Kalshi终身禁赛前CFTC委员：市场合规与监管博弈

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It is a day that ends in Y. So, there's a lot going on with prediction markets. The latest is that ex-Congressman George Santos won't be able to place another wager on Khi after the platform banned him for life for allegedly manipulating wagers on his his attendance at this year's State of the Union address. Brian Quintens joins us now. He's a former CFTC commissioner. He's former head of policy for A16Z crypto. That's the VC firm Andresent Horowitz.

He's now advising finance and tech companies. He's a board member at Koshi Exchange. So, this is the CFTC regulated derivatives market. It's a position he's held since 2021. He joins us here in the Bloomberg Business Week studio. Brian, welcome.

Thank you. Thanks for having me.

So, this is the first such ban by Khi. It the company announced the action on Monday along with a fine of over $71,000. What does it take to get banned by the platform? Well, I think in this case what we saw was a deliberate lack of cooperation. I mean, it's one thing to violate the rules and you always want to see an exchange enforce those rules. We can't live in a minority report society where we just expect nothing bad to ever happen.

You know, something bad will happen, but it's important that the exchange prosecutes that, surveills it, finds it, discovers it, refers it to the CFTC. But in this case, what we saw was a complete lack of cooperation after being caught. And if you're not going to respect the enforcement process after you've been caught doing something bad, why should we think that you're going to respect the market integrity if you're allowed to trade again?

So in this case, I think a lifetime ban was very appropriate. And uh the more examples we see of these kinds of things happening, hopefully the more of a prophylactic impact it has to prevent it from happening again in the future.

Yeah. I mean, how effective do you think it's going to be as a precedent? Is it a strong enough signal to, as you say, you know, other potential elements or or people who might attempt something like this? Uh, do you think that will give them pause now that this first such example of a lifetime ban?

Yeah, I I I think, you know, as a former regulator and now being a part of, you know, C the Cowi Exchange board, you never want to see bad things happen. You never want to see, you know, people violate the rules or unethical people, you know, try to compromise market integrity. But the reality is is that it happens. And so, you know, the flip side, you know, to having these things reported on and, you know, possibly indicating some kind of um, you know, negative issue with with the market is that there are being caught and they do provide, you know, that story that if you do something bad, you know, we're going to come after you. from a civil perspective, not from a criminal perspective.

Well, well, yeah, Koshi can enforce the rules on its own exchange. The CFTC as the regulator can enforce civil penalties, but it would be up to the DOJ to prosecute criminally.

Do you think we start to see that?

I it's possible. I mean, I think when I was at the CFTC, it always depended upon, you know, the uh the impact of the behavior,

meaning the number of people who are affected, the amount of money, that sort of thing.

Exactly. and and obviously fraud is a lot easier to prosecute than manipulation. Uh but certainly manipulation cases were brought by by DOJ. Uh so it's I think it's a it's it's based on an order of magnitude of the impact.

So you would refer some Kali you would refer something to the CFTC. The CFTC would then decide whether or not to refer it to DOJ.

That's correct.

Um I want to talk a little bit about some other news that we got late late last week and this is the ninth circuit opinion that we got on Friday. Khi took a hit when the US Court of Appeals for the Ninth Circuit said that sports bets are not swaps. Here's what Judge Ryan D. Nelson said. Quote, "For Khi to deny its sports event contracts or sports bets under a reasonable person's understanding is disingenuous. That sports events contracts are in reality sports bets is not just an I know it when I see it."

Rather everyone including Khi knows it when they see it. How do you respond to that? Well, unfortunately in in my view, I mean, I think the Ninth Circuit opinion provided more confusion than clarity. If you really look at the issue and you look at what the casino industry and the states that have allied with them in prosecuting these cases have charged or claimed, it's that states can uh control or dictate what kinds of contracts are listed on federally regulated exchanges and US law does not preempt that.

And number two, you know, as that opinion described, these events aren't actually events and therefore they don't qualify as swaps. I think the interesting part about the Ninth Circuit opinion is that on that first point, it actually agreed with the Third Circuit, which ruled in KI's favor that the CA, the Commodity Exchange Act, does preempt states from regulating or dictating what kinds of contracts can be listed on federally regulated exchanges.

But then again, it made the in my view I think confusing determination that for instance whether or not the Super Bowl occurs is an event but who wins the Super Bowl is not

and I can't necessarily comport those two things. Ultimately

this is going to come down to the Supreme Court and it's going to be an issue that requires their intellectual firepower and patience and discipline and attention to the law as opposed to working backward from a result.

Yeah. Well, I I guess one of the questions that the decision brings up, right, is that whether it does undermine the basic legal foundation for offering sports markets nationwide that making that determination between sports bets and distinguishing them from swaps. What do you think?

So, I I view betting as as something you do against the house where you know the house always wins. It sets the odds. Its incentives conflict with its customers, right? not a marketplace where traders are engaging with each other and there are market prices for outcomes. Um, and I think the other important thing to mention is that the states and casinos are pursuing a zero zero sum outcome here. They're they're saying that the only place these kinds of financial activities can occur is in a casino or a state regulated sports book.

Khi and the CFTC are saying, "Well, that's fine. You can do that, but if they also qualify as derivatives, they can be listed on federally regulated exchanges subject to CFTC rules.

It it seems like the sports question is a real headache for everybody except the lawyers who are working on this truly. I mean, it seems like it's a game of whack-a-ole between KHI and different states that are that are coming up with this that are working on these cases. Do you guys ever talk about saying, "Okay, we'll we'll put sports on the back burner because it is so contentious and we'll kind of focus on everything else."

I think the thing that I think about is what does the law allow for and why? And the law was written very deliberately to say that an event that has any financial, commercial, or economic consequence can have a valid derivative listed upon it because it poses risk. And the whole purpose of derivatives markets is to allow for risk management and price discovery. I think one of the points of your question is that it's a perception issue.

And I think that's what the quote that you know you just read from the judge kind of indicated. But if you go back in time, you know, corn contracts were traded in bucket shops in Chicago and they sued when corn track corn contracts ultimately got listed on federally regulated exchanges also and they called it gambling. So whenever you take a product that was traded in the dark rooms and in bucket shops and in casinos and you bring