Loading summary
Transcript74 lines
- [00:00]
Sam Ender
I think and it doesn't have to be limited to commodities and I think if you are privy to non public information that could affect the price of an asset, whether that is a bet on polymarket, real estate stocks, a gambling bet, if you have material non public information information that could really be market moving as to the value of an asset, it's not available to the public and then critically you received it in confidence from someone that you have a duty of trust and confidence to like
- [00:36]
Steve Ehrlich
like Google or the US Government. For the two cases that we mentioned.
- [00:39]
Sam Ender
Right. In case of Google. In the case of the government the the the soldier Van Dyke had signed paperwork that he had to comply with the classified classification and confidentiality requirements. The complaint in the Spagnuolo case the Google employee is less clear on whether there was some type of non disclosure agreement. But generally employees have a fiduciary duty to their employer and there's pro and they reference in the complaint that it was marked confidential. So if you have material non public information inside information, if you got it from a source that expects you to keep it secret, trading on that information could be a crime. That's the basis.
- [01:22]
Steve Ehrlich
Hi everyone. Welcome to another episode of Bits and Dips the interview. My name is Steve Ehrlich. I am the head of research at Sharplink and once again your host. For today. We've got a really exciting episode and hopefully one that will distract you a little bit from some of the market doldrums. But before we get into all of it, as always, nothing that you say, nothing that you hear or see on the show should be considered investment or financial advice. For full disclosures and before we begin, let's take a very brief break to hear from some of the sponsors who make the show possible.
- [01:54]
Podcast Announcer
Heads up everyone. We'll now be fully transitioning Bits and Bibs to its new dedicated Bits and Bibs channels starting next week. So if you're not yet subscribed to the Bits and Bibs channels on X, YouTube, Spotify, Apple, wherever you get your podcasts, then go there now and subscribe after that transition for a few weeks. We'll place segments of the full interviews on Unchained as a reminder, but head there now and subscribe so you don't miss an episode. You can get links to all of the platforms on Unchained Crypto.com bits Again, that's Unchained Crypto.com bits and bips spelled B I P S quick plug before we keep going. If you want crypto news without the hype subscribe to the Unchained Daily. It's our free morning newsletter. The day's most important stories explained clearly in a few minutes. Sign up@unchained crypto.com newsletters.
- [02:44]
Steve Ehrlich
All right, welcome back. So I am here today with Sam Ender, prominent attorney, former DOJ prosecutor and currently the a partner Cahill and founder of Cahill Next, a prominent law firm focused on all things crypto. So welcome Sam.
- [03:00]
Sam Ender
Thank you so much for having me, Steven. It's a pleasure to be here.
- [03:03]
Steve Ehrlich
Yeah, absolutely. And we're here to talk about prediction markets. There's they've been in the news a lot, honestly since last year's or since I would say the presidential elections in 2024. But, but there's been a number of of I guess events, newsmaking events that have happened over the last couple of months that really brought to for brought forth a lot of key questions pertaining to sort of the safety of these markets, especially as usage is only growing. So that's what we're really going to talk about a few I guess, I mean, probably the most prominent example that happened recently is an insider trading case that occurred that was brought against a former, I guess a current Google employee who traded on inside information related to top searchers for 2025 to make about $1.2 million. And interestingly, this was I think, presented as an insider trading case, as you know, and I would imagine a lot of people in the audience know insider trading is kind of a curious term for something like this because we usually think of insider trading as trading on equities with privileged information. And that's not exactly what happened here, even though it certainly rhymes. So why don't you kind of walk us through what happened and, and why you think this is the first time I believe that the DOJ has actually brought an insider trading type prosecution against the prediction market participant.
- [04:24]
Sam Ender
Sure. And it's a fascinating issue. I used to be a federal prosecutor in the Southern District of New York. That's the office that brought actually there are two insider trading prosecutions relating to prediction markets. Both happen to be poly market but you know, we may see cases in the future that relate to trading on Kalshi. The one you mentioned, US versus Spagnuolo, that's the Google employee case. And there's also a case called United States versus Van Dyke that was actually the first one.
- [04:54]
Steve Ehrlich
That's the Venezuela one, right?
- [04:55]
Sam Ender
Yes, exactly. That is a member of the US Armed forces who allegedly traded traded using classified national security information ahead of the invasion and arrest of Maduro in Venezuela. The, the Google case. Spagnolo is a case where Spagnuola was a Google engineer. He allegedly had access to confidential internal information at Google about, you know, who were the top searched folks who were the top five in a year and allegedly placed a bet on Kelshi and made a lot of money based on inside information about what those results showed. Those are the two cases. Both are historic and both are fascinating for a variety of reasons.
