Ep. 2 Gary DeWaal On The Pre-History of CFTC Regulation

[00:00:00] Speaker A: Who turns down free money? I will pay 50 cents on the dollar. I'll take 40 cents on the dollar. [00:00:04] Speaker B: 30 cents on the dollar, 20 on the dollar, 10 cents on the dollar. How about zero cents on the dollar? Do you realize how much money he just saved us? All right, welcome to the second episode of the 50 Cent Dollars podcast, a podcast generally about prediction markets and kind of an offshoot of my substack, also called $50.00.50.com, all spelled out and generally I'd like to, when we're trying to think about the future of what might happen with prediction markets, the best way to look, the best way to figure that out is to look at the past and use that to infer patterns and how history doesn't repeat. But it might rhyme. And looking at talking to experts who have been in the game for so long is just like, I think, a very important exercise. So I'm glad to have a perfect guest here in Mr. Gary de Waal. He's been a long time derivatives lawyer, been in the game for decades. Was there back when derivatives trading went from the pits to computerized, back when crypto started coming online. He was an early crypto advocate, crypto lawyer, and now here to have him talk about what he thinks is going to happen with prediction markets and this innovation and the role of regulation in that. And so I just wanted to welcome Gary and if you could give a bit of background about who you are, what you've done and yeah, great. [00:01:34] Speaker A: So thank you for having me on your, on your podcast. It's a pleasure to be here. I'm talking to you live from Estes Park, Colorado, high up in the, in the Rocky Mountains, where this morning was 16 degrees Fahrenheit. [00:01:47] Speaker B: Wow. [00:01:48] Speaker A: And I was told it feels like 6 degrees. But to me it's a balmy day in Miami. So you know, what can I tell you? I'm crazy. So as you said, you know, I sort of, I joined the futures industry in 1982. By background, I had graduated with both a JD and an MBA. In 1980, I joined a very big Wall street law firm that formerly was headed by Richard Nixon, known as Mudrose, Guthrie and Alexander. I joined as a corporate securities lawyer back in the early 1980s. Associates who were corporate securities attorneys had a great honor. I got to go to the printers on Hudson street in New York City every Evening from about 6pm till early morning and proofread documents as I came up to printing press. That's what an associate did at that time. I had great people working with Me, I had great mentors teaching me, but it probably wasn't what I wanted to do. I had a lunch one day with a gentleman. His name was Richard Fielding. He was the former associate General counsel of the Commodity Exchange, Inc. Which I had never heard of. Now, I'm a native New Yorker. I was born in Brooklyn, New York, and I've rated that great. [00:03:10] Speaker B: I can tell in the New York metropolitan area. [00:03:13] Speaker A: I had an mba, I had a jd I had an undergraduate degree in economics. I had never heard of the commodity exchange and I had never heard of a futures contract until I had lunch with this gentleman, Mr. Fielding. He described the product to me. He talked about this financial instrument which people don't care if they go up or down because, you know, the basic purpose is for hedging, which is, you know, to obviously protect against price risk, price movement, risk. And I was fascinated. Anyway, two days later he comes into my office at like Rose and he said, you know, Gary, I shouldn't be doing this because, you know, here I am with fellow fellow employees. But I could tell you were really fascinated by what I was talking about. And I happened to know there's an opening at the Commodity Futures Trading Commission, an agency which I also had never heard. [00:04:02] Speaker B: Still to this day, most people have never heard of. [00:04:04] Speaker A: Until, by the way, I can't tell you how many times it's called the commodities plural Futures Trading Commission in the media, which is absolutely wrong. It's Commodity Futures Trading Commission. [00:04:14] Speaker B: Tell me about guilty of that. [00:04:16] Speaker A: Long story short, I was with the division enforcement of the CFTC in about six weeks. You know, it was, it was, it was fantastic. First, I always had wanted to be a litigator and allowed me to do litigation, division enforcement. And second of all, I got to do market integrity cases. I got to investigate market integrity cases, I got to bring market integrity cases. And so I learned a lot about the markets. The one problem I had at the cftc, when I joined the crtc, there was really no one I joined in the New York office. There was no one in the New York office who could train me. So I had to train myself, which I didn't mind. And what I did to learn about the markets was I went to the floor of the commodities chain and I stationed myself right outside the gold futures trading thing. And I literally would watch everything that was going on. [00:05:06] Speaker B: Wow. [00:05:07] Speaker A: And figured by osmosis I'd learned something. Unfortunately, it was such chaos. If you've seen the movie Trading Places, you know that if you haven't seen the moving trading Places I recommend highly that you see it so that you learn about the futures markets in the. In the early 1980s. But anyway, made a long story short, there was a gentleman, his name was George Jiro, who was a local on the floor, and he came up to me. I had a big red badge that said CFTC with like. With like the Scarlet Letter by Nathaniel Horse. [00:05:37] Speaker B: Oh, yeah, I can imagine. [00:05:39] Speaker A: You know, everybody knew who I was because I'd been with this big badge. But George came up to me and said, you look, you look very industrious. He says, you know, I don't know if I should be talking to you, but, you know, if I'm allowed to, you know, I don't mind, you know, do you know what you're looking at? I says, no. He said, well, I don't mind helping you understand what you're looking at. He says, every day I'll give you a little tip about look at something to help learn. And he was great. He was a man of his word. And literally every day he'd come over, he'd say, you know, don't look at the whole pit. Look at one or two or three traders. And then he would say, don't look at the whole body of the traders, look at their hands, look at their hand signals. And, you know, I mean, he really broke it down to micro aspect. I really got to understand how the market worked. I really got to have developed theories about how markets work, how markets are subdivided in the old days with bits because it got so noisy and so chaotic. Effectively, one market owns lots of different sub markets just because of the ability of folks to talk to each other. And then over time, I got to see developments that fascinating. You know, in the beginning, you know, everything was, you know, people were running back and forth to deliver order tickets to the people in the ring. Absolute chaos. But over time, it started changing. People started using headsets, people started trading options. They started bringing computer paper printouts into the pits to better, to help them understand better the gamut, all the different Greeks associated with options. And at every incident there was opposition. The world is going to end. You can't let people bring your computer paper onto the floor. You can't allow people to use headsets. [00:07:24] Speaker B: And then what was the justification? That it was cheating or unfair or what? [00:07:29] Speaker A: Because they had it and I didn't have it. Yeah, it was nothing more than they had the fancy toy and I didn't have the fancy toy. They were making more money than me now with a fancy toy. [00:07:40] Speaker B: Yeah. [00:07:40] Speaker A: And then I Got to start seeing progression to electronic trading. That was, that was a, that was a showstopper, you know, because ultimately, as we now know, almost all trading is electronic. But I got to see the evolution of trading from early stages where it was just yelling and screaming and passing paper to electronic, you know, appliances around the pit, headsets, you know, technology that allow people to better trade into seeing the whole, you know, electronification of, of markets. And that, that was just an amazing thing. [00:08:20] Speaker B: So, you know, yeah, yeah, I was about to say, like this kind of, I think like a theme of this podcast is history doesn't repeat, but it rhymes. And when you describe this evolution of traders adopting technology, moving to a new format and a new kind of venue, it makes me think of sports bettors today, sports betters who are used to betting against the sports book and having to do all the things that you need to do to be a successful sports better in that industry to now prediction market's kind of like shaking things up. Now you can like make a resting order, you can be the maker if you want. Now you can book the other side of parlays. And I'm just wondering if high level, I didn't realize until now that you were really, you were actually in the pit witnessing this, like seeing the whites of their eyes. And want to ask you like, of the traitors that were able to, what were the characteristics of the traitors who were able to adapt and able to survive the transformation and the characteristics of those who did it? And like, what did you notice? And do you have any kind of like, maybe advice for someone who's also going through a similar transformation? [00:09:28] Speaker A: Well, absolutely. I mean, the key is open mindedness and the key is basically be willing to accept new ideas. I mean, even as I was joining the Commodity Futures Trading Commission, there was no such thing. I mean, the use of laptop computers by folks like me, lawyers, was very, very uncommon. I was fortunate as an undergraduate and while I was studying for my mba, just for fun, I took courses in computer science. So I had a sense of how to do programming. And when I joined the commission, I had my own personal PC that I had bought because I was fascinated. And I learned how to develop macros on what was the predecessor of Excel, which is Lotus 1, 2, 3. And I used