcement action agreed with Calli
Speaker 2: Markets to keep the blockchain and the kind of the
Speaker 2: underlying exchange offshore. Now we've seen them come into the
Speaker 2: US and have a registered exchange with US under the
Speaker 2: Trump administration. That said, their offshore platform does not directly
Speaker 2: offering to the United States. You know, I can't speak
Speaker 2: to whether the people are accessing it through a VPN
Speaker 2: or that sort of thing. As you point out, I'm
Speaker 2: not aware of this, but the platform itself is not
Speaker 2: available to the United States. Whereas the regulated platform, which
Speaker 2: we are the overseer of, is a self regulatory organization
Speaker 2: and has to meet our standards.
Speaker 1: But is there a chance that we're sitting here maybe
Speaker 1: a year from now in polymarket is regulated by the CFTC.
Speaker 2: Well, the poly Market US platform is regulated by the
Speaker 2: CFTC today, but.
Speaker 1: What about polymarket international.
Speaker 2: Well, I'd love to see blockchain based exchanges here in
Speaker 2: the United States. I think the potential of on chain
Speaker 2: markets is huge, and if you combine the decentralized truth
Speaker 2: aspects of a blockchain and prediction markets, I think that's
Speaker 2: going to be a really exciting thing to have here
Speaker 2: in the United States.
Speaker 1: Well, speaking of the blockchain, what can you do further
Speaker 1: when it comes to digital assets? If Congress just cannot
Speaker 1: get through the Clarity Act.
Speaker 2: The CFTC has got a lot of authority where going
Speaker 2: to continue to make sure that we're prepared for Chaine markets,
Speaker 2: and we're modernizing and upgrading our rules and regulations so
Speaker 2: that the exchange that wants to put their markets on
Speaker 2: a blockchain can do so here in the United States.
Speaker 2: It's really unacceptable to be pushing all this stuff offshore
Speaker 2: simply because it's different type of technology. The Clarity Act
Speaker 2: is really, I think a powerful piece of legislation because
Speaker 2: it'll help future proof our crypto markets by ensuring that
Speaker 2: things are in statute, and the Supreme Court said very
Speaker 2: loud and clear that if things aren't explicit in statute,
Speaker 2: there's a risk that the agency doesn't have the same
Speaker 2: sort of difference on some of the authority of the
Speaker 2: agency that said to be a very broad authority over
Speaker 2: our derivative markets, of course, over anti fraud and anti manipulation,
Speaker 2: the spot markets, and then to the extent in exchange
Speaker 2: is offering margin trading that's also within our authority. So
Speaker 2: there's a lot we can do with without legislation.
Speaker 1: I think a lot of people are thinking about just
Speaker 1: person power at the CFTC, and I'm wondering enforcement staff.
Speaker 1: The Chicago office doesn't have any enforcement stuff. I know
Speaker 1: they resigned before you were even chair. What's the status
Speaker 1: of hiring people there or other commissioners to be appointed.
Speaker 2: Well, I just brought on a new enforcement director and
Speaker 2: he's quickly staffing up and building out that capability. And
Speaker 2: it's very important to have, you know, folks in each
Speaker 2: office and throughout the building. But of course we're not
Speaker 2: operating kind of like a Starbucks model where you have,
Speaker 2: you know, an office on.
Speaker 3: Every block with with people in it.
Speaker 2: We've got a critical mass in DC and that's where
Speaker 2: a lot of our enforcement attorneys are housed. We've got
Speaker 2: a number of attorneys in New York of course as well,
Speaker 2: and in Kansas City. So we'll continue to build out
Speaker 2: personnel and each office. But we're also in a world
Speaker 2: where AI and automation are allowing us to do so
Speaker 2: much more with less individuals. So I'm not concerned about
Speaker 2: being able to fill our obligations. But I'm always excited
Speaker 2: to bring on people that are willing to help support
Speaker 2: the mission.