- [05:47]
Steve Ehrlich
Yeah. And it is again, just to kind of get back to my first question, certainly just from the looks of it, it can seem that this is wrong. I mean, people should not trade on, on insider information in the Google case. I mean, I was reviewing some of the details of that case this morning and it seems like he was able to find a mismatch between what market participants were expecting to be the highest search terms and what the Google internal tool showed. So it was sort of a risk free trade from his point of view, notwithstanding legal risk. And then. Yeah, and then the Venezuela case, as someone who used to have access to confidential and, and I'm sorry, classified information pertaining to military operations. That is a, that is a very. Not only is, is that cheating other market participants, but that theoretically could have put lives at risk because I know at this point, I mean, adversaries all around the world are looking at prediction markets to get a sense of incoming operations and Israel, it's happening and, and all over. So, so these are very serious charges. But again, the insider trading case, the term insider trading in most people's minds has a very specific definition. Can you walk me through in particular, and let's use the Spagnolo case as the, as the example, what are the precise charges that were brought and how does that align with what most people commonly believe to be insider trading?
- [07:08]
Sam Ender
Great question. So it's an interesting question in part because insider trading itself is actually not a legal term. So, you know, we have to take a step back even further and say, look, when, and I tried, I have tried insider trading cases. I've defended insider trading cases. When I was a prosecutor, I handled a jury trial involving an investment banker who was charged and ultimately convicted by the jury of tipping his father, head of M and A deals, so that his father could trade stocks. Right. That's the ARC T insider trading case. But it's important to understand when people talk about a traditional case. So a company insider at I knows what the earnings forecast is going to be and buys IBM stock ahead of the earnings announcement, disclosed to the investment market with positive information and then can sell the stock after that earnings announcement. The, the charge in that case is not insider trading. That's a, that's a colloquial term we use to describe it. Really. The charge would be securities fraud or wire fraud. Okay. That is, those are the typical charges when you're talking about trading on the basis of inside information in the securities markets. In this case, the Spagnolo case, the charges are fraud and wire fraud. So commodities fraud on the, on the theory that a fraud was committed with respect to the trade and that the instrument of the trade was a commodity, a swap rather than a stock, which is a security wire fraud. Judge Rakoff, Southern District Judge, once called the wire fraud statute a prosecutor's cult. 45. What he meant by that is, uh, it's a generic statute. It's very broad. Any misrepresentation or failure to disclose something that is material, when you have a duty to disclose in a situation that involves interstate, interstate transfer of wires, email, telegram, messages, a wire transfer of funds can be prosecuted under the wire fraud statute.
- [09:20]
Steve Ehrlich
Yeah, I remember, actually, I think we first got to know each other a little bit when you appeared on Lara's show during the SBF trials. And wire fraud charges, I think there were several of them were part of that indictment and ultimately conviction. So that certainly rings a bell, the whole, I guess, the fungibility of that type of charge that you're referring to
- [09:43]
Sam Ender
and the money laundering. They've also charged money laundering, Title 18, US Code, Section 1956. But really that's kind of an ancillary or subsidiary charge because the predicate is you committed a crime and then you moved the money and tried to conceal the source of the money. So they have to prove either they have to prove up the commodities fraud or wire fraud charge to win the money laundering charge.
- [10:08]
Steve Ehrlich
Yeah, that makes sense. And I think in both of those cases, again, correct me if I'm wrong, they tried to cover their tracks, like deleting their account. I think Spagnola tried to, because on polymarket, everything is in usdc. They tried to sort of move it through various, like defi protocols, things like that, to sort of hide the progeny of them.
- [10:25]
Sam Ender
So.
- [10:25]
Steve Ehrlich
So I certainly understand that. And yeah, and this reminds me a lot of the open sea insider trading case that I believe is actually ultimately dismissed. And that that was brought as a quote, unquote, insider trading case, as you mentioned.
- [10:38]
Sam Ender
But.
- [10:39]
Steve Ehrlich
But again, if NFTs aren't securities, like, it can't be securities fraud. And for. Please remind me which prosecutorial office brought that maybe it was yours.
- [10:48]
Sam Ender
But there's the Southern District. Yeah. Nathaniel Chastain.
- [10:52]
Steve Ehrlich
Right.