those macros to help me do analytics. Well, the same thing with the guys on the floor. The folks who are able to adapt and start using computer technology started exploring and taking advantage of a new technology because they were open minded. They were the guys who, and gals who were the most successful. You know, when I started there was no such thing as high frequency trading. It was as low frequency trading as it could be. And I got to see the development of proprietary trading host who used math and computers to help develop their trading skills. And yes they did better typically than folks who didn't have those skills but they simply took advantage. They were open minded technology and they were open minded to evolution. We're seeing that now. Folks who are open minded to artificial intelligence clearly have a leg up I believe over people who are open minded to AI. Going forward, folks who are open minded about extreme exploring the use of quantum computer will be, you know, much better off than the folks who don't. I mean again it scares some people but the people who get over their fear and embrace it are very, very helpful. And as you said, you have seen them. You know, the debate right now, the big debate right now is classic betting, okay, which is, you know, the House always, you know, basically is the versus. All of a sudden now folks are getting to do these kind of contracts against other traders and you know, maybe there's commissions, maybe there's some, you know, some, some amount that the, that the House is taking but they're not that they're not typically the counterparties certainly when, when, when, when as we talk later on, prediction markets are, are, are regulated markets oversee by the cftc. [00:12:07] Speaker B: So you joined the CFTC back in the, it sounds like the earlier mid-80s. And I was wondering, yeah, 1982, I was wondering what from 1982 onwards what is an example of like a new product? So we talked about technology changing the active trading. What about the, the actual underlying was there was a new, was an example of a new underlying that came out that like caused a lot of rockets or like people were like this is gambling or this is crazy. How can we do this? This is not what the CFTC was originally created to do. And can you just tell me, yeah, what was the example of that product? What was the timeline of like how people kind of got used to it and then what like got people around to the idea that actually this product should exist and actually this is actually very important to exist and is going to help the world in the way that exists? [00:13:00] Speaker A: Well, unfortunately I may be old, but I'm not that old. The biggest, the biggest evolution occurred going into 1974 which was the year that the CFTC was effectively created by the Commodity Futures Trading Commission act of 1974. What had happened was is that for many, many years the CFTC Predecessor, the Commodity Exchange Authority had jurisdiction over what we're basically trading on regulated markets on enumerated contracts. Enumerated contracts were your traditional agricultural products and your traditional livestock products, your wheat, your grain, your pork bellies, etc. What happened was then there began to be interest in trading gold, precious metals, there was interest in trading oil, there was interest in trading foreign exchange, and there was interest in trading a stock index type products. Okay. And that, that desire to see those products being rationally regulated just like traditional commodities, that's really what gave rise to the enactment of the CFTC act in 1974. And then the other thing that happened is part of that is that the CFTC was given exclusive jurisdiction. Exclusive meaning the states were out. [00:14:28] Speaker B: Those two words are very important these days. [00:14:30] Speaker A: Yeah, we're going to discuss that a lot in the next short while. But the CFTC was given exclusive jurisdiction over basically futures contracts and options on futures contracts that were traded on something called a board of trade licensed by the cfpc, commonly known as a designated contract market. And that was a very, very big thing. Okay. Because now you had one regulator that was exclusively responsible for these products. Now interestingly, at the beginning the states didn't really get the message that Congress wanted to do what we'll later discuss as field exemption in this area. They just, they thought that in order to fulfill the purpose of the Commodity Exchange act, which is to have rational and well run markets to allow folks to hedge, okay, you needed to have a single regulator. Well, for the first couple of years, the CFT's history, they started operation in 1975. You know, it wasn't uncommon for states to try to go after what they considered to be bad doers in the futures market, relying on their bucket shop laws and their gaming statutes. They considered the fact that since most, even most speculators didn't hold futures contracts to the end, but you know, liquidated them before the end, that they were more the nature of gaining contracts. And the courts were actually pretty good about saying no, that's just not right. CFTC has has exclusive jurisdiction. A big case, Paine Weber vs. Conaway in the Northern District of Alabama in I think, what is it, 1981, you know, very much says gaming statutes don't apply to this business. You know, bucket shop laws don't apply to the statute. If it's a futures contract. And by the way, later on it will discuss this. If it's a swap and it's traded on a dcm, that's CFTC exclusivity. If it doesn't trade on a dcm. If someone really is doing nefarious activity, they're not going through the registration process with the CRF in sight. Sure. But then the states can rely on their traditional fraud. And even to this day, it's not uncommon to have state and CFTC joint actions with bucket shops that are trading on a designated contract model. But the CFTC was given exclusive jurisdiction. There were challenges, they were rejected by the courts. And then the other thing that was happening at this point in time, early late 1970s, early 1980s, was that there were products being developed, futures that were being developed that looked like security. Okay, maybe they were futures on an index or futures on a single stock. [00:17:40] Speaker B: Security. [00:17:41] Speaker A: And so not only was there tension with the states, there was tension with the sec. And the good news was the then chairpersons of both the CFTC and the sec, Johnson from the cftc, Philadelphia Bry Johnson from the CFTC, and John Shad from the SEC got together and said, okay, we can, we can figure this out. We can, we can figure out when something should be under the cftc. We can figure out when something should be under the sec. And they came up with this thing that, you know, depending on whether you're a hugest guy or a securities guy, you've called the Johnson Shad Accord or the Shad Johnson Accord with the same thing which divided up jurisdiction. Yeah, they submitted the NGOs, the, their court to Congress. Congress basically, you know, amended the Commodity Futures Trading Commission act to avoid the Commodity Exchange act as it was to allow for this accord to go into place. So, you know, again, so we saw the tension with the states, we saw the tension with the sec. The CFTC prevailed. It goes forward. You know, if, if Congress ever gets back to their desks, we expect another major advance in CFTC oversight going forward, which is it is likely that the CFTC will receive exclusive jurisdiction over trading of crypto, spot crypto on licensed exchanges going forward. But again, you know, we need to see proposal. There's something called the Clarity Act. Yeah, that goes. And that's in the future. [00:19:21] Speaker B: So tell me a bit about what your involvement was with crypto and when crypto started to gain prominence. I had bought two bitcoins when I was a kid. I had to drive to CVS with my new driver's license and MoneyGram or Western Union money to Coinbase to get two bitcoins. Man. I was back at $90 each and I sold them at $100 each. So I was really happy with my $20 profit. But yeah, I just wanted to, it's like it's come so far now and I feel like you're actually, you were in the thick of it while crypto was in the throes of trying to be seen as legitimate and, and try to get regulated and try to be real. Right? [00:20:06] Speaker A: Well, yeah, so let me just give you a very quick, I'll tell you how I got there. So I was at the CFTC for four years, 1982 to 1986. Then I joined a brokerage entity at that time known as La Tada Futures Corporation. It later changed its name to Brody White and Company and then its assets were acquired by a subsidiary of a French bank, Societe and RALPH known as femat. And basically I was at Brody White through FEMAt from 191986 through 2012. You know, I, I, I. [00:20:46] Speaker B: So yeah, I skipped a lot of history there, but I want to discuss it. No, it's okay. Well first, actually, before we get to crypto, like was there anything. Obviously crypto is top of mind now and for most of the people listening to it, that's like what they remember. But I was wondering if there was any kind of product or controversy that happened in those decades where you were working in the derivatives industry that reminds you of crypto and then events contracts, like something that we can look back on. [00:21:19] Speaker A: I would say it wasn't during most of my career until the advent of event contracts, okay, until the first time I, I, I heard about, you know, event contracts, which is, which was in 1992, that actually was the first real kind of change other than swaps. Swaps are relatively new also. So I, I would say you started seeing folks trading swaps and you started seeing folks being interested in the Venn contracts and the 90s. And then you ultimately saw, you know, laws being enacted to, to accommodate both products certainly by the time the Dodd Frank law were, were enacted in 2010. So it was mostly, I would say, technology that was changed way the trading change from 19, when I joined the industry, 1982 to the mid-1990s and then from that point you saw upside. There was actually another change. Internationalization, US