Is Kalshi Headed to the Supreme Court Next?

Transcript

You're listening to a brief segment from one of the Bits and Bips episodes this week. The full show [music] is now only available on its own dedicated Bits and Bips channels. So, be sure to go to X, YouTube, and your favorite podcast platform and search for bits [music] plus sign BIPS spelled BIPS and subscribe. >> [music] >> But the ruling was that the Ninth Circuit ruled 300 that Nevada can enforce its gambling laws against Khi's sports event contracts. Uh, Judge Ryan Nelson specifically said Kali sports contracts are quote a quintessential form of gambling outside the CFTC's purview. This directly conflicts with the third circuit's April ruling that

KSHI is actually regulated by the CFTC that was in New Jersey. This means we have a live circuit split which is why I have specifically flagged the Supreme Court part that is catnip for the Supreme Court in the number one way that they end up taking cases because to say the exact same federal law means this here but something different over here is the exact thing they are meant to guard against. So, as you can imagine, the gaming association likes this. They are calling it a significant win for consumer protections and taxpayers, a big loss for Coli and other backdoor sports gambling operations. Again, gaming association CEO. Uh, but Zack Fulton, a CFTC spokesman on the split,

said a derivative contract structured as a swap is a swap regardless of the underlying subject matter. The Ninth Circuit aired. Now, what [clears throat] this means for the industry is Robin Hood and Crypto.com have similar parallel suits in Nevada. Roughly 20 states are now in litigation over prediction markets. A Supreme Court fight is looking increasingly likely according to CBS News. So, I'm going to start Andy with you at Colshi. This obviously has created a mess for you guys internally. I'll use that word so you don't have to say it because you now have two different federal courts telling you mutually contradictory

things. How did this land on the day of? How do you even think about that situation? >> Look, that's a great question. I guess it safe to say we're disappointed by the the ruling. We didn't think it would go that way. Secondly, I guess from my side, prediction markets are super different from sports books. And the exchange works exactly like a commodity exchange where buyers face the sellers. You don't face a book that is is is generating a price against you. It's a fair and competitive market price just like commodities markets or or just like interest rates or FX or equity markets.

Um you know you can see on the charts that we produce on the on you just have to go on to carry.com and look you know we see that you know pro promotes healthy price discovery there's nothing hidden you know you can see where the order book is you can see where the depth of the market is and if you make money on kshi well you made money on koshi and you can continue to make money on kalshi in fact we like you to make money on koshi because you're improving the aggregate quality of the prediction of the market you're making the market a better quality that's got a societal benefit it. If you make money on a sports book, they ban you and say, "I'm sorry, you're too clever. You're not allowed to trade with us anymore." And so to declare all those things exactly

the same. That that feels a little difficult to me. And then nationwide regulation, as you say, was enacted because large and diverse liquidity pools with large and diverse participants are critical. And you know that's what you've seen in all of our other economic markets, all of our other swap markets around the country. And so yeah, I I think that that's you know, do we end up at the Supreme Court? The various steps occur before them. Still considering the the the group are considering that work here. Yeah. But look disappointed. But what we are doing genuinely is one following the law and then two just getting on with it. getting on with servicing customers, listening to

clients, and our volume continues to grow week over week, month over month, and we've got millions and millions of users on the app. And so, this isn't something that has been forced down people's throats. This is something that people are either enjoying, liking the price discovery of, or feeling that they've got some value to add about it. And if you go talk to the winners on Kelshi, I don't think they talk about it as gambling. They talk it about as making prices in derivative contracts that they are happy to be trading on.

So Chris, I want to ask you here because I know both of us have some friends at the CFTC and I know you've been on some of their advisory boards. How was the CFTC looking at events contracts writ large? Did that have any specific implications for call it the sports vertical and how do you think they are proceeding in light of this? And again I'm asking you to speculate here. Everybody please remember Chris is not a CFTC employee but curious. >> Yeah I'm definitely they don't represent the CFTC. I don't represent anything but myself. Um I think they feel very strongly I mean look at what um what Chairman Celigus said. They they believe that they have federal preeemption.

These are the the thing about crypto people they didn't understand for a long time was that derivatives on commodities have always been regulated and that regulation is very very clear. Commodities exchange act 1974. Don't hold me to it. I think it's 74. So these are the rims on commodities are fedally regulated. That's within the CFTC's jurisdiction. They have a very strong view that this is their market and they have incredible discretion on the underlying markets that they regulate. So I we've seen the CFTC I mean Andy I'd love to get your they required you to stay keep markets open in New York right?