- [10:52]
Sam Ender
And you're absolutely. That. The Second Circuit Court of Appeals, that's the intermediate court between the trial court and the Supreme Court, reversed the conviction. And the reason they reversed it is they said the, the court said that the, the information in that case is not the type of property that can be the subject of a wire fraud prosecution. So in Chastain at that time, we were in the middle of the debate in the courts about whether or not digital assets were securities. You know, are they a commodity, are they a security? And the Southern District got around that debate by just saying, look, Chastain was an employee of OpenC. He knew which NFTs would be listed. He knew that the listing would have a material impact on their price. He used inside company information, confidential information to trade the NFTs ahead of the, the public release of the listings.
- [11:45]
Steve Ehrlich
I think it was the carousel in particular that was part of the case. The ones that would be prominently featured on the homepage.
- [11:51]
Sam Ender
That's right. And you know, the court said this is not the type of information, this is not the type of property that is the proper subject of a wire fraud prosecution. And I think that that precedent, Chastain, is definitely something that the defense Inspagnuolo is going to look at and for different reasons. In Van Dyke, the Soldier case with Maduro, there's a similar type of argument based on a different line of precedence, including a case called Blasak, that that raises the question of whether government information is the type of property that can be purloined, stolen, and then traded on for an insider trading prosecution.
- [12:33]
Steve Ehrlich
Yeah, and we're going to get into that because it really raises a fascinating question. I mean, not to keep everybody in suspense, but it's sort of well known that there are many ways to legally trade on, quote, unquote, proprietary information. When it comes to commodities markets, not unlike securities markets, there's different types of information, asymmetries. I know there's a lot of qualifications in what I just said, but. But that is sort of at least my understanding.
- [12:56]
Sam Ender
And yeah, I think you're. I think we could give three examples. Okay. Just to make it very concrete. So one example would be you. The. The many people think of insider trading as a crime on the market or a crime on other traders because I have an unfair advantage if I have inside information. That's not how the law thinks about it. So the way the law looks at insider trading is if I work for A company or if I am a lawyer for a client or if I'm an investment banker for a client and I have a duty of trust and confidence to the source and I take the information that I'm supposed to keep in confidence and use it for my personal gain to trade for my own profit or to Tim someone so that they can profit. That is a breach of my duty. That is the essence of the crime. It's not about me having an unfair advantage. It's about me misusing and violating the trust of whoever gave me the information. And if you understand that premise, that runs a line through how all this works. So for example, if I'm in a taxi cab or a better example, I'm at a bar and the CEO of IBM is on a call, he's speaking too loud and he says buy, buy Dell, do it tomorrow. I overhear that I can trade on that information that is material, it is non public, but I have no duty to this guy at a bar I can trade on. A second example which is very typical in commodities markets is let's say I'm a farmer and I know my crop, my orange crop is going to be down this year, right. I have that information. I can go. It is well accepted that I can go buy a future speculating that, you know, hedging my bet. And indeed that's like the article example of how the derivatives markets what you're
- [14:49]
Steve Ehrlich
supposed to, it's what you're supposed to do.
- [14:52]
Sam Ender
And then a third example is suppose there's public information but I'm better at analyzing it. Maybe I have an algorithm that is just better at understanding and synthesizing signal and weeding out noise from signal and then trading on it or does it faster? That's not inside information even though the secret sauce of my algorithm is non public.
- [15:18]
Steve Ehrlich
Yeah, I get that. Although I think always makes me think the Lewis and Billy Ray example from Trading Places that would be seen as. I'm not quite sure the right, the right term is. But, but seeding fake information to somebody so that they can trade off of it that, that I would, I would imagine that Whoever was the CFTC chair back in the 1980s might have had something to say about that for sure. Movie didn't have to wrap up in two hours.
- [15:44]
Sam Ender
The so called Eddie Murphy rule which is one of the statutes that was charged against Van Dyke.
- [15:49]
Steve Ehrlich
Yeah, okay. So yeah, we're gonna, I want to get into all that a bit more because it is pretty, it is pretty fascinating. But there's one other recent Example that I wanted to talk to you about in relation to, I guess the spirit of, of our discussion so far that relates to our good friend George Santos, who got out of prison. I believe his sentence was commuted by President Trump and now he is reportedly being investigated by the DOJ for, I don't know, maybe you know, the exact term, but again, it's manipulation or related to a prediction market stemming from his attendance of a State of the Union address. He prominently said that he was going to attend and then I guess it was a few hours before I was about to begin, said that there travel issues or something and he's not going to be able to attend. And it turns out that he bet heavily on himself not attending, sort of going against the grain of what the market was doing based on what he had said previously. I'd love to get your thoughts on this. And it really raises the interesting question of what type of responsibility is there in this case. He actually was able to directly affect the outcome of, of the market. He wasn't trading on inside information. He was like, he was the primary actor. What do you make of that?