monopoly in the markets. For most of my early career, I mean, I think 99% of all transactions occurred on U.S. markets. And then over time they became internationalization. And in fact the brokerage company that I joined, as I said, Brody White, it was Mikada Brody White that became femat, became, you know, probably the largest expansion derivatives broker in the world. I mean, I had a boss said he wanted to be the leader in the international arena. We set up offices all around the world, you know, very, very early on. And we ultimately became, you know, at least initially, in fact, the executing and clearing broker for a lot of our competitors on the international markets, because we were there and they weren't. So that was a big change. Seeing, seeing trading move all around the world, that was very, very exciting, too. But anyway, on my own career path. So, you know, when I was at the brokerage, I had all sorts of different positions. At one point, I was even president of Brody White. But most of my career, I was group general counsel. I was responsible for compliance. I was responsible for legal issues. I was responsible for anti money laundering, which was a developing new area. I left because the parent company wanted to change the organization. I didn't want to be part of a new organization. I set up my own consulting firm for a year. And then what happened was while I had been in house counsel, I used a firm called Cahen Mitchen Rosamund as one of my outside counsel. And I got very, very friendly with a partner there, the famous partner. He's one of the legends of the field. And he kept trying to convince me to join him at Canton. And I didn't want to join a law firm basis. My experience beginning. Ultimately, he won and I joined. The problem was that over the years, I had helped Arthur recruit people to join his law firms. I had a lot of friends working in Canton, and when I joined, I realized that lawyers get paid. Basically, they eat what they kill. You bring in a client, you get paid off that client. And all my friends there were doing the exact same thing that I thought I'd be doing there, which is derivative futures, you know, stuff like that. And I said, well, that's not going to be cool because I'm going to steal their business. They're going to get hungry, and I don't want them to get hungry. I'm their friend. So I had to do something else. And I, you know, I. I started looking around. What, what, what field, what practice of law could I do? And I read the Satoshi Nakamoto white paper, and again, because I had that background from my courses in computer science, it made sense. I didn't understand necessarily every technical detail about. But I read it and I said, and I read some ancillary materials about blockchain technology and bitcoin and ethics. And it really excited me. You know, I sort of said, you know what? This is something I can heal. And so at that point, maybe a year later, I walked into our general counsel's office. Even law firms have general counselors. And I said, I want to develop a business in crypto, you know, he looked at me askance. You know, aren't you a little too old for that? Or. [00:25:48] Speaker B: Especially back then, crypto kind of had this taint of, like, it's crime, it's whatever, you know? [00:25:54] Speaker A: Oh, yeah. My brother worked for the. My brother worked for the Justice Department. And when I finally told him that I was. I was. I was now doing crypto law, he said, I can't believe my own brother is helping money launderers. Yeah, you know, so not every Thanksgiving dinner, but, yeah, we still stay. Hi. But anyway, so I started. I started, you know, I started develop. I started, you know, learning more. I started interviewing people who I knew were in the crypto space. One of the guys I talked to was a guy named Paul Chow who was associated with a firm called Ledger X. And I knew that they were applying with the CFTC to get a license, designated contract market license. And about a year later, he called me up and he said, hey, Gary, he said, you know, you promised me you knew nothing about crypto. You convinced me you were right, and you're not a liar, but obviously you know a lot about derivatives. Can you help me get a license with the cftc? And I said, yes. And the rest is history, because in about seven, eight months, we got him a license both as a DCM and a dco, which, by the way, Kalsheet. [00:27:03] Speaker B: At its inception was using Ledger X's dco, so. So thank you for making that happen. [00:27:09] Speaker A: Yeah, you're welcome. And I got to spend a lot of quality time with Christian Carlo during those years. But once I was able to get, with the support of a fantastic bunch of people at Cat and Mewchen, they actually did all the work, believe it or not. I just. Pretty face. But, you know, once the word got out that we got them this license, and you can imagine other folks started talking to us all of a sudden, you know, I. I was doing all sorts of crypto projects, and they were very, very interested because I had never thought I'd be giving lore in an area where the law was so confusing. People used to say, oh, crypto's not regulating. I say, no, no, no, no, no. Crypto is un. Highly regulated. The problem is the regulation is completely irrational because there's overlap. There's no. There's no exclusive jurisdiction. There's. It's all over the place. And frankly, that. That. That really held back the development of the crypto space for years is that, you know, it was really Russian roulette. You know, regulators didn't like what you were doing and a lot of the regulators didn't like they thought the world was going to end because nice advent of crypto, you know, they, they made life miserable for everybody. And so it's really hard to give advice when you have to start saying, well there's no certainty. This is the best I can do, but can't guarantee anything. You know, lawyers aren't used to doing that. But you know, again, you know it was, it was so that was great space. And you know we saw development into derivatives in crypto. You know, we sort of see it. We saw the CME to do bitcoin futures. We saw, you know, so that was a new asset class also that that started developing and the future will be very, very interesting. I think the developments in crypto are going to be mind boggling going forward. Not necessarily the same kind of products now, but for example, I think tokenization of real world assets and securities is going to be a big, big thing going forward. Just like I think stablecoin will be a big, big thing going forward, you know, and, and you know bitcoin is sort of substituting for gold in some people's mind as a store of value. And, and you know some of these smart contract technology is going to be very, very interesting also as it's, there's. [00:29:40] Speaker B: So much, there's, there's so much that's going to, especially with the more I would say friendly regulatory environment towards all this stuff. So much is going to happen, so much is going to get big. But one thing I would love to double click on is we got to. [00:29:56] Speaker A: Make contracts at some point. [00:29:58] Speaker B: Eventually, eventually. Because I would really like when the CME started to list crypto products, what was the process like for them? Because now we kind of people are somewhat aware of like the self certification process, right? You design a contract, you self certify it and then you wait for the CFTC to like say yes or no, then you go ahead and so when the CME made that jump to do bitcoin futures, what like what went into that? Was it hard? Was it easy? Was there a lot of pushback? Was there not? And like how did that get smoothed over? And then now you look and it's like doing tons of volume. It's like a huge product. And so just like in a nutshell, like how did that cycle happen where it was like new scary thing to being accepted? [00:30:46] Speaker A: It was a New scary thing. And remember, as you correctly said, prior to 2000, contract markets had to get CFTC's prior approval to list new contracts and they had to demonstrate something called the economic purpose test, which really meant the contract has valid hedging purposes and has valid what they call basic qualities, which means that the prices can be used for reference for other purposes. Then when the Commodity Futures Modernization act was signed a law in 2000, a new process began again as you said, self certification. Basically I go in there and I say, hey, I'm going to start listing this new contract and I warrant and represent it that it meets the core principles. And the core principles are about 23 items. Among that is that the contract I'm proposing is not readily susceptible to manipulation. That's critical. And likewise that there's going to be impartial access to all market participants. I can't give one class of market participants preference over another and I can't exclude any type of market participant potential. And if we get time, I'll tell you how that came up in one of the political event, one of the sports contract cases. So you're absolutely right. That's how it was done. Then when the CME came in to list the bitcoin futures and some other exchanges came in to list bitcoin futures also the CFTC said wait, hold on a second, hold on a second. You know, we need more time to think about this. We need some, you know, there's, there's special risk with coins. We've got to think about this stuff. So you know, I don't recall 100%. I sort of remember they came out with, into some of the advisory one point on how to deal with these kind of contracts. But there was definitely more scrutiny given to the futures contract in the space. You tended not to just go in with self certifications. You tended to talk to the commissioners ahead of time just to make sure they were comfortable. They accommodated. I mean they ultimately accommodated. Obviously they approved the contracts, you know, but there were, there were bells and whistles that you had to apply that you wouldn't do with a Ford Dairy Festival because of what would consider to be the special risks around bitcoin futures. [00:33:27] Speaker B: Gotcha. Well now it seems like that has all kind of gone out the window a little bit. It seems there