00:00It's happening so quickly when it comes to interest in prediction markets.
00:04I just want to get your response on this news from Nevada, because it does seem like state after state
00:10is going after these companies and this company.
00:13And maybe it has to do with gambling revenues.
00:17Maybe it has to do with other lobbyists.
00:19I don't know.
00:19Can the states actually bar this company from doing business in different states?
00:25Well, what happened today in Nevada is called a temporary restraining order.
00:29So they can, but usually for a small period of time.
00:33And then they have to have a hearing, a full hearing before a judge where they'll then decide if that's
00:37a permanent ban.
00:40We've seen other states take very similar steps.
00:43What usually happens is there's then some litigation in federal court.
00:47This is a state court judge.
00:49And whether it then goes back to state court or the federal judge handles it, it really depends.
00:54But other states have done similar things.
00:57You know, I can't tell, Ian, if we're putting the cart before the horse here.
01:02In other words, it feels like crypto, where things kind of moved ahead and we haven't kind of put in
01:08place the safety infrastructure, the regulatory infrastructure.
01:11And I look at valuations growing.
01:13I mean, is everything getting ahead of itself?
01:16Do we need at this point regulators to set some things up here?
01:19Well, so there's a few things going on.
01:21And like you said, there is a lot going on, right?
01:23On the one hand, you have legal regulatory developments.
01:26On the other hand, you have just the businesses growing tremendously, sponsorships.
01:31And LB is pretty serious.
01:32I mean, that is a huge, huge endorsement of the type of trading.
01:39But I think there's a few things.
01:41There is regulation.
01:42You know, there was insider trading.
01:44Yeah.
01:44And I think, you know, that's something that people need to realize.
01:47And when there were there talks about insider trading and things like that, that is prohibited.
01:52Always has been.
01:52There's a little bit of nuance to it.
01:55But the CFTC recently this week put out something called a notice of proposed rulemaking.
01:59Basically said, we want comments from the public, whether you are the states, businesses, sports leagues.
02:06And we're going to consider that because we are considering regulation.
02:10So we don't know the form of that regulation.
02:12It's not come out yet, of course.
02:15But it certainly suggests that the CFTC is considering regulation and that there will be some more regulation and potentially
02:22some contracts that are not listed.
02:24So but should the world then slow down a little bit until we understand all of this or no?
02:30Well, we'll see what the courts say.
02:32I think that's where we'll see a real kind of scope of where things should go.
02:38You are allowed to self to self certify your contracts.
02:42That is a regulatory regime the CFTC has.
02:45Now, the CFTC can step in and stop that.
02:48And so we'll see if that happens.
02:51But right now, where the where the kind of guardrails are coming from is existing CFTC law and then court
02:58decisions.
02:58You mentioned there was a criminal case that came down this past week.
03:05And these are just my personal views on it, not those of my firm or any clients.
03:09But, you know, that was noteworthy.
03:12And it's the first criminal case in the space.
03:14Right.
03:15Whether or not it relates to a temporary restraining order, which is a civil matter, probably not.
03:21But we'll see.
03:22But, you know, that criminal case is interesting, though, because it does not mention it doesn't charge any individuals.
03:28It is all misdemeanors.
03:30All the and any any accusation, of course, should be taken seriously.
03:35But felonies are the more serious charge, not not misdemeanors.
03:40And if you look at the charging instrument, you know, we were talking a little bit about it.
03:44It just lays out that there were trades in, you know, on on a certain platform.
03:49It doesn't you know, when I was a federal prosecutor, you have a choice when you release a charging documents.
03:54You can do something called like a speaking indictment or a speaking instrument where you lay out kind of all
04:00the facts and what, you know, based on this.
04:03They did not do that.
04:04Yeah. What's a potential outcome here when it comes to the way that courts rule on this?
04:09And I think a lot of people agree that this this goes right to the Supreme Court either this year
04:14or next year.
04:15Is there a chance the Supreme Court comes out and says, OK, prediction markets can operate in the United States,
04:22but they can't include sports predictions, for example.
04:25They can include other things, but can't include sports predictions.
04:27Like what would a case I don't know, I'm just theoretically, what would a case potentially look like or a
04:32decision potentially look like from the Supreme Court that would clarify this for us, for users, for these companies?
04:39Well, so the Supreme Court really answers narrow questions.
04:43That's one thing to think about.
04:45We saw this in the tariff decision and there was a dissent that I think spelled this out where the
04:50Supreme Court will weigh in on the most narrow issue that it's presented with.
04:53So you could see the issue here is preemption, so whether federal law or state law applies.