- [17:08]
Sam Ender
Yeah, it's a great problem. So I think you're the, the first part of your question or the, the last part of your question I think is a good place to start, which is this may not be insider trading because he's not, he is the source of the information. He's not betraying a duty to somebody who told him what his travel plans are. He, he is the creator, the maker, the definer, he is the principal. Right. So it doesn't fit the conduct. The, the fact pattern doesn't really fit into. It's like a square peg round hole as to an insider trading legal theory for a prosecution. But then you have the question of was there some other type of crime here? And I think there's two possibilities. I'm not saying he's, that he committed a crime. I don't know, I don't know the facts well enough that ultimately have to
- [17:54]
Steve Ehrlich
decide that I would imagine.
- [17:55]
Sam Ender
Right. But you know, taking the allegations as we have them, one possibility is, let's say hypothetically that Santos knew he was not going to attend, said he was going to attend, place the bet that he wouldn't, and then disclosed that he wasn't going to make it. That fact pattern is what is known sometimes as scalping or a pump and dump. When I was at SDNY, I prosecuted John McAfee, the McAfee antivirus creator, for a similar type of fraud. He, he had a He had two things. He had a Twitter feed where he would. It was called Coin of the Day. He would buy a token, say on Twitter. I have no position, but I strongly recommend this coin. And while he was recommending other people buy it, he would sell it, pump and dump. Scalping. That is a fraud. That is a type of fraud that can be prosecuted as wire fraud, can be prosecuted as commodities fraud if the instruments. A commodity can be securities fraud if the instruments are security. In a different situation. If, let's say he told the truth when he said, I'm going to come and he intended to come and that was a true statement. But then he realizes he's not going to make it and decides, let me place a bet, and then I'll just not come and profit from this. There you could. You could potentially have market manipulation. Market manipulation can fit under a variety of statutes. There are commodities fraud statutes that criminalize that conduct. There's wire fraud. So there are various theories that could be used to prosecute that, depending on what it looks like. But then there are two sort of core issues that you usually get down to as a prosecutor looking at that type of case. Case one is, was this an artificial manipulation of the market? And number two, was there any deception generally whether or not the government could legally bring a manipulation case? They like to see a lie deception. I think for. For a variety of reasons, both because of what an appellate court might do, what would be compelling to a jury, and other reasons prosecutors have discretion over whether to charge a crime.
- [20:10]
Steve Ehrlich
It makes me think of legally blind, which I'm sure you've seen. Mens rea. I don't know if that's the right term here, but they like the intent to commit a crime. You have to kind of get it. Is that. That's basically what you're talking about here?
- [20:22]
Sam Ender
Yeah, it's a big part of it. Mens rea willfulness. You have to show criminal intent. And without an intent to break the law, very difficult to convince a jury to put somebody behind bars. So prosecutors like to. In a manipulation case, which is harder than a traditional insider trading case or a traditional. Like in the Bankman Fried case, right? Ftx. They were lies. They were direct lies. Hey, everybody, your money's safe. He knows it's not. When we're talking about manipulating the market, then we get into, well, what if a trade was a hedge? What if a trade. You know, there's a variety of legitimate reasons why certain trades could be appropriate. Much harder case.
- [21:01]
Steve Ehrlich
Yeah, I remember the FTX case. I Mean one of the things that SDNY walked, walk the jury through was how there were plenty of off ramps where Sam could theoretically try to end this and, and limit the damage. And he chose not to. And that I think that also spoke to the willfulness of, of, of what he was doing during the last days of of ftx. So let's, I want to start looking, I want to turn to a couple of other topics but before we do just to tie a bow on sort of the whole quote unquote like how insider trading matches up with, with prediction markets which are essentially commodities market swaps regulated under the, under the Commodity Exchange Act. Can you just perhaps neatly tie that in a bow? Because we talked about a lot of different, a lot of different ways it could apply but also a bunch of different mitigating circumstances and really just like help everyone understand if you are a prosecutor working at the DOJ or cftc like what are the like the two or three things that would be like blaring red flags that you would look for to get a sense of a potentially criminal act?
- [22:09]
Sam Ender
Sure. I think and it doesn't have to be limited to commodities and I think if you are privy to non public information that could affect the price of an asset, whether that asset is a bet on poly market, real estate stocks, a gambling bet, if you have material non public information information that could really be market moving as to the value of an asset, it's not available to the public and then critically you received it in confidence from someone that you have a duty of trust and confidence
- [22:45]
Steve Ehrlich
to like like Google or the US Government. For the two cases that we mentioned.