isn't much like, well, Kalshi is often self certifying a lot of contracts at a rapid clip to a degree that makes me believe that like not much working with the CFTC before self certifying is happening. And I don't know, it's like, it's an interesting flip towards from, from what used to happen and now what, what is kind of the, the norm now. And we heard like Terry Duffy at the round table kind of talk about this a little bit like oh, like this shouldn't happen this way. Like you can't just like take advantage of this self certification in one day kind of thing. And I just find it a very interesting dynamic because you know, when I look at how this is all set up, like this was always there, right? This was not always but like since the self cert process began there was always this like way you could kind of go for it. Right. And now Kalshi's being the one that's like aggressively going for it. And Tarek himself said this at the roundtable that they're you know, quote unquote hardcore about their approach to regulation. But you know, at least it's still regulated. [00:34:51] Speaker A: So and keep in mind, even in the self certification route you still can get pre, you can still request pre approval from the CFTC if you want. I mean it's options. Either you self certify and literally you can trade the next day, you can list your product the next day or you can ask for pre approval. And we're going to discuss later on. [00:35:11] Speaker B: Yeah, for sure. Yeah. We're 30 minutes in. Yeah. Oh yeah, absolutely, we're 30 minutes in. We haven't talked about event contracts yet but I think that's great because this lore is really important and. [00:35:28] Speaker A: Law and the lore, because I'm from Brooklyn, you can't tell the difference. [00:35:34] Speaker B: Exactly. Yeah. That's so funny. So yeah. So when did you first hear about event contracts and what was the early history of event contracts? And kind of like how did we get here now it's kind of the hot thing. [00:35:50] Speaker A: Well it's really. So I'm going to describe it very, very quickly and we've actually touched on some of the points. So the first time I ever heard of an event contract is when I read a no action letter that was issued by the Division of Trading and Markets, the CFTC in 1992 to the benefit of the University of Iowa. The University of Iowa had said, had asked for relief. They had somehow correctly assessed that, you know, they were developing what they called a market, a political contract market. And the purpose was to determine whether markets can aggregate information and predict election outcomes more accurately than public opinion polling. And so they operated an experimental and for academic purposes this market, it was run by universities, by the university and Faculty. There was no effort to make money off of the thing. Number of participants were limited. The maximum investment per individual was limited. But they sort of sensed that this thing might be regulated by the CFT SIP because it had security. Maybe it was a binary option. So it was something that sort of sounded like something under the cftc. And the CFTC basically, okay, if you, if you limited it, as you say, because it's really not for profit, you know. And the product really was related to the presidential election in 1992. The Iowa presidential Stock Market. That's what the market was called. They said you do not have to register as a designated contractor. That was in 1992. There was really no business. Big legal analysis around that in the no action letter. It was just like a page or two of the letter. So you didn't really understand what was going on. But that was really the first thing I ever heard in the end, Coach. And then the next year came and the folks at the Iowa University went back to the C2 and they said, you know what? We want to do more. We don't want to limit ourselves just to political contracts. So let's. First of all, we changed our name. We no longer just the Iowa Presidential Stock Market. We're the Iowa Electronic Markets. You know, we're still going to have bells and whistles. We're not going to make money. We're going to be good folk to almost understand. And we still want to offer some political contracts, but we want to deal with different types of elections in 1993, in 1994. But we also want to have contracts on economic indicators, you know, like economic indexes, cross currency exchange rates. And they also said we want to do a market on earnings which would be based on the earnings of several corporate stocks. Okay, well, the sec. I'm sorry, sec. The CFTC said, okay, we hear what you're doing. You're not changing things radically. We can live with everything you're saying. You can offer this limited market, not for profit, limited access, et cetera, et cetera, et cetera. We'll give you no action in connection with what you propose on the political market, and we'll give you no action on what you propose on the economic indicator market. But we can't give you no action on the earnings market because that sounds like options on securities. Yeah, it's based on. If it's based on. On the earnings of particular securities. That's not within our ambit. We're going to refer that to the SEC and let them decide what they. [00:39:41] Speaker B: Want And I wonder what they said. [00:39:42] Speaker A: Yeah, you know what, I had sort of recalled that I had never heard of what the SEC did. I did a little research, I couldn't find anything. I couldn't find that the SEC ever responded. The CFTC actually wrote a very good letter to the SEC about this. It's like, you know, you should think about this and I won't tell you the gentleman it was addressed to, I, I happen to know the guy, he's a really good guy. But I saw no response officially from the SEC on this matter. So someone from the SEC at that time was podcast call me and tell me if there was ever anything done with it. But anyway, so that, so the market was approved and then re approved for no action release. They didn't have to register a designated contract market and they could offer effectively their predictive markets for political contracts as well as economic invigorating. And they didn't at least do a gather in 1994. And we stopped there because then we start seeing some of the laws change that were relevant to event contracts, although not necessarily particular to a bank contract at the time I mentioned already the Commodity Futures Modernization act of 2000, which changed the nature of how contracts were approved. And after that all happened in 2000, the next time I heard about event contracts was 2008. The CFTC issued a concept release on the appropriate treatment of event contracts. It was again very, very thin document. It was published in the Federal Register. And the CFTC basically said we think that event contracts may be within the CFTC's jurisdiction as something called excluded commodities that wasn't excluded commodity. So as I mentioned before, the whole CFTC was set up to be a regulator of broader spectrum of products, commodities. Well, as part of that, the definition of commodities was a definition of commodity Walker. And the definition of commodity was really, really broad. I know there's a case down in the fifth circuit of Texas now challenging this, but at least all of us who have been in the business forever have regarded almost everything as a commodity potential except for two things. Onions and movie tickets and indexes based on movie tickets. But the definition of commodity is very, very broad. It includes the old enumerated commodities. I told you what those were. Grain, corn, you know, live pig bellies, things like that. And then something called excluded commodities. And what are excluded commodities? Well, definition of excluded commodities is really interesting. It includes an occurrence, extent of an occurrence or contingency that is beyond the control of the parties to the relevant contract, agreement of transaction and associated with a financial commercial or economic consequence. So basically it's plain English please. Yeah, well there's no such thing as plain English. But basically if you have a, there are other excluded commodities too, interest rate, futures, exchange rate, Europe, you know, all these other kind of things that you, that make sense, you know. But then there's this occurrence except extent of an occurrence or contingency, okay beyond the control of the parties to the actual contract. So it means that the people who are trading the product can't have an impact on this occurrence center occurrence and it's associated with a financial, commercial or economic consequence. So it has to relate to one of those three categories. Financial, commercial or economic consequences. Clearly an event contract on you know, whether the CPI is going to go up or down, that's an economic consequence. Right. You know, you know and we'll get into this a little bit later but to me, you know, if you have a contract based on whether a baseball player is going to, you know, hit above or below 300, I am not aware of any professional baseball players that work for free. So I do think there's a commercial aspect and if it's right in here, the category of excluded commodity. So anyway, so the CFTC issued this concept release in May of 2018 and said what do you out there in the industry think about event contract? So again folks are thinking about event contracts now a stupid officially for the first time. And there was lots of response to that. Nothing really happened as a result of that until 2010, two years later. And it wasn't that the CFTC then carved out something particular dealing with event contracts. What Congress did is they enacted something called the special rule and what the CFTC said and this is really a reflection, this was really a reflection on the approval self certification process. [00:45:17] Speaker B: And this is section 5cc 5C. [00:45:19] Speaker A: Yeah, yeah, yeah, yeah, exactly. I'm trying to be generic so not to bore people with the specific. [00:45:24] Speaker B: I'm just trying to impress all my readers that. [00:45:26] Speaker A: I know, you've impressed me, you've impressed me but so basically the special rule says that the CFTC may determine that an agreement is contrary to the