Everyone Wants a DCM. Why Is Kalshi Still Losing? - DEX in the City

Transcript

But look, we can't not talk about Kelshi this week. We just can't not talk about it. And to be clear, Kelshi's not crypto, guys. Okay? But obviously, it's prediction markets. It implicates crypto. So, we need to talk about it. Now, we thought on this topic, we'd cover two quick things. The KI latest developments, and then a very quick explainer on what a designated contract market is and why everyone's obsessed with them. because Kelshi is a CFTC registered designated contract market or DCM and so is every prediction market that's operating in the United States and now every PERPS exchange. So again, DCM's so hot right now. But look, we talked about Khi in Michigan a couple

weeks ago. Khi in hot water with Michigan. Michigan forcing Khi to unwind sports contracts. This latest development is out of the great state of New York where a district judge not only denied Koshi's request for a preliminary injunction that would have prevented New York from enforcing its gambling laws against the sports contract. But basically after that decision, New York doubled down and filed a civil enforcement action against Calshi. So, super quick, a preliminary injunction. We tal talked about this before, but that is a mechanism to say, "Hey, you can't do anything while this case proceeds." Like everything needs to pause. No bad stuff can happen on either side, but usually one side brings it to

prevent bad stuff like a civil enforcement action until the litigation progresses because litigation can take years. This litigation will definitely take years. Okay, so Cali's getting beaten up by New York. This allows New York to continue treating Kouchi sports contracts as illegal gambling. Why? While the litigation proceeds. Why is this really important? Why are we talking about it? Because there's so much litigation surrounding the prediction markets. We could talk about this on every episode. I'm sure there's multiple prediction market podcasts.

There's probably a prediction market litigation podcast. This is important because Koshi's preeemption argument has failed. They made the argument that New York did not have jurisdiction over their sports contracts and the CFTC has jurisdictions instead. This failed and this was a pretty big pretty firm decision. Okay. The judge was unconvinced that Koshi was likely to succeed on that theory and this judge found that state gambling regulation remains an area of traditional state authority and the commodity exchange act doesn't preempt New York's gambling laws. This is a jump here for a second.

>> Yeah, please. >> Like play out what's happening across the entire country right now because we're focusing in on New York because it's sort of crazy what's happening there. One, it's an important market, but two, there's like a federal entity and a state entity sort of on opposite sides of an argument and this company caught in the middle. But right now, and it might have changed because it's changing all the time, but the scoreboard is looking really ugly for sports prediction markets, it's something like they've lost 19 of 23 of the rulings. Now, this isn't the end of the case, but if you look across all the cases that are in in pendency right now and at different stages,

the governments at the state level, usually gam uh gambling commissions, gaming commissions, um where it's a little bit different in New York, but they're winning. And so, we all talked about what's going to happen with the Supreme Court. It's probably going to end up there. And this New York case might be the one that sort of pushes it towards that finally. >> Although I would caveat that a little bit, Jesse, though, because the third circuit has ruled for Cali, the first federal appeals to weigh in. And so, as a refresher to our non-legal listeners, there's state courts down here. Then there's circuit courts, the federal court. So, it's like a triangle. And then there's the Supreme Court. So what the f if the federal court does

something it completely preempts what the state courts do. So >> depends depends it depends on the type of issue for sure >> as long as it addresses exactly the same issue in the same case. But frankly we are all just waiting like it's like we're watching the opener to a concert. We're waiting for the headliner to come on. >> We're not very good these openers. >> The openers are annoying and stressful and >> get on. I'm glad I'm not on the couch legal team. Like I guess if you want some trial experience, you'll joy legal team. Like okay. But uh look like all of this is happening. This is all going to end up at the Supreme Court. [snorts] It is absolutely I mean I don't like to use

absolutes. I am a lawyer. [laughter] But we are at the point where this is pretty absolute. Okay. And why? because in part when there is a split that makes it ripe for potentially obviously circuit court review which we're already seeing like this New York issue and and what's really interesting is although the prediction markets have lost in a number of states and this is not just Koshi other entities are involved you know Coinbase and others are involved in this litigation but you also have a situation where very recently New Jersey right across the way actually disagreed with New York. So this is a mixed record. This is create this creates a

split which means this is hyper ripe for a higher court to take this on. That being said, this decision probably will embolden state states other states to kind of file and be more aggressive. And for Cowshi, the appeals were will continue. They actually sought emergency relief, but it was denied. They have to wait for the second circuit, the next court to take this up. And in the meantime, they have to fight they have to fight this civil enforcement action which is seeking in order stopping Koshi from offering these contracts in New York and penalties and disgorgement and all these >> well not just New York right they're asking they're trying to shut it down nationwide aren't they >> like the New York AG I thought that's what they're asking for

>> well the New York does not have power to uh shut Kashi down full stop in other states because state jurisdiction New York and the New York AG and the New York con and these New York um state gambling regulators have authority over New York customers. So they have the authority the basically you hit the border of the state that's where the their authority ends. Now arguably they could try to inflict collateral damage on Khi that could impact their ability to offer contracts uh beyond New York, but New York likes to be the most aggressive state version of Team America World Police. but their jurisdiction is limited. And it's funny because the same

argument that they're rejecting on the basis of the CFTC limits their own state jurisdiction. So >> yeah, >> it is what it is. But but basically we're at this place where Khi needs to like needs to decide whether they're going to keep offering these products and keep fighting whether they're going to geoence New York or whether they're going to negotiate with New York. And there has been some rumor that they were already negotiating with New York, but negotiations broke down culminating in this. Then now New York is obviously going to be greatly emboldened by this pretty determinative lawsuit.