- [22:49]
Sam Ender
Right. In the case of Google, in the case of the government, the, the, the soldier Van Dyke had signed paperwork that he had to comply with the classified classification and confidentiality requirements. The complaint in the Spagnolo case, the Google employee is less clear on whether there was some type of non disclosure agreement. But generally employees have a fiduciary duty to their employer and there's and they they reference in the complaint that the information was marked confidential. So if you have material non public information inside information, if you got it from a source that expects you to keep it secret, trading on that information could be a crime. That's the basis that, that is the undercurrent, the simple core essence of these cases.
- [23:38]
Steve Ehrlich
Yeah and it's interesting too because I mean thinking like people I know there's been some very curiously timed trades related to oil markets and White House announcements. It's etc and I, I, I back when I was still a journalist. I mean we talked, we reported on this a little bit that if you overhear something in the White House but you didn't receive in quote unquote in confidence what's the gray line there? And, and I think that's also why we're talking about sort of I don't know if new laws are necessary or just new guidance to, to make sure things like that can't happen because nobody would argue that that type of financial trading is, is appropriate.
- [24:11]
Sam Ender
Yeah. And I think that this is clearly an area both regulators, the cftc, the Department of Justice and legislators, policymakers in Congress are focused on this issue. I think a week or two ago House Oversight Committee Chair Comer sent a letter to polymarket and Kalshi demanding information about what about steps they're taking to prevent insider trading on those prediction market platforms. So you know for Comer, a Republican to send that letter to a two prediction market operators which is something the President has said this isn't market he supports his true social platform is going into the market for the Republican Party to be investigating this that is clear signal that there is enormous pressure on legislators to do something here and make the rules clear. And it isn't just about market integrity. Right. We, we do have a market integrity issue. We want to make sure that bets are fair. But there's also as you pointed out at the beginning of the show there's a national security issue if, if Van Dyke, if, if our enemies, if we're at war with Iran and or in conflict as the President would say with Iran and Iran can look at poly and, and, and if they think people are going to trade on inside information and that they can get a signal on when a military operation is going to happen that jeopardizes the security of the United States. This is something we have to think
- [25:37]
Steve Ehrlich
through of course in seconds or minutes can matter in something like that for sure. Okay so we need to take a very quick break so we can hear from from some additional sponsors but we're going to come back and talk about sports betting and, and how that overlaps with with prediction markets and the big microstrategy bitcoin sell selling debate or controversy
- [25:56]
Podcast Announcer
before we dive back in a quick word about something we make ourselves. If you like the way we cover crypto on this show clear eyed we no shilling just what actually matters. You'll like the Unchained Daily. It's our free newsletter that lands in your inbox every weekday with the most important stories in crypto written by Journalists, not marketers. No jargon, no hype, no number go up cheerleading, just the news. You need to stay ahead in the time it takes to drink your coffee. Subscribe for free@unchainedcrypto.com.
- [26:26]
Steve Ehrlich
all right, welcome back. So one other big I guess area of one big competitive landscape when it comes to prediction markets is sort of the way it fits within state gambling laws, particularly as it pertains to sports. A lot of states and too many for me to count have sort of, I'm not sure what the right word is, but they're trying to press the rights in order to sort of enforce their own state gambling laws. The cftc, especially under new chair Mike Selleck is arguing that these types of contracts which are swaps and as thus regulated under the cea preempt state laws and a bunch of different cases are working their way through the courts. Can you Sam, give us a sense of the size of, of of these markets? Like what's really at stake and sort of level set where things stand.
- [27:15]
Sam Ender
We're talking about billions of dollars of transactions and, and these are projected to become, you know, these could easily become multi trillion dollar markets over time. And so this is enormous and for a variety of stakeholders, right? New Jersey, Nevada, states that derive a significant amount of tax income from gaming, the question of how gaming is, is operated, what licenses you need is a critical, critical question. Many casinos and then online, you know, operators like FanDuel and DraftKings have place bets, so to speak on the regime they have based on the view that certain types of bets on outcomes have to be done through a gambling license. They have gotten licenses from a variety of state regulators. Now you know, I think the, the commodity, the Commodity Futures Trading Commission Chair Selig, the President of the United States have very forcefully taken the position that when a CFTC regulated designated contract market, a derivatives exchange offers a binary contract on an event which could include a sporting event, something that was previously thought of as gaming or gambling when, when that type of futures contract or swap is placed as a trade on a derivatives exchange that falls under the exclusive purview of the CFTC's jurisdiction under the Commodity Exchange act and that regime preempts, I.e. controls in favor of any state gambling rules. And thus if you're Kalshi or and you're operating a dcm, a designated contract market or on a that is CFTC regulated, you don't have to get a gambling light license, you don't have to comply with the state gambling rules. This is derivatives activity, not Gambling activity and ports right now that that issue. This is a reminder. This takes me back to the Howie days. You know, a year or two ago when, when Sher Gensler was the head of the SEC and President Biden was in office, we were debating in the, in the crypto market. We were fighting in court with the SE and civil plaintiffs over whether or not digital asset transactions were regulated as securities or not. Now I think the big question for courts that is adjacent to crypto markets is is this activity, the type of activity we see on polymarket on Couchie, is that appropriately regulated at the federal level by the, by the cftc or is this an issue that should be regulated by the states by state gam gambling regulators?
