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00:00It seems like anything everybody wants to talk about or everything anyone wants to talk about is prediction markets right
00:08now.
00:08Why do you think that is? What is unique about this moment in time?
00:11Well, I think we're really at this unique, pivotal moment in our history where many have lost faith in traditional
00:18news media and traditional information sources.
00:20People are trusting and relying on social media, prediction markets, Twitter, all sorts of new media sources.
00:29And that's not a bad thing. I think as Americans, we need to explore different avenues for getting our information.
00:36But prediction markets aren't new. They've been around for a long time.
00:39New exchanges are offering all manner of new informational products from predicting sports to political events to the price of
00:49oil with all the activity going on in the Gulf.
00:53So I think that's a good thing for society.
00:55You wrote this interesting op-ed in The Wall Street Journal last month about how event contracts serve legitimate economic
01:02functions.
01:02They allow businesses and individuals to hedge event-driven risks, enable investors to manage portfolio exposure, provide the public with
01:09information about the outcome of future events.
01:11I think that makes a lot of sense for people when they look at certain elements of prediction markets, when
01:16they look at the price of oil or they look at interest rates.
01:18But things that are sort of more consumables, more entertainment, like who's going to win season 50 of Survivor, for
01:26example.
01:26Like, what's the legitimate economic function of a contract like that?
01:31Well, look, people are hedging all sorts of different risks.
01:34As a regulator, it's not my job to sell them what to hedge and what not to hedge.
01:38That said, some of these products maybe are more for speculation, more for, you know, entertainment.
01:44The markets aren't designed just for hedgers or just for certain things that have, you know, a risk management aspect
01:51to them.
01:52Derivatives are derivatives.
01:53We have broad authority over derivatives, and we regulate the markets for derivatives.
01:57Each exchange as an SRO has the responsibility to evaluate the products that it lists.
02:02It has to ensure that those products are not readily susceptible to manipulation.
02:06It certifies that to us as a regulator, and we review that application to go and list and self-certify
02:13a product.
02:13So a lot of the responsibility, of course, is on the exchanges to evaluate products.
02:17We're not doing that as a kind of merit-based regulator where we're picking winners and losers.
02:22But it is important that each product has integrity and that they're not susceptible to insider trading and manipulation.
02:28Are there certain products or certain contracts that could be more susceptible to insider trading or manipulation?
02:33Well, certainly, there's a range of different products out there, right, and certain products.
02:37We just saw with Kalshi listing a product related to Mr. Beast, and it brought an enforcement action against an
02:45employee of Mr. Beast
02:46who had information about when the videos would be posted and contents of the videos and was able to predict
02:51certain things and trade ahead of that.
02:54And insider trading is certainly a crime under our authority.
02:58That said, other products, right, you have controls, and you ensure that there's not the ability to misappropriate insider information
03:04and trade on it.
03:05You block certain, for example, players from trading in their own contracts or people with information about an employer that
03:12they can trade ahead on.
03:13So it's important to enforce that in our markets.
03:15We have the same risks in our securities markets, and, you know, you could have someone insider trading on a
03:20broker trading ahead of a customer, for example.
03:23So we do set rules, and we enforce them.
03:26And some products, of course, are more susceptible than others, and maybe those shouldn't be listed by exchanges as they're
03:32evaluating what's susceptible to manipulation.
03:34When you were in school and you were doing your training, did you ever think you'd be talking about Mr.
03:37Beast?
03:37I did not.
03:38That was not, you know, on the bingo card, for sure.
03:41Hey, what about sports?
03:42Because our analysts at Bloomberg Intelligence, they note that on these platforms like CalShe, like Polymarket, about 90% of
03:48what happens there, 88% of U.S. activity on prediction markets still sits squarely in sports markets.
03:54Why is betting on sports prediction market and not gambling?
03:58Well, we've got all sorts of different products out there.
04:02You start with insurance, you have securities, you have derivatives, and, yes, there's gambling at the state level.
04:06They're all structured differently.
04:08These are different activities, different products.