04:58But it's very rare that the Supreme Court or any other court takes the next step and says, well, now
05:04here's how it should be regulated or here are the particular.
05:07That's where the agency comes in.
05:09So there's a chance.
05:10So the question would be whether or not the CFTC is the regulator versus the states or the regulators?
05:15That I think is going to be the main question.
05:17Now, there may be some nuance in there as to what is the definition of something that's a swap, what
05:22can be traded.
05:23Why does the CFTC regulate these prediction markets but states regulate FanDuel and DraftKings?
05:29Well, the difference, I think the argument is the difference in the structure of how they're, you know, and at
05:34a very basic level, right, you are betting against the house when you think of traditional, right, traditional gaming and
05:41gambling.
05:42In these models and prediction markets, you have counterparties, right, some that are institutional, liquidity providers now.
05:48It's becoming a lot more like a stock market.
05:51Look, on that point, I mean, one of the things that keeps coming up, and it certainly did in the
05:55panel that you did down in Florida, about this idea of whether or not prediction markets are gambling.
06:00It came up over and over.
06:01And you did speak exclusively with the Cal sheet co-finder, Tarek Mansoor.
06:07Let's listen to what he had to say.
06:09There's always been a battle of whether financial derivatives are gambling.
06:13Great futures were called gambling in the 1800s, and there was a Supreme Court decision that, you know, said, even
06:19though there is speculation, these, you know, products have financial, are structures of financial markets, and thus are going to
06:25fall under financial market jurisdiction.
06:26So, I always say this, you know, whether something feels and looks like gambling doesn't necessarily make it gambling.
06:33Speculation exists in all financial markets.
06:35If we're going to take a line that speculation is gambling, then the stock market with retail participation is gambling.
06:41Then buying options for retail or zero-day expiry options is gambling.
06:44Then retail buying crypto is gambling.
06:47So, that, of course, is Cal sheet co-founder, Tarek Mansoor.
06:51We're talking with Ian McGinley, partner of Sidley Austin, former director of enforcement at the CFTC.
06:55So, does he have a good point, or is there a distinction between what happens on prediction markets versus what
07:00happens in financial markets, whether it's derivatives or, you know, you name it?
07:05Well, I think the point, from a lawyer's standpoint, is the Commodity Exchange Act doesn't define gambling.
07:12That's kind of why, and that's what the CFTC implements, that's its statute.
07:18And so, that's where we've seen a lot of courts come in and try to distill the concept down.
07:24Now, there's a concept in federal law, CFTC law, that talks about gaming, but it also doesn't define it.
07:32And so, that's why I think you see regulators now.
07:36When I was at the CFTC, there was an effort to further define gaming, and it looked at, you know,
07:41is it a game of, for example, a game of skill or a game of chance?
07:47And so, I think that's where you'll see regulators go.
07:50But the reason why, you know, and you mentioned all the courts and the different decisions.
07:55You have district courts, you have appellate courts, and you have the Supreme Court.
07:59There have been different decisions on a district court level.
08:01I mean, you guys know lawyers.
08:03You can't get lawyers to agree on anything, right?
08:04So, now we're at three appellate courts, right, that are now dealing with it, and we'll see how they come
08:13out.
08:14And then, you know, I agree.
08:16I think likely we see it in the Supreme Court, because I don't know that all those courts are going
08:21to look at it exactly the same way.
08:23You were formerly director of enforcement at the CFTC, and I think one thing that's notable to people is the
08:30way the CFTC has come out as essentially been a loud cheerleader, a proponent of these platforms under Mike Selig.
08:38I'm wondering your view on that.
08:40Like, why do you think the CFTC is in this position to sort of not necessarily promote them, but to
08:46come out on X after the Arizona decision and say, essentially, this is an overstep?
08:53Well, some of it is jurisdictional.
08:55Agencies, you know, typically defend their jurisdiction.
08:59But I read it a little bit more nuanced, where I think the CFTC, my read of what they are
09:05saying is, yes, this is our jurisdiction, but, you know, there need to be guardrails.
09:12At the same time they put out a notice for proposed rulemaking, they put out an advisory.
09:17That advisory was essentially, as I read it, a notice to the exchanges to say, when you register as an
09:23exchange for the CFTC, you have to make representations.
09:26You have to say, these contracts are not susceptible to manipulation.
09:30We have adequate surveillance.
09:32And I read the CFTC putting out that advisory as saying, hey, everyone, you're on fair notice.
09:38Yeah.
09:39You have a job as a registrant to police yourselves, but if you don't fulfill that, we're here.
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