- [29:58]
Steve Ehrlich
Yeah. And where do you fall on that? Because it it. I can understand both sides. I mean for one thing, I don't think many people feel a lot of sympathy for FanDuel and DraftKings. Anyone who lived through their just inundation of ads 10 years ago when they were fighting with each other to, to get mind share. But at the same point, like it's certainly one. I could see an argument to be made that there's a loophole in just the way that these contracts are structured, the fact that they are swaps, that there are binary outcomes that like does it. I could see one arguing it's against the spirit of what gambling laws are supposed to protect. But I can also understand how if the contract structured in a particular way to fall under the cea, they have a strong case. I mean, where do you fit in this? And I know laws are really, they have to have like actual guidelines and rules people can follow. But they're meant to sort of protect like functions like the spirit of things, so they don't have to always be updated. Like where do you stand?
- [30:54]
Sam Ender
I think the, you know, I, I represent prediction market operators. I'm firmly in the camp that the Commodity Exchange act controls and preempts and I think that side has the better of it. The Third Circuit, not in a definitive ruling but in a, in a ruling on a preliminary injunction, signaled that they agree with that view. But there's a disagreement among judges. First of all, in the Third Circuit in that particular case, which I believe was a litigation involving cowshi, there was a split panel. So two judges, the majority said the Commodity Exchange act preempts. At the dissent gave all the arguments for the other side. The ninth Circuit in California has not ruled, but at oral argument in one of the pending litigations signaled through the questions of the judges that they're probably going to come out the other way. And trial courts in other circuits, including the 4th Circuit and the 6th Circuit, have reached different outcomes on these issues. So I think that there is a tremendous uncertainty as to how this will play out in the courts and who's right. And unless Congress legislates and clarifies this through a statute, it'll probably have to be resolved by the U.S. supreme Court.
- [32:14]
Steve Ehrlich
Yeah, and I know there's a lot of talk about different guidance, interpretation, the Clarity act, correct me if I'm wrong, I don't believe it mentions prediction markets really at all.
- [32:25]
Sam Ender
Correct.
- [32:25]
Steve Ehrlich
It does not.
- [32:26]
Sam Ender
The Clarity act doesn't resolve this issue.
- [32:28]
Steve Ehrlich
Yeah, I know that there is. Like I could, I don't even know. Like, I can imagine there could be some overlap when it comes to like the treatment of certain, like DAOs and DeFi protocols, which perhaps could be a bit more appropriate to a construct like polymarket as opposed to Kalshi, which is fully centralized and polymarket is smart contract based and uses usdc. But yeah, but it certainly seems, I can't imagine the crypto industry wants anything else added to it as we're racing to get Clarity act done anyway. But it certainly, as you mentioned, it looks like this will need to be adjudicated by courts because that seems to be the only pathway to get some sort of quote, unquote, no pun intended, clarity on the subject.
- [33:08]
Sam Ender
Yeah, I think the, that's right. The, that's how I see it. Because look, absent a change, forecasters believe if you were to take a bet on Pocket on who is going to win control of Congress, I think the, the betters favor the majority of folks on Pocket or Couch are betting that Democrats are going to win the House, maybe the Senate too. So the opportunity, the Runway to get legislation like this done is probably this year. We have a crammed agenda. I'm very hopeful that, that the Clarity act will pass and give crypto markets the regulatory clarity and structure that we need and that would get a whole bunch of institutions to come out of the sidelines and get into the market finally after so many years. So I don't think we're going to have legislation on this, certainly not in the near term. And yeah, I think it's going to be the Supreme Court that has to resolve this question.