public interest. And what does that mean? Well effectively what it says that something is contrary to the public interest if it involves contract and the transaction involves involves activity that is unlawful under federal estate law, terrorism, assassination, war, gaming or other similar activity activity determined by the Commission by rule and regulation to be contracts of public interest. But importantly it didn't say the special rule wasn't that such contracts would be prohibited. It simply said, said that the crtc may determine that such that such contracts or transactions are contrary to the public interest. And then it says if it made such a determination, which it didn't have to do, then no trading in such products could occur. Okay, that's really interesting because that means that the presumption is that even contracts that have these bad characteristics are okay unless the COTC determines they're not okay affirmatively. So that that was, that was a big change in the law and we're going to deal with what that how that was mattered going forward. The other thing that the CFTC did and remember what brought about Dodge Frank, it was the financial crisis in 2007, 2008, when it was discovered that we had the banking issues. And then we also discovered that lots of firms were engaging in swap transactions and basically recording them on the back of napkins, if as much as that. And so there was a big effort to better regulate swaps, bring swaps to markets just like futures contracts were on the market. And a whole regulatory scheme was added related to swaps. And, and swaps had an interesting, had had a definition now for the first time. And basically a, A, A swap meant a bunch of stuff including, you know, certain types of options. But also a swap is effectively a transaction that provides for any purchase, sale, payment or delivery that is dependent on the occurrence, non occurrence or the extent of the occurrence of an event or contingency associated with a potential financial, economic or commercial cost. We heard that phrase before in the definition of excluded commodity. Well now we hear it again. A swap is something that for provides for any one of the definitions. There's other definite other parts too that provide for any purchase, sale, payment or delivery that is dependent on the occurrence, not occurrence or the extent of the occurrence of that event. That word is going to become very critical later on for contingency associated with potential financial, economic or commercial backgrounds. So those are some important changes that occurred by law. About a year later in 2011, the CITC adopted a rule to implement that special rule that we just talked about, Rule 40.11. Boy, you're right on top. You're gonna hate. [00:49:12] Speaker B: I'm the teacher's pet. I have done my homework. [00:49:14] Speaker A: I used to teach derivatives regulation at Brooklyn Law School for about a decade. Yes, you would definitely get an A in my class. [00:49:21] Speaker B: I appreciate that. Yeah. Can I, can I. Yeah. So is this are you. Is the direction you're going with this is like. Especially when you're talking about the word may. [00:49:31] Speaker A: Yeah, right. [00:49:32] Speaker B: Earlier I've heard from. You're not the only lawyer I talk to, believe it or not. [00:49:40] Speaker A: We're like talkers all over the place. [00:49:43] Speaker B: And I've heard kind of like apologies. [00:49:46] Speaker A: To my colleagues in this profession. No, these guys aren't. [00:49:51] Speaker B: I've heard that there's like this kind of a theory, or maybe it is not a theory or it's real or what, but that Rule 40.11 itself may not be legal or like. [00:50:04] Speaker A: Let me jump ahead, okay? No, no, no, no. Cause you're on. [00:50:09] Speaker B: I was the one disrupting class with like my question. But you can like go through the history that you're going to go to and get to that if you want to. [00:50:16] Speaker A: Okay, so I was going to go and talk about political contracts first. First. But okay, I'm going to mention, I'm going to take a slight deviation and talk about the application of ERIS X to list RSBIX NFL futures contracts in 2020. Okay. Because what you just said is, feeds right into that. So In December of 2020, Eris X, which is now part of CBO Global Markets, self certified three financially settled contracts called this RSBIX NFL Futures contract. And you know, pursuant to the special rule, because there was the word, you know, gaming is one of the baddies. On December 23, just a few days after they filed, the CFTC advised ersax that it had determined if NFL contracts may involve or relate to gaming and invoke the 90 day rule. So the, the thing then apparently, you know, meandered around the CFTC for a while and apparently at some point it was communicated to, to ERSX that there, that. That the CFTC was going to take advantage of their right to deny the rule. And that word got out. And so a day before the 90 day period expired, ErasX ended up withdrawing their self certification. In response, there were two statements issued by two of my favorite CFTC commissioners. The one relevant to your point was by Brian Quintess who, who unfortunately, as we know, was recently nominated to be chair of the CFTC and ultimately withdrew. [00:52:10] Speaker B: And he famously wrote a memo called Any Given Sunday. [00:52:13] Speaker A: Yeah, yeah. [00:52:14] Speaker B: Or not so famously, but he was a great writer. [00:52:16] Speaker A: He was a great writer. Yeah, I loved it and I always chuckled when I read his views. Not because. But he was very smart. He was very smart. But he actually said the law, first of all, he said the law is unconstitutional. The special rule itself is unconstitutional because under the law the CFTC has unfettered discretion to deny contracts based on a public interest determination. But public interest was not a defined term and the CFTC was saying informally that, you know, it was, you know, you have to show that, you know it's valid, the hedging. And you had to show it was valid for a price basing. But that requirement was eliminated in 2000. Okay. But the CFTC was still applying it because of this, of the special rule. So he felt that the law was unconstitutional in space for vagueness. He also claimed, to your point, big shot 40.11 was invalid. And he claimed because it reversed the presumption of the law. The law basically said that all contracts, even including all those bad elements involving those bad elements were presumptively okay. Unless the CFTC said maybe not. Okay. [00:53:39] Speaker B: Yeah. [00:53:39] Speaker A: Okay. The law said the opposite. I'm sorry, the rule that was Britain said the opposite is that all these are prohibited, period. [00:53:49] Speaker B: Yeah, it just used. So this is my understanding of what happened. 5cc 5c writes these things are not allowed more assassination. And then, and then it may be blocked. And then 4811, which is the rule, which is not the law. It's like different. It's, it's something that CFTC can just. [00:54:07] Speaker A: Well, CFTC's law. [00:54:09] Speaker B: Yeah. And, and so then they used the text, they like copied and pasted or copied the homework of the 5cc 5C and then said we're going to block all these. But that's not what 5C 5C actually said that they could do. [00:54:24] Speaker A: Correct. [00:54:24] Speaker B: Do I have that right? Putting it in like, I think you're layman's terms. [00:54:27] Speaker A: You're absolutely right. And that's exactly what Brian said. Brian said that it's a big problem and the law is unconstitutional and the rule violates the law. So, you know, he was, you know, he was pretty angry, by the way, Dan Berkovitz. And it was amazing because remember, Brian was nominated by a Republican president, Dan Berkovitz was nominated by a Democrat. You know, he also wrote a statement, you know, his was a little bit more, less broad in its point of view. There had been a law for a long, long time, you know, known as PAPSA PA S P A which basically said that states couldn't enable, couldn't enact laws that allowed gambling or betting on sports events with exemptions to states that were already permitting it, like Nevada in 2018. That law was knocked down by the Supreme Court. And so Dan pointed that out in his statement and he said, listen, as far as I'm concerned, because of that, if ERIs acts could show an economic purpose, meaning it has a potential for bona fide Hedging. And it has a purpose other than gaming itself. It would not be kind of traded public interest. His complaint was Erasex didn't do that, but they could have, and that would have made the contract okay. He also said another problem with the RSX proposal was that it barred retail persons. And he said you can't do that in corporates. You have to have equal access. That. That's one of the key core principles. So he also said that I would have probably maybe come out, you know, I don't know. [00:56:29] Speaker B: Can I pause you? Why would Aero sex. Why would they do that? That feels like shooting themselves in the foot. Like, why would they block retail from it? Of course retail wants to battle. It's the NFL. Yeah. [00:56:42] Speaker A: You got to talk to the folks over there. [00:56:44] Speaker B: But my guess is that they did it because they thought it would make it more okay. Or the bone. [00:56:50] Speaker A: I think they were trying to. [00:56:51] Speaker B: Yeah. [00:56:52] Speaker A: The folks who really could benefit from the contract, like, for example, the guys who sold hot dogs, like Jerry Jones. [00:56:58] Speaker B: Like the owner of the. [00:57:00] Speaker A: Yeah. So to buttress the claim that it was. Was a hedging vehicle, you know. But anyway, my guess is that those are the kind of things that, you know, could have been discussed internally. That was the premonition of the commission at the time. But it was interesting that even though there was no official denial order issued in this case, because ERIS X was. [00:57:25] Speaker B: Their application, there's two separate comments on it. Yeah. [00:57:28] Speaker A: Writing effectively dissents to an order that's not out there. Wow. [00:57:36] Speaker B: That's funny when you put it like that. Yeah. And so they withdrew it. And