04:09I can design an insurance contract that looks a lot like a derivatives contract, but there's different, you know, economic
04:15variables that are at play, and the way that it's structured is documented differently, all of that.
04:20When you go into a casino and you make a bet with a bookie, the house usually wins.
04:24There's a different model, of course, where the bet is priced based on the house's own decisions and analytics.
04:32And, of course, you get paid out, you win, you lose.
04:34If you win too much, you often get kicked out.
04:36With derivatives, we have a very standardized system where you have a contract that allows here for a binary option
04:42where you are paid out based on an outcome.
04:46And you can get out of your position, you can sell it.
04:48You know, if the value of your contract goes up, you can liquidate, get out, recoup some of the costs.
04:54You can hold your position to the end, whatever you want to do.
04:56But we have certain rules around these products, and they're structured very differently from, for example, gambling.
05:01The underlying asset, I think, is what you're pointing to, right?
05:04You've got a sports event as the underlying to the derivative as opposed to, let's say, pork bellies as the
05:10underlying of the derivative.
05:12To us, we're agnostic.
05:13We have a very broad definition of commodity under our statute.
05:16And so we're not picking, okay, these sports products are gambling because they're the underlying sports.
05:23We treat them the same.
05:25The underlying fundamentals of the contract are the same.
05:28The asset at the underlying base is different, but that doesn't mean it's treated differently under our regulatory framework.
05:35I think a lot of people out there right now might be thinking it's kind of crazy that I can't,
05:38you know, use FanDuel or DraftKings in every state in the U.S.
05:43I have to be 21 to do that.
05:44But I can do the same thing to a certain extent on CalShe when I'm 18 and anywhere.
05:51How do you make sense of that for, like, a normal person?
05:54It really is no different than I can go and you have a state regulatory regime for insurance.
05:59I can go get an insurance contract in my home state.
06:02I can go otherwise go to the federal system and get a derivatives contract that gives similar economic protection, risk
06:09management to myself as a company or as an individual.
06:14I really don't see any difference there.
06:16There are different regulatory regimes for different products.
06:18And we have a federal system for derivatives.
06:21And so it does allow for those products to cross state lines and be accessed in places where maybe you
06:26couldn't access it otherwise.
06:27Just like with an insurance contract, they typically can't be offered across state lines.
06:31There's different regimes for insurance in each state.
06:34And we've got the same with gambling versus derivatives.
06:37So I want to talk a little bit about sort of some recent events because there's this conversation happening about
06:44what should constitute like a death market or not.
06:49In your speech yesterday, you said that your regulating philosophy is simple.
06:54Like the practice of medicine, our focus should be on finding and then administering the minimum effective dose.
07:00How do you apply that minimum effective dose to geopolitical risk bets that seem to quickly devolve into death markets
07:07or death bets?
07:08Well, self-regulatory organizations like exchanges have the obligation to evaluate the contracts that they're listing to make sure that
07:16they meet our standards.
07:17One of those standards, as I mentioned earlier, is not being readily susceptible to manipulation.
07:23Another is our requirement that they have to be not on things like assassination or terrorism and so on and
07:30so forth, which are all restricted under our statute.
07:33And we as a regulator do have some authority to, when it's in the public interest, allow certain types of
07:39contracts.
07:40When you have a contract around a political event that isn't tethered or tied to, for example, an election, that
07:48does create a lot of risk that you could back into becoming an assassination market or a terrorism market or
07:54a war market.
07:55That's something the exchanges have to think about that's not, you know, we're not in the business of going and
08:01rejecting contracts when we believe there's a potential risk if the exchanges are telling us they believe that these are,
08:08you know, consistent with our standards.
08:10But we, of course, exercise our enforcement authority where we think exchanges are violating the law.
08:14So it's an important question.
08:16It's one that the exchanges have to think about.
08:18We may have a role in providing guidance there.
08:21And that's something I think folks should stay tuned on.
08:23But, of course, you know, it's very important to tether some of these political contracts to an actual political event.
08:29And that cabins the risk of something turning into an assassination market.