- [33:59]
Steve Ehrlich
Okay. And let's talk about one other big news item before we start to wrap up here, and that is the controversy surrounding strategies selling of, of, of Bitcoin for the first time. I don't think it was the first time in its history, but the first time in years and years and years and we'll, we'll sidestep because I know this is not your role. The, the impact on the market, which although this was sort of pre telegraphed during I think Saylor's Q1 earnings call, the market is obviously reacting poorly to it. But there is a real debate about how a contract on Polymarket tied to the timing of that sale is resolving and it creates a whole nother, it opens up a whole nother suite of issues that we haven't even touched on when it comes to the operation of these platforms. So why don't you walk us through that really quickly.
- [34:48]
Sam Ender
So I believe the issue is that there was a market on Polymarket where you could place a trade expressive view on whether or not by a certain
- [35:00]
Steve Ehrlich
date through the end of May, through
- [35:02]
Sam Ender
the end of May, MicroStrategy would sell. And there was a disclosure that they filed an SEC filing. The SEC filing was made in June, but it revealed that prior to June, in May a C sale had taken place. And so there, there is a dispute right now with, you know, big money at stake on whether or not who is correct for purposes of this trade. Is, is the controlling date, the date of the trade, the date of the sale of the Bitcoin or is it when it was made public through the S file?
- [35:40]
Steve Ehrlich
Yeah, and, and like you said, big money. I think like tens of millions of dollars have been bet on this market. And, and yeah, it really comes down again to like how these things, how these contracts are written, how they're structured, how they're designed to resolve. And then we didn't get into the Oracles and they use a relatively smaller Oracle provider called UMA to actually vote on the outcome of these events. And I think I've seen some analysis that ultimately nine people control enough voting power on UMA to actually decide which is not quite as decentralized as I would imagine many people would want. And this is just, I see it as another risk as it relates to prediction markets. I mean we're excited about the technology. I can certainly understand the value of it in sort of crowdsourcing intelligence for important events. I mean there are certain vices, I mean gambling and betting on trivial items that maybe we need, maybe we don't. But I can certainly see the viability of certain markets have to account for when it comes to participating in these platforms. And this doesn't even get into necessarily some of the other issues or risks. And again, I know this is not Your purview, Sam. But I mean, there's been a lot of reports. The Wall Street Journal had one. There was an academic study really showing how the vast majority of participants lose on these platforms. And just like a casino, the house, the house always wins in a certain way. A lot of the people that make money are the professional market makers, the ones running sophisticated algos and they prey on retail traders to a large part trying to find long odds that could pay off and just fundamentally misunderstanding risk, which frankly I think we all do from a certain time to time. But there's a lot of different things for traders to be careful about when, when it comes to participating in these markets. I'd love for you, because we have to start wrapping up to just what, to the extent you are able to share and from your vantage point as a former prosecutor and just someone who intimately understands the way these markets operate in a not official financial advice point of view, like what are some of the things that you for instance, would look at, look for, try to understand before you might want to put a bet on one of these markets?
- [37:59]
Sam Ender
Sure. I think what I would look at first, as you point out, it's very important to diligence. How is the bet, who determines how the bet is one, what are the rules for that? You, you need to understand that's kind of part of understanding counterparty risk.
- [38:13]
Steve Ehrlich
Right.
- [38:14]
Sam Ender
Is understanding the mechanics of it so that if there, you don't want to, you want to make sure you're playing on a level playing field. Right. Part of understanding the level playing field. The second thing is why am I placing this bet? Am I placing this bet because I believe I have better information or better judgment? Is this for fun? What am I, what am I, I doing here? If this is a serious bet, then I need to, to understand whether I really have some kind of asymmetric advantage that is legal. In other words, I'm not, I don't have any symmetric advantage because I am, have inside information, but I have an asymmetric advantage because I am smarter at analyzing the signal than the rest of the market. Or maybe it's a hedge, but frankly, I personally find that the, the, the greatest use of prediction markets is the information. Not, not as a better, but as a source of information.
- [39:13]
Steve Ehrlich
Yeah.
- [39:13]
Sam Ender
And obviously that happens because other people are placing debts. Right. But, but it is an entirely new category of data signal. Five years ago, this is not something that was regular, pervasively available. But now when I'm thinking about an issue, I always look at Polymarket or Cal sheet to see what are they saying about it, if there is anything.