then. So we never got an official. We got opinions of. Yeah, we got the opinions of two officials. [00:57:46] Speaker A: Yeah. [00:57:46] Speaker B: That's not the same thing as an official decision. [00:57:49] Speaker A: Not at all. [00:57:50] Speaker B: So now how did we end up here? [00:57:53] Speaker A: Am I allowed to talk about. [00:57:54] Speaker B: We'll cut. We'll cut stuff out if we need to or whatever. Let's keep. We're getting to the good part. [00:57:59] Speaker A: We're getting to the good part. Let's talk about some more action in the political contract space. [00:58:04] Speaker B: Yeah, sure. [00:58:05] Speaker A: Okay. So the next time. So remember the last thing we heard. We know about the Iowa exchange and we know that. We know that this concept release. We don't hear again about event contracts until 2011. Okay. What happened then? NADEX, you now know, is crypto.com, but it wasn't then NADEX self certified political event contracts in December of 2011, and they were denied approval on April 2, 2012, after the 90 day review why? Because according to the CRTC, political event contracts involve gaming and are contrary to the public interest. And they said that the economic purpose test, which again remember the way the COTC applied it that way, was told not necessary in 2000, but they were still doing it in 2012. The economic purpose test calls for evaluation of the contract's utility based on their ability for hedging and price basis. And this is great. The COTC said because of the unpredictability of the specific economic consequences of an election means that the political event contract cannot reasonably be expected to be used for hedging purposes. That was the basis to deny NATO's political event contract. I am personally not aware of any contract out there where you know what the result is going to be in advance. So why they picked up the, why they said that, you know, we don't know how elections are going to come out, so therefore what's the use? I mean it defies expectations. I mean that's, that's what hedging is all about. Yeah, exactly. Hedging. Not because you know with certainty what the markets are going to do. You hedge because you know what you need to do. And so you take a position effectively opposite that in the markets to protect yourself. But here the fundamental reason why markets exist was used against Natick to deny their political event contract, which I, which, which, which to me makes makes no sense. That's true. 2011. That's 2011. We meander forward slowly. Okay, we mean to pursue slowly to 2014. Then some folks from Australia, our good friends down under Victoria University of Wellington requested authorizations to operate a not for profit market for trading within contracts accessible by you US persons. And they applied for no action release just like Iowa University. And they said our markets are going to be just like Iowa universities. We're only going to trade two submarkets, political events and economic indicators. And we're going to have, we're making the same kind of representations. We're going to limit the number of traders, we're going to limit the amount of money people can put up. We're going to have limited advertising, we're going to use a, a third party, this company called Aristotle International to do our KYC kind of stuff. But effectively we're just IO exchange all over again. And the COTC say okay, we'll buy it. I mean, you're right. Just sounds like Iowa University. God bless you. Go forward. Eight years later, the CFT says we're withdrawing this no action letter from, you know, eight years earlier, 4-4-2022, the CFTC says the University is not acting in accordance with the commitments made in the NAF in a no action letter and therefore it must liquidate or close out all contracts by February 15, 2023. You go back and look at the no action letter withdrawal, it's very, very bare bones. Like what did they do wrong, you wonder? Well, interestingly, so are the users. So they immediately filed a suit. You know, as I said, the nal, the no action letter was withdrawn in August. They filed a lawsuit in September. And they basically say we want a preliminary injunction against the cftc, you know, shutting down this market which we're relying on. There's no decision, the court doesn't issue a decision. So the users appeal what they consider to be an effective denial of the request for injunction by the district court and the CFTC moves to dismiss their appeal. It's denied. Okay. The CFTC then withdraws the withdrawal letter. Okay, so there was the original letter, there's the withdrawal letter. The CFTC withdraws the withdrawal letter and simultaneously provides a new letter that basically says you're done, you're done. We're not. You can't rely on our although action letter. But they do articulate some specific issues. They talk about the fact that the platform is no longer operated by the university, but by this company called Aristotle which was supposed to just be doing kyc. They talk about the fact that a subsidiary of the University of Melbourne has been receiving compensation from Aristotle. And they talk about that the platform is now listing contracts way outside the city scope of the original no action basically, you know, some contemporary event kind of things, not just economic indicators, not just political stuffs. [01:03:59] Speaker B: Yeah, like how many times will Donald Trump tweet this week? Yeah, you know, was. Yeah, yeah, maybe a political event, but. [01:04:05] Speaker A: It may be a political event. Probably is. Anyway, so, so that, now that, that, so the, the, the, the court of Appeals now gets their act together and they enjoined the CITC from closing the predictive market from, by February. So this is, this is by the following February they issue a warrant. This was in May of 2023. And they issue a more robust, they issue a full decision a couple of months later in July of 2023. And they basically say that what the CFTC did, even in the withdrawal of the withdrawal letter, but with new withdrawal, new cancellation terms, is final agency action and absolutely, it's appealable. Okay. So they knock out One of the COTC's a big claim and they say, by the way, you're withdrawal withdrawal letter violating a prior order that you couldn't cancel this contract because effectively you are canceling this contract, even though you're being nice and saying, oh, by the way, University of Wellington, if you want to tell us that you have concerns about what we're doing, let us know. So, you know, the, the court is not, not very happy about that. And, and they say that even though the new letter gives lists your right to sort of write back to the CFTC and say what you think is wrong, that's not the process you need to follow when you want to cancel someone's license. And they said effectively, well, University of Wellington had an effective license to do what they were doing. The CFTC didn't give the University a chance to really reflect what, what they were charging, nor did they give them a chance to correct what they thought had gone wrong. So what happened after that? Well, long story short, you know, ultimately the CFTC decides not to go forward with their appeal to settle. Yeah, well, they don't really settle. They really just say we're not going to, we're not going to do this appeal anymore. We drop our appeal. They issue a new no action letter amending the original no action, not the withdrawal of the withdrawal letter. [01:06:33] Speaker B: Yeah. [01:06:34] Speaker A: And allow the, the entity to operate. They allow Aristotle to be involved. And then in last month, last month, this new, this facility known as Free Predict it now, by the way, it was known as Predicted back then, also received the DCM and DCO license. And. [01:07:00] Speaker B: Yeah, which I, which I think is like, I mean, what a story. [01:07:05] Speaker A: Right? [01:07:05] Speaker B: Like you start off with the no Action letter and you kind of do your thing for years on multiple election cycles, then it gets yanked because, and like in Quintenza's own word, according to John Phillips himself, like Kuten said, there's other people trying to do what you're trying to do and they're using, implying that the existence of Predict it is making their case stronger. So we want to end Predict it to make their case weaker. [01:07:29] Speaker A: Right. [01:07:29] Speaker B: And to go through all of that and to then now end up with the Holy Grail, the DCM and the DCO combo, it's just like this incredible fall from grace and then rebirth. Like a Phoenix story. At least that's how it feels to me as a, as a nerd. Maybe not to anyone, but I think it's incredible. [01:07:49] Speaker A: Yeah. [01:07:49] Speaker B: So let's talk about sports. So we, we touched on it a bit earlier with the Quintenz letter. Any given Sunday, what Air sex tried to do. And now we're here in your opinion. One, how did, how did we get here? Just high level. Two, like, what's going on with preemption is, what do you think is going to happen? Is it going to go to the Supreme Court? How Supreme Court rule. What's your, how do you handicap this? I, and I know every time I ask any lawyer to like, what's your price for this? They're like, I don't, I'm not a, I don't care, like, whatever. They don't give me a price. And I'm like trying to, you know, if you could be so racist to handicap, what do you think will happen? And will it go to the Supreme Court? What will happen in the Supreme Court? And then perhaps, you know, even, even higher level, like, what this means for event contracts? Like overall, like is anything game now? [01:08:46] Speaker A: Sure. And just for the record, you know, if anybody in the audience wants to know about, you know, the excitement of polymarket or calcium connection with political contracts, we can discuss that offline. But those are interesting stories too, the sports. I mean, first of all, I'm a big believer in the exclusive jurisdiction of the CO2C. As you said, history doesn't repeat, but it sure does rhyme. And I'm not sure the gaming rhymes with gaming, but you know, the history of the CFTC was that it was under the gaming statute. How ironic. Now, you know, what is it? Almost 50 years later, the states are now saying, oh, by