>> Yeah. Look correct. And so we're you know again one of those uncomfortable positions where the CFTC is telling you to do one thing and and a local um area is telling you to do something else. It's like that that's a difficult position to be in as well. But ultimately we got customers. I mean, you got actual real people who are who are using this every day. And it's not just in it's not just individuals. It's like we have ice cream shops who are hedging their rent based on whether it's going to rain or whether it's going to be cold. We have um kayak um uh renters who are, you know, who say, "Well, we don't

run a lot of kayaks if it's windy." Um, we have, you know, people who who run boat charters who say, "Well, look, if we're going to get a hurricane, we're not going to run a lot of boats." We we've got huge numbers of of individual um and then and then people obviously hedging promotions as well. We've got people hedging the risks of running their business on a day-to-day basis. And those risks used to be available for the very biggest guys. If you were a big huge company, yeah, sure, you could go and arrange an insurance or you you could buy you buy a CDS on your credit risk or whatever it was. Now, individual mom and pops, individual enterprises across the US can hedge their own risks of running their business. That's just

way better for enterprises, way better for growth of America. It's way better if you want to invest in your company. It's de-risking you. And I think you've got to just say there's a that's a really exciting development I think in markets and and US Inc. and I come from Europe and your comment earlier on about plastic bottle tops is absolutely right. You know, we're debating the financial equivalent of that here in Europe. Meanwhile, the US is is developing bringing innovation on shore under the leadership of Chairman Celich. And I I think that's going to drive growth and drive innovation and safe innovation within within a regulatory perimeter. Um whether that be prediction markets or crypto and maybe some people don't like that. I get it.

It's different. But I think it's >> where do you see the most volume? Like th those novel use cases you mention on like hedging for a small business. They make for great storytelling and oh that seems really interesting. I could see more of that. But is there real volume there or is most of the volume around uh liquid contract markets referencing like various asset classes and will the Fed raise or lower rates? So a few months ago I was I was comfortably saying look sports volume's decreasing in in size and and then we had the World Cup and sports volume increased fast rap rap rap rap rap rap rap rap rap rap rap rap rap rap rap rap rap rap rap rap rapidly right and so you know that is what it is sports volume again is is is reduced and we're continuing to get that

development of um we're continuing to get that development of more markets more more liquid products I started at Cal six seven months ago we had about 4,000 markets we're now out of point where we've got 10,000 markets. I don't mean 10,000 strikes. We've got multiple strikes in those markets. We got 10,000 markets and so we're seeing the development and interest in those. And some of them, as you say, are big like, you know, where will the Fed be? But some of them are much smaller. But what's super interesting is we did a calibration study and we published this oh a couple of weeks ago now. And if you go on to Kouchy Research, you can go and find this calibration study. And we looked at 2.2 two million data points.

And what it said was that if you imagine that you had a straight line, which is a perfect prediction, i.e. Kali's model was perfectly calibrated to what actually happened in in events, um, you'd expect our markets to sit absolutely along that straight line. And you know what? They pretty much sit along that straight line. But what's really, really interesting is they sit along that straight line one week out. and they sit along that straight line when maybe only $50,000 $60,000 is traded on that market. So you don't need institutional size to have a really well-c calibrated market. And I think again going back to that question, what's it for? If if an individual can hedge a risk and there's a couple

hundred thousand trading on that market, it's a perfectly good wellpriced market and we're happy to offer that service and that individual or company gets a great hedge. That's a brilliant opportunity for us and a brilliant opportunity for them. We don't just need to have everybody correlated around the very biggest most liquid points. Now, clearly we do and have work on those as well, but it it's broad as well as um as well as deep. If you like this segment, please like, subscribe, and tune in every Monday at 4:30 p.m. Eastern time. I'm Austin Campbell, the host of Bips and Bips, along with my friends Ram Alawalia and Chris Perkins and our slate of exceptional guests. Every week, we're going to discuss macro, crypto, and the

collision of worlds, covering [music] topics that move markets and shape the financial landscape. >> $540 million. That's how much concentrated liquidity sat idle in a given week in the first half of this year. about 30% of the D5 TVL if you're wondering. That's according to Dune Research commissioned by 1 in. But there's a solution. 1-in Aqua is the new shared liquidity platform. It lets LPS back multiple positions with the same token balance and keep their tokens in their wallet till a swap comes. Why does that help? Because the LPS don't have to split their tokens across positions.

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