- [39:34]
Steve Ehrlich
Yeah, I think those are really good points and frankly, it can be difficult for people to understand the way certain things resolve. I'm sure you remember, and I'm sure plenty of people listening here remember the debate over Zelensky's suit. I think when he came to guess meet President Trump another time because of what happened when he went to the Oval Office was in February of this year. Was that or was it last year? At this point, I can't remember, but there was a whole debate as to whether or not what he wore was actually a suit. And it came down to again, like these people, nameless people behind an oracle to kind of decide. And I remember that that resolution was also unsatisfactory to a lot of people. And it's hard sometimes to due diligence those types of things because these are very esoteric topics that very few folks are experts in. But I think your point is very well taken. And again, because this is a trader show, this was a tremendous kind of walk through all the different issues pertaining to these markets. But for people participating, retail people participating, because there is a lot of incentive to participate in these markets given how altcoins and crypto in general are going down a little bit. And if you're not going to put money into AI stocks, which are, which are booming prediction markets, is an area where you can kind of get that risk on fix, for lack of a better term. So yeah, really understanding, like what is the advantage that you have and is it legal? There are plenty of legal ways to get for these types of markets to get like an informational advantage. And in that way it's very different and perhaps a little superior to securities markets. But you need to understand kind of what that, what your advantage really is, or if nothing else, make sure you don't bet money that you can't afford to lose because especially as some of
- [41:21]
Sam Ender
these markets are now going to start
- [41:22]
Steve Ehrlich
offering leverage trades and so on and so forth, there's a real possibility to really go up or go down depending on what happens.
- [41:31]
Sam Ender
Yeah, for sure. And I think one other point, which, in addition to the rules, I think you're hitting on this with the suit example. There's a good example is what exactly is the phrasing? Right. I went to Hebrew school. We can debate the Talmud both ways, all right? And litigators, I make a living splitting hairs on what the, the meaning of words is. What does it mean? Is this ambiguous? Is it not ambiguous? And so you definitely have to be. Is this clearly a binary, Is there going to be a clear winner to this?
- [42:01]
Steve Ehrlich
Yeah, it's actually a really good point. I should have brought it up sooner than, I mean as a former journalist and intelligence analyst myself, I certainly understand the importance of choosing your words carefully. Are there any laws or rules as far as like or standard language for how these things should be structured to take out some ambiguity? I mean I know in the law there's always going to be certain areas of grayness, but are there any best practices that people should look out for or any standards that are being developed that could help answer some of these questions?
- [42:32]
Sam Ender
I think the development of regulations is going to start. The CFTC has made clear that they want the, the way the CFTC rules work is they basically let a designated contract market certify on their own self certified. So they want those designated contract markets, I. E. Kalshi, for example, to make the, the guidelines right to make guidelines that ensure that for example the market isn't susceptible to manipulation and that may, that might, I don't know, covered, you know, down to the level of making sure that this is a concreted enough binary question that there can be a yes or no.
- [43:10]
Steve Ehrlich
Yeah, it's actually, it reminds me a good friend of mine is Chris Giancarlo, the former CFTC chair who I'm sure you know as well and I remember when we were talking, I think a conversation years and years ago about when ftx I think think they're requiring Ledger X and we're going to launch a US based DCM and I was talking to him a little bit about what that could offer and he was kind of walking me through because this was one of my first times as back at Forbes and kind of going through this how it's different than the SEC where like you need to get approval to launch a spot etf. Whereas like CFTC regulated entities they have sort of the ability to self license and then the CFTC can step in and I know this is an oversimplification, they can step in if something is, is not right but they really give a lot more leeway to operators under their purview. So that is a pretty fascinating point. It's probably worth someone looking into to really understand where does that kind of go into and is there any work being done to help standardize some of these outcomes? Because like anything, the only risk you want to take on for any investment is market risk. You don't want to take on like the risk of someone interpreting something else. So on and so forth. We have to wrap up. But I want to just give you a chance, Sam, to share anything else related to the subject that we didn't get a chance to cover or just anything else on your mind related to what's happening in crypto today that would be helpful for our audience to know.
- [44:37]
Sam Ender
Sure. Thank you so much for having me. I think the core question is the two criminal cases we see are a clear signal from the government that they want to prevent market abuse on prediction markets. This is an area of focus, and so folks have to really think about what the rules of the road are. By the same to. And by the same token, I think it's quite interesting to see that the US Government is now saying trades on polymarket are commodities, not gambling, for example, not securities. That has implications for debates we were having years ago about what is or is not within the currency view of Howie. But I think how these cases will play out remains to be seen. There are some open questions about do these cases apply the laws extraterritorially, you know, you know, to offshore conduct, what type of property can be regulated by these statutes? These are all open issues. It's a fascinating time to be in our, in our industry.
- [45:38]
Steve Ehrlich
Yeah, it always is. Never, never a single dull moment. All right, well, Sam, thanks for, for joining us. We'll have to have you back again. Thank you to everybody for watching and listening.