the way, you guys need to comply with our gaming statutes. We don't care about CFTC troops, but jurisdiction, we've come full circle, okay? And you know, I, you know, my, my personal sense will be, I like it that exclusive jurisdiction means something. Okay? Exclusive jurisdiction means something. The problem here is you have a very interesting case now where you've got two opposite decisions in sports contracts by the same judge. [01:10:01] Speaker B: This is, please explain this to me. How is this Boxman? He has changed his mind, I guess. [01:10:07] Speaker A: Like as he changed his mind. I mean. Yeah, you know, when the, the Nevada Gaming Commission went to Cal State, the Nevada Gaming Commission went to Kalsi and said, hey, cease and desist with your. By the way, it's not just sporting event contracts, but political event contracts too, because they're gaming and you better comply with our gaming licensing requirement. You know, the judge did the right analysis in my beard of preemption and he basically said, no. CFTC got pretty strong authority. It's pretty clear under the Commodity Exchange Act. It's pretty clear from the debates leading up to the Commodity Exchange act that the CFTC was meant to have exclusive jurisdiction in this space. Okay. And if the damn kind of. [01:10:51] Speaker B: Sorry, let me pause you. This space meaning any contract that happens to be traded on a designated contract. [01:10:57] Speaker A: Correct. They didn't. [01:10:59] Speaker B: Yeah. They didn't say like Congress didn't say we want all sports gambling to be or sports betting to the exclusive directors. [01:11:07] Speaker A: Yeah, futures contract to be. [01:11:08] Speaker B: Yeah, exactly. It's not about what. It's really not about what the thing is, it's about where it's happening. I think this is like a truly people are missing the point about this lawsuit. Right. Like and. And when people especially my God, sports gambling, Twitter insane like people are really vitriolic and very hateful towards me just because I guess I'm a torchbearer for prediction markets or whatever. [01:11:35] Speaker A: Because you're a nerd and you know. [01:11:37] Speaker B: Yeah, it's. They want to put me back in. You know actually there is, this is a total aside, but there is like a representative of a tribe who's like time to stuff these nerds back in the lockers. And I was like, this is like crazy. [01:11:48] Speaker A: But. [01:11:49] Speaker B: But yeah, the point is it's like there's so much the emotional knee jerk reaction is like this is sports betting. This is gambling. States do gambling. So it's like. But it's not the fact that it's not about sports at all. [01:12:00] Speaker A: It's really about as neither with sports at all jurisdiction. Anyway, so. So Dr. Jekyll and Mr. Hyde. [01:12:06] Speaker B: Yes. [01:12:08] Speaker A: So Dr. Gordon and Mr. Gordon. [01:12:11] Speaker B: Yeah. [01:12:11] Speaker A: Dr. Gordon said pre eption raised when the case was against Kalsi or Kelsey brought the case. When Crypto.com brought the case, he said well, I've had new thoughts. We're not talking about a swap. So therefore it's not a swap trading on a designated contract market. It's something else. And therefore the CFTC does not have exclusive jurisdiction because the CFTC exclusive loose. Jared Thickness only goes to futures contract and swaps that are traded on dcms, not some other contract. Now why did he say a. He didn't even think about it. He didn't even address this issue in, in the Kali she case. But in the crypto.com case he did. And why did he. Why did he say that? Well again, let's go back to that definition of a swap. A swap is something that provides for any purchase or sale, payment or delivery that is dependent on. Listen carefully. Occurrence, non occurrence or the extent of the occurrence of an event. He said there ain't no events in these sports contracts. [01:13:18] Speaker B: Now yeah, he Said some like really confusing stuff about the word occurrence. [01:13:24] Speaker A: Fairness. Yeah, he picked out, you know, a couple of, a whole bunch of dictionaries and he said, oh, yeah, you know, an event is. In old days, an archaic definition of an event involves an outcome. But that's an archaic definition, he said, so let's forget about that. The current definition of event, or at least the definition of the event at the time that the CFTC adopted special rule or definition of swap was, was not something that, you know, was not happening, was not an outcome. Wait, hold on a second. Did you just say. I don't, I don't follow an archaic definition? Archaic means it used to be, you know, I don't know about a lot of folks, but when I was a kid, okay, I rooted for the Mets. I had no choice. My dad refused to let me root for the anchors. I had to root for the Mets. Okay. And to me the event was because the Mets were so bad, I think what, they lose 120 something games their first year. It was an event that they won. That was an event. He's telling me that was an event. I didn't want to go see the Mets lose. You know, I want to see the Mets win. That was the event. But he using this, this bunch of definitions and ignoring what he considered to be a cake definition event, saying no event existed. So therefore, since no event existed, and he also claimed that no contingency existed, that. Because he saying that crypto.com didn't even discuss the contingency issue with a Laguna, which I don't understand the problem with that. But in any case, he said because of those two things, it's not a swap, therefore no exclusive jurisdiction. Therefore I deny Crypto.com's request for any Jones. And by the way, he says in a footnote, I'm not even going to deal with the second part of that test, which it has to deal with the financial, economic or commercial thoughts he doesn't deal with. [01:15:29] Speaker B: Okay, that's pretty convenient. [01:15:32] Speaker A: Well, yeah, so we don't have guidance, but again, as I said before, very few MLB players work for free. Yeah, I can't think of one. So, you know, that's where it is. Ironically, there's. There's sort of four decisions out there right now. There's a district court in New Jersey that actually sort of agrees with the first approach of the honorable Judge Gordon. And then there's another decision in Maryland that all that takes a contrary position also, but not because of the swap analysis, but simply saying that, you know, historically State tests have, have been. [01:16:15] Speaker B: This is the presumption against preemption thing. [01:16:17] Speaker A: Therefore, you know, there's no preemption here. There's no, no, no field preemption. And you know, since that time, New York has gotten into the fray. [01:16:26] Speaker B: We haven't, it's getting crazy. [01:16:28] Speaker A: We haven't heard it. [01:16:28] Speaker B: Well, so now, now like let's, let's do what we're all here for is predicting right forecasting. And so do you think this goes to the Supreme Court? [01:16:39] Speaker A: Yes. [01:16:39] Speaker B: And if it does, what do you think? It happens. [01:16:41] Speaker A: Very interesting, you know, because you got loafer bright out there, you know, which really shows that Congress isn't really keen on agencies determining what their own jurisdiction necessarily is. [01:16:56] Speaker B: So the judges get a lot more say in how to interpret these. Everything that we look at high level, that's what local grade is about. [01:17:03] Speaker A: De novo by the judges. Yeah. You don't give what they called Chevron deference to entities anymore. So. [01:17:11] Speaker B: Yeah, also de novo means like with fresh eyes or like a fresh look. [01:17:15] Speaker A: Yeah. Again, man, you just went from an A to an A plus. [01:17:19] Speaker B: Thank you. You know, you know, someone told me like I should consider going to law school. I'm like, no, this is fine. Just blogging about it. Consequences, no. Tests, no. [01:17:32] Speaker A: So, so the court will go back to the law. And now we go back into Brian Quinten's land. Is this law unconstitutional? Because on its face, it talks about public interest. It clearly has. The idea of public interest has clearly been misapplied by the CFTC since 2000. I think there's a very good chance they, they knock out the special rule, period. And now you're back to, you know, clear preemption. And I don't know, you know, it seems pretty clear to me. [01:18:11] Speaker B: Well, hold on. So this is so, so the special. Well, what does the special rule have to do with like the states don't care about 5cc 5C. [01:18:24] Speaker A: They don't. They really don't. But I'm just saying in the whole analytics because I doubt, I don't know what's going to be looked at by district. Remember the calculation, the Nevada Commission, by the way, Nevada is reconsidering now their original Cal State decision they've been asked to do. And Nevada is going after these folks for both. I mean with cryptoc.com it's just as far as I remember it's just sports contract but with Kalshi it was sports and political events. So, you know, it's hard to imagine, you know, some aspect of the special rule isn't going to go up. I do think the exclusive jurisdiction of the CFTC is pretty clear from the beginning of time. Otherwise why would there be a cftc? That's why I'm saying the whole reason the CFTC was created and the Commodity Exchange act was modified in 1974 was to give this exclusive jurisdiction. Now, Judge Gordon does present a good argument. He does say, listen, if event is as broad as you think, okay, if it includes happenings, okay, arguably, then even the betting without being a swap constitutes a swap, okay? And therefore should be traded on a, on a designated contract market. And, and, and, and therefore it's just too broad. You know, I'm sympathetic to that, you know, but the opposite is also problematic, you know, so, you know, maybe we do have a mess that has to be cleaned up, you know, by, by more federal legislation. But to me, you know, these, these event contracts, no matter what their underlying is, if it references within, if it's a swap, because it references event. And I believe event has to be looked at broadly and it relates to something that's commercial, and I do believe sports are commercial. I think it's pretty