Chapter 1: What is the main topic discussed in this episode?
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Subject to credit approval, Apple Card issued by Goldman Sachs Bank USA, Salt Lake City branch. Terms and more at applecard.com. Bloomberg Audio Studios. Podcasts. Radio. News. It seems like anything everybody wants to talk about or everything anyone wants to talk about is prediction markets right now. Why do you think that is? What is unique about this moment in time?
Well, I think we're really at this unique, pivotal moment in our history where Many have lost faith in traditional news media and traditional information sources. People are trusting and relying on social media, prediction markets, Twitter, all sorts of new media sources. And that's not a bad thing. I think as Americans, we need to explore different avenues for getting our information.
But prediction markets aren't new. They've been around for a long time. New exchanges are offering all manner of new informational products from predicting sports to political events to the price of oil with all the activity going on in the Gulf. So I think that's a good thing for society.
You wrote this interesting op-ed in the Wall Street Journal last month about how event contracts serve legitimate economic functions. They allow businesses and individuals to hedge event-driven risks, enable investors to manage portfolio exposure, provide the public with information about the outcome of future events.
I think that makes a lot of sense for people when they look at certain elements of prediction markets, when they look at the price of oil or they look at interest rates. But things that are sort of more consumables, more entertainment, like who's going to win season 15, 50 of this survivor, for example, like what's the legitimate economic function of a contract like that?
Well, people are hedging all sorts of different risks as a regulator. It's not my job to tell them what to hedge and what not to hedge. That said, some of these products maybe are more for speculation, more for entertainment. The markets aren't designed just for hedgers or just for certain things that have a risk management aspect to them. Derivatives are derivatives.
We have broad authority over derivatives, and we regulate the markets for derivatives. Each exchange as an SRO has the responsibility to evaluate the products that it lists. It has to ensure that those products are not readily susceptible to manipulation. It certifies that to us as a regulator, and we review that application to go and list and self-certify a product.
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Chapter 2: What are prediction markets and why are they gaining attention?
So a lot of the responsibility, of course, is on the exchanges to evaluate products. We're not doing that as a kind of merit-based regulator where we're picking winners and losers. But it is important that each product has integrity and that they're not susceptible to insider trading and manipulation.
Are there certain products or certain contracts that could be more susceptible to insider trading and manipulation?
Well, certainly. There's a range of different products out there, right? And certain products we just saw with Kalshi listing a product related to Mr. Beast and it brought an enforcement action against an employee of Mr. Beast who had information about when the videos would be posted and contents of the videos and was able to predict certain things and trade ahead of that.
And insider trading is certainly a crime under our authority. That said, other products, right, you have controls and you ensure that there's not the ability to misappropriate insider information and trade on it. You block certain, for example, players from trading in their own contracts or people with information about an employer that they can trade ahead on.
So it's important to enforce that in our markets. We have the same risks in our securities markets and You know, you could have someone insider trading on a broker, trading ahead of a customer, for example. So we do set rules and we enforce them. And some products, of course, are more susceptible than others.
And maybe those shouldn't be listed by exchanges as they're evaluating what's susceptible to manipulation.
When you were in school, when you were doing your training, did you ever think you'd be talking about Mr. Beast? I did not. That was not, you know, on the bingo card for sure. Hey, what about sports? Because our analysts at Bloomberg Intelligence, they note that on these platforms like Kalshi, like Polymarket, about 90% of what happens there, 88% of U.S.
activity on prediction markets still sits squarely in sports markets. Why is betting on sports prediction market and not gambling?
Well, we've got all sorts of different products out there. You start with insurance, you have securities, you have derivatives, and yes, there's gambling at the state level. They're all structured differently. These are different activities, different products.
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Chapter 3: How do event contracts serve legitimate economic functions?
We have a federal system for derivatives, and so it does allow for those products to cross state lines and be accessed in places where maybe you couldn't access it otherwise, With an insurance contract, they typically can't be offered across state lines. There's different regimes for insurance in each state. And we've got the same with gambling versus derivatives.
So I want to talk a little bit about sort of some recent events because there's this conversation happening about what should constitute like a death market or not. In your speech yesterday, you said that your regulating philosophy is simple. Like the practice of medicine, our focus should be on finding... and then administering the minimum effective dose.
How do you apply that minimum effective dose to geopolitical risk bets that seem to quickly devolve into death markets or death bets?
Well, self regulatory organizations like exchanges have the obligation to evaluate the contracts that they're listing to make sure that they meet our standards. One of those standards, as I mentioned earlier, is not being readily susceptible to manipulation. Another is our requirement that they have to be not on things like assassination or terrorism,
and so on and so forth, which are all restricted under our statute. And we as a regulator do have some authority to, when it's in the public interest, allow certain types of contracts.
When you have a contract around a political event that isn't tethered or tied to, for example, an election, that does create a lot of risk that you could back into becoming an assassination market or a terrorism market or a war market. That's something the exchanges have to think about. That's not, we're not in the business of going and
rejecting contracts when we believe there's a potential risk, if the exchanges are telling us they believe that these are consistent with our standards. But we, of course, exercise our enforcement authority where we think exchanges are violating the law. So it's an important question. It's one that the exchanges have to think about.
We may have a role in providing guidance there, and that's something I think folks should stay tuned on. But of course, it's very important to tether some of these political contracts to an actual political event. and that caverns the risk of something turning into an assassination market.
If you look at, for example, the 2024 election contract, there were assassination attempts on President Trump. There was a risk, for example, that could have turned into an assassination contract. I think this risk is underlying with a lot of contracts that doesn't make them assassination contracts themselves.
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