>> And am I right that like the Supreme Court could potentially weigh in sooner than that if Khi files an emergency action with them? >> Yes. >> So that could happen like any day now. >> Not any day now. Do they have to wait until like a >> Well, it depends on which case they're filing it in. Like Koshi could pretty much do that. I don't remember the exact procedural status of different cases across the country, but depending on what has been ruled on in in different courts. You can go directly to the Supreme Court. The likelihood of them accepting it is obviously the issue here. And you know, we've talked a bit about the shadow docket before, but um it sort of depends on the timing and the

schedule. And it's also strategic on Koshi's side because you don't want to ask for it too soon either. And I'm I think this is only going to get more complex because remember this is sports. like we're just talking about the sports event contracts here with all the litigation at the state level and you know with the American Indian statute um across the country. There is so much more going on with prediction markets too. And I think Robin Hood came out this week or last week about how it's now making more money from prediction markets than from its stock portfolio and other things that it is doing. And Robin

>> in crypto. Yeah, >> if you're on it. Oh yeah, and crypto. Yeah. >> And so that component of it, more and more players are going to want to get into it. And at the same time, there's all this other controversy happening with prediction markets. The election manipulation in California that like I'd love to get Catherine's input on because it's pretty troubling. And then also there's been some new markets about wildfires and so they're trying to stop that because of all the people and animals and wildlife being destroyed by these fires and while people are making money on that. I mean >> that's a really scary

>> stomach sick. >> That's a really scary one. But at the same time you also understand why people might want to try to hedge their wildfire risk because they can't get insurance because of wildfires. You know, it's like people in Florida that are trading on prediction markets to hedge their flooding risk because they can't get flood insurance. So, that's a terrible situation with with no easy answer. On the Supreme Court point really quick. >> So, Couchik is not going to get emergency relief from the Supreme Court in part because someone can apply to the Supreme Court circuit justice. This case is currently being heard by the second circuit, but they've been denied emergency relief by both the district court and the second circuit. So like

the the chances of that happening is non-existent. The other thing someone can do, and this is not a prediction, Mark is saying, this is anyone, they could ask the Supreme Court to hear the case before the second circuit issues a final decision by filing a petition um for searchy before judgment, which is the fastest route. But the court only grants those petitions in cases of imperative public importance. So the best example is like the Watergate stand scandal with Nixon or election uh issues that I mean that's imperative public importance like who is the president?

Not can people in New York gamble. So I think the chances of that the Supreme Court hearing this sooner than throughout the kind of natural progression of the second circuit, third circuit, which we're talking earliest 27, likely 28, that I think that's what we're really going to see this come to a head. But really quick before we move on, I did promise a quick point on DCM. So this is dry, but at the same time, I cannot tell you guys how much people ask me about DCMs. like random people all the time and it's it's a few different pockets. A it's lawyers trying to get up to speed on all things CFTC because all of a sudden the CFTC is important. B it's builders who want to build

prediction markets or per stexes and are like how do I list these in the US and then I have to explain that they need a DCM or three builders that are looking to acquire a DCM because they're so hot. So they're like can we shortcut this acquisition process? So, super quick, a DCM is a designated uh like a designated contract market. It's basically a derivatives exchange. And as I said before, those DCMs are the place to trade through perks recently by the CFTC and prediction markets. And the hot thing to do has been acquisition to date. Like the other thing I was going to mention is where is Poly Market in

all of this, right guys? like Poly Market is crypto, but as a reminder, Poly Market is fundamentally different from Cali in a million ways, but they originally started offshore. They were not in the US. They couldn't be in the US because of a settlement with the CFTC in 2022, but then they acquired a DCM, QCEX, and then 6 months later, I I think they acquired it for 112 million. So these DCMS, these licenses are are quite pricey, particularly now when there just really aren't very many left to acquire.

And full disclosure, I am on the board of Architect. Um, Architect Exchange is a fully licensed Bermudeian Purpose Exchange. Architect recently acquired a DCM uh in the US as well. Everybody was trying to buy them. You still have to go through the ex the change of control process, but the alternative, of course, is filing for a new DCM. And there is a very long line for DCMS with a relatively underststaffed CFTC to go through these licenses. So TBD on the DCM landscape, it's it'll be really something really interesting to watch for the purposes of competition and growth in in both prediction markets and perks.

Okay, so everybody wake up. That was a clip from Dex in the City where the wallets are cold and the takes are hot. And we've got a lot more in the full episode. Links in the show notes. I'm host Jesse Brooks. Subscribe and join us on the live stream every Tuesday at noon Eastern. If you hold crypto on your phone, your biggest vulnerability isn't your wallet, it's your carrier. AT&T, Verizon, and T-Mobile have been breached again and again, and SIM swaps are still one of the easiest ways for attackers to drain accounts. That's where Cape comes in.

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