clear that the exclusive jurisdiction of CFTC applies today, just like it did when Olo stays true challenged the CFTC jurisdiction back in the 70s and early 80s. [01:20:37] Speaker B: So have you looked at the. I mean, I'm so. Thank you for your point of view. I just. If you looked at the point of the. Sorry, have you looked at, like, how these justices on the Supreme Court have, have previously talked about preemption and like, what do you think they're going to think about this example and actually, Gary, before, let's pause you for a second. I think this will probably be the last thing we talked when I asked you about what you think the justices think about preemption, what you think it's going to happen in the Supreme Court. [01:21:06] Speaker A: But I do want to talk about some of the recent scandals, how that might impact the world. [01:21:13] Speaker B: Oh, okay. Yeah, we can do that too. [01:21:17] Speaker A: So, okay, so maybe you divide this into two parts. [01:21:19] Speaker B: Yeah, I was thinking maybe I'll do that. I'll figure it out. Don't worry about it. I'll figure that stuff out. So, okay, so this is your point of view on, like, how you feel about how exclusive jurisdiction matters. What do you think the Supreme Court will think? Because if you look at the background of these justices, a lot of them have a history of ruling in preemption cases, ruling against the federal government. But my impression of this, after having talked To a lot of lawyers and research with this is that like preemption is one of those legal doctrines that, where previous rulings on preemption is not necessarily a great predictor of future returns. I mean, future rulings on, on preemption. So I was wondering, is that much of a signal what do you think these judges are going to come, where do you think they're going to come down on this particular issue? And is this one of those times where, look, the law says this and the justices are going to think this is the law we can't just overturn like the cea. [01:22:21] Speaker A: Right. So the, the issue again. And I, I, I, you know, I hate to sound like a lawyer, but I can't tell you how this review of justice is a rule. But let me read you a paragraph. I referenced this case, Payne Weber in Northern District of Alabama. [01:22:35] Speaker B: Yes. [01:22:36] Speaker A: From 1981, where the state of Alabama tried to rely on its, on its gaming statutes to go after a, something that the CFTC thought they had preemption over. And they talk about the fact that the conference report on the final bill, which is the Commodity Futures trading Act of 1974, stated that the Commission quote, would preempt the field insofar as futures regulation is concerned. And it goes, although there is no federal interest in whether a state prevents fraudulent commodity transactions thereby. I told you, if something is fraudulent and it's off the exchange, it's, the states are free to prosecute it. There unquestionably is a federal interest in whether a state brands commodity transactions as gambling and effectively bars those transactions on federally regulated exchanges. Okay. And we've come full circle. The CFTC was established and the Commodity Exchange act was enacted in 1974 expressly to sort of get all derivatives exchange trader derivatives trading under the CFTC because that was considered to be in the national interest. It was considered critical, okay. To ensure viable and fair markets. So it would be very difficult, I think that the Supreme Court, looking at the legislative history, the transition of the oversight from the Commodity Exchange Authority to the cftc, the amendments, the drastic amendment, the clear drafting of this exclusive jurisdiction provision and saying, never mind, they would just. [01:24:20] Speaker B: Yeah, I mean, think about the implications if the implications of like letting the state of Michigan or the state of Texas or the State of New York like tell the CFTC what they can and can do. I mean, suddenly you have like 50 different CFTCs, right? [01:24:33] Speaker A: And this is why I was so angry when the CFTC issued that advisory a couple of weeks ago about event contracts saying, hey, by the way, you know, while we're away and the government is closed, you guys should be thinking about the fact that sports contracts may be subject to all sorts of problems and you better have plans for that. I, I mean, first of all, every exchange has to have plans for all sorts of occurrences. I'm not sure why sports contracts were singled out. I'm not aware that either calci or crypto.com were ever told by the CFTC, you can't list sports contracts. And to me, if the CFTC allowed it, therefore now you're in that special bucket stranding on a DCM and you're within equal jurisdiction. Okay, so I think I surprised by that note. [01:25:24] Speaker B: My interpretation of that guidance that was issued internally was that like, hey, there's a chance that a judge might come down and say, okay, Kalshi can't be trading in California anymore. [01:25:38] Speaker A: Right. [01:25:39] Speaker B: And then, and then if that happens, even though they don't necessarily agree with that judge and that, that really would be problematic in its own way. The CFTC has a rule where you, you have to let everyone trade it, but in this case, let's not enforce it because it's not Kalshi's choice to not trade in California. Some judge told them that they can't do that. And so that's, I think that was the purpose of the guidance. But like, it's like also kind of. I agree. It's like have us like have a spine. Like, these are, this is your thing. This is happening under your watch. Why don't you say anything? But it sounds like they're kind of in this way. [01:26:13] Speaker A: Let's see. Our view is that sports contracts are permitted. There may be folks out there who disagree. I could have thought that I could have lived with that. I thought the way written was very, very passive. [01:26:27] Speaker B: Yeah, yeah, but. Okay, so then how do you think the, you mentioned that you want to say something about like the recent scandals that we've seen in sports betting and how that affects what is happening here. [01:26:41] Speaker A: Yeah, I mean, listen, I think it's very, very interesting now that we, we have, we have problems with Major League Baseball. We've got, you know, two players in the Cleveland Guardians that have been suspended because of their participation in events that, that may have helped folks, you know, who gamble. We have the episode last week involving the National Basketball association where a current coach, a current player and a past player. [01:27:09] Speaker B: Yeah. [01:27:11] Speaker A: You know, we're all, you know, alleged to have been involved in schemes that help gamblers. You know, we have, there was a letter by A bunch of senators, you know, to the CFTC sort of saying, you know, what's going on here in sports contracts. It's hard to imagine that when the new chairperson of the cftc, if it is Mike Selleck, steps into his office, the first issue he has to deal with is not crypto but is event contracts. Remember there was supposed to be an open forum this year in April on event contract. It didn't happen. It was canceled. The quote was ever efficient schedule. The CFTC in 2008 had talked about the need to clarify. I'm sorry, 2011 had talked about the need to clarify gaming and there was all these obviously controversies going on with the various states. It's hard to imagine that there will not be some kind of activity that comes out of all these events and relates both to, you know, regular game. I mean, hey, listen, just what. Yesterday the FCAA reversed its prior inclination to allow college persons on teams to, to bet on sports event. It's, there's a lot of stuff coming to a head at this point and, and there's going to have to be some kind of resolution and so we'll see where it is. I mean I think it will be a market for oriented response. I don't think there's bans in play. There may be some more bells and whistles attached to things. Cautiously optimistic, but the CFTC is not going to stop these kind of contracts and they're going to fight their preemption authority. I hope so. You know, but, but we'll see. But there's a lot of stuff happening that can't be ignored that's going on in the, in the sports betting business. You know that that's putting some shadows on the tippity and it's hard to imagine there won't be some kind of response. But keep in mind it was the FBI that dealt with the last issue. It was a federal regulator. The problem was considered to be national. Okay, if you start having this done state by state. [01:29:38] Speaker B: Yeah, it was the, yeah, look, it was the coach in one state, state and the player in another state. And you know, maybe that's an argument that this should be happening under. [01:29:46] Speaker A: CSA already has a prohibition against, you know, against, you know, training on, on material non public information as a result of Dodd Frank provisions and a rule they adopted. You know, the number of that rule 180.1. [01:30:02] Speaker B: No, you got me, I, I got that question wrong. [01:30:05] Speaker A: So, so there's also. So the CFTC already has an infrastructure to deal with the kind of issues that have emerged in the latest scandals and you know that because there is a comprehensive regulatory scheme dealing with the trading of of derivatives based on commodities on platforms and you know to me that that sort of supports why the CFTC should be the you know should be allowed to regulate the space on a preemptive basis. [01:30:34] Speaker B: Yeah, absolutely. Well Gary, this has been incredible super informative and history lesson about what's going on here. I think like this kind of thing is so crucial Having the context, having the expert weigh in is really important to like help conceptualize this this issue that I think is very emotional for some people and very knee jerk so I really appreciate you taking the time and it's been an absolute pleasure yeah. [01:31:05] Speaker A: It'S been a pleasure to talk to you. I'm sorry we got sort of sort of erratic in our direction at the end. [01:31:11] Speaker B: No great that's points absolutely yeah and maybe I'll fix it in post. It's okay.