08:33If you look at, for example, the 2024 election contracts, there were assassination attempts on President Trump.
08:39There was a risk, for example, that could have turned into an assassination contract.
08:43I think this risk is underlying with a lot of contracts.
08:45That doesn't make them assassination contracts themselves.
08:48But if you have one that's very open-ended and isn't tied to a specific election, that's really what they,
08:54in theory, could become.
08:55And that's something that we as a regulator are thinking about.
08:58And I encourage the exchanges to think about as well.
09:00People often lump Kalshi and Polymarket together, but they are regulated differently.
09:06How is Polymarket International not covered by U.S. regulatory oversight?
09:10It is an overseas platform, of course, but its executives are here in the U.S.
09:16Its headquarters are in New York City.
09:19Americans can still access the platform with a VPN.
09:22Why is it not regulated by the U.S.?
09:23Well, the Biden administration actually drove Polymarket out of the U.S.
09:27through enforcement, had an action against the company.
09:30And as part of that enforcement action, agreed with Polymarket to keep the blockchain and kind of the underlying exchange
09:41offshore.
09:42Now we've seen them come into the U.S. and have a registered exchange with us under the Trump administration.
09:49That said, their offshore platform does not directly offer into the United States.
09:55You know, I can't speak to whether people are accessing it through a VPN or that sort of thing, as
10:01you point out.
10:02I'm not aware of this.
10:04But that platform itself is not available to the United States, whereas the regulated platform, which we are the overseer
10:11of,
10:11is a self-regulatory organization and has to meet our standards.
10:15But is there a chance that we're sitting here maybe a year from now and Polymarket is regulated by the
10:20CFTC?
10:20Well, the Polymarket U.S. platform is regulated by the CFTC today.
10:24But what about Polymarket International?
10:26Well, I'd love to see blockchain-based exchanges here in the United States.
10:30I think the potential of on-chain markets is huge.
10:32And if you combine the decentralized truth aspects of a blockchain and prediction markets,
10:38I think that's going to be a really exciting thing to have here in the United States.
10:42Well, speaking of the blockchain, what can you do further when it comes to digital assets if Congress just cannot
10:47get through the Clarity Act?
10:50Well, the CFTC has got a lot of authority.
10:51We're certainly going to continue to make sure that we're prepared for on-chain markets and we're modernizing and upgrading
10:57our rules and regulations so that an exchange that wants to put their markets on a blockchain can do so
11:03here in the United States.
11:04It's really unacceptable to be pushing all this stuff offshore simply because it's a different type of technology.
11:09The Clarity Act is really, I think, a powerful piece of legislation because it'll help future-proof our crypto markets
11:16by ensuring that things are in statute.
11:18And the Supreme Court said very loud and clear that if things aren't explicit in statute,
11:22there's a risk that the agency doesn't have the same sort of deference on some of the authority of the
11:27agency.
11:28That said, we have very broad authority over our derivatives markets, of course, over anti-fraud and anti-manipulation in
11:34the spot markets.
11:35And then to the extent an exchange is offering margin trading, that's also within our authority.
11:40So there's a lot we can do with or without legislation.
11:43I think a lot of people are thinking about just person power at the CFTC.
11:47And I'm wondering, enforcement staff, the Chicago office doesn't have any enforcement staff.
11:53I know they resigned before you were even chair.
11:56What's the status of hiring people there or other commissioners to be appointed?
12:00Well, I just brought on a new enforcement director, and he is quickly staffing up and building out that capability.
12:05And it's very important to have folks in each office and throughout the building.
12:10But, of course, we're not operating kind of like a Starbucks model where you have an office on every block
12:15with people in it.
12:16We've got a critical mass in D.C., and that's where a lot of our enforcement attorneys are housed.
12:22We've got a number of attorneys in New York, of course, as well, and in Kansas City.
12:26So we'll continue to build out personnel in each office.
12:29But we're also in a world where AI and automation are allowing us to do so much more with less
12:35individuals.
12:36So I'm not concerned about being able to fulfill our obligations, but I'm always excited to bring on people that
12:42are willing to help support the mission.
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