Why Insider Trading Law Now Applies to Prediction Markets: Bits + Bips

Transcript

Hi everyone. Welcome to another episode of Bits and Bips the interview. My name is Steve Ehrlich. I'm head of research at Sharplink and once again your host for today. Uh we've got a really exciting episode and hopefully one that will distract you a little bit from some of the market doldrums. But before we get into all of it, as always uh nothing that you say nothing that you hear or see on the show uh should be considered investment or financial advice. For full disclosures, please see unchainedcrypto.com {slash} bitsandbips. And before we begin, let's take a very brief break to hear from some of the sponsors who make the show possible.

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Quick plug before we keep going. If you want crypto news without the hype, subscribe to the Unchained daily. It's our free morning newsletter. The day's most important stories explained clearly in a few minutes. Sign up at unchainedcrypto.com/newsletters. >> All right, welcome back. So I'm here today with Sam Enzer, uh prominent attorney, former DOJ prosecutor, and uh currently the uh a partner K Hill and founder of K Hill Next a prominent uh law firm focused on all things crypto.

So welcome Sam. >> Thank you so much for having me, Stephen. It's a pleasure to be here. >> Yeah, absolutely. And uh we're here to talk about prediction markets. There's they've been in the news a lot honestly since last year's since I would say the presidential election in 2024 but but there's been a number of I guess events news making events that have happened over the last couple of months that have really brought to brought forth a lot of key questions pertaining to sort of the safety of these markets especially as usage is only growing. So that's what we're really going to talk about. uh a few I guess I mean probably the most prominent example that happened recently is an insider trading case

that occurred that was brought against a former I guess a current Google employee who traded on inside information related to top searches for 2025 to make about 1.2 million dollars. And interestingly this was I think presented as an insider trading case. As you know and I would imagine a lot of people in the audience know insider trading is kind of a a curious term for something like this because we usually think of insider trading as trading on equities with privileged information and that's not exactly what happened here even though it certainly rhymes. So why don't you kind of walk us through what happened and and why you think this is the first time I believe that the DOJ has actually brought an insider trading type

prosecution against a prediction market participant. >> Uh sure. It's a fascinating issue. I used to be a federal prosecutor in the Southern District of New York. That's the office that brought actually there are two insider trading prosecutions relating to prediction markets. Both happen to be Polymarket but you know we may see cases in the future that relate to trading on Kalshi. um The one you mentioned US versus Spagnuolo that's the Google employee case and there's also a case called United States versus Van Dyke. That was actually the first one.

>> That's the Venezuela one right? >> Yes exactly. That is a member of the US armed forces who um, allegedly traded a traded using classified national security information ahead of uh, the invasion and arrest of Maduro in Venezuela. The the Google case, Spagnuolo, is a case where it Spagnuolo was a Google engineer. He uh allegedly had access to confidential internal information at Google about, you know, who were the top searched uh, folks, who were the top five in a year.

Uh, and allegedly placed a bet on Cal She and made a lot of money, um, based on inside information about uh, what those results uh, showed. Uh, those are the the two cases. Both are historic and both are fascinating for a variety of reasons. >> Yeah, and, uh, it is, again, just to kind of get back to my my first question, um, it certainly, just from the looks of it, it can seem that this is wrong. I mean, people should not trade on on inside information. Uh, in the Google case, I mean, I I was reviewing some of the the details of that case this morning and uh, it seems like he was able to find a mismatch between what uh, market

participants were expecting to be the highest search terms and what the Google internal internal tool showed. So, it was sort of a a risk-free trade from his point of view, notwithstanding legal risk. And then, uh, yeah, and then the Venezuela case as someone who used to have access to confidential and and I'm sorry, classified information pertaining to military operations. That is, uh, that is a very not only is is that cheating other market participants, but that theoretically could have put uh, lives at risk, um, because I know at this point, I mean, adversaries all around the world are looking at prediction markets to get a sense of incoming, uh, operations that and then Israel's happening and and all over. So, so, these are very serious charges, but again, the insider trading case, the The insider trading in most people's minds

has a very specific definition. Can you walk me through uh in particular and let's use the Spagnuolo case as as the as the example, what are the precise charges that were brought and and how does that align with like what most people commonly believe to be insider trading? >> Great question. So, it's an interesting question in part because insider trading itself is actually not a legal term. So, you know, we have to take a step back even further and and say, "Look, when and and I tried I have tried insider trading cases. I've defended insider trading cases. When I was a prosecutor, I handled a jury trial involving an investment banker who was

charged and ultimately convicted by the jury of um tipping his father ahead of M&A deals so that his father could trade stocks, right? That's the archetypical insider trading case. But it's important to understand when people talk about a traditional case. So, a company insider at IBM knows what the earnings forecast is going to be and buys IBM stock ahead of the earnings announcement disclosed to the investment market um with positive information and then can sell the stock after that earnings announcement. The The charge in that case is not insider trading. That's a That's a colloquial term we use to

describe it. Really, the charge would be securities fraud or wire fraud. >> Okay. >> Um That is the Those are the typical charges when you're talking about trading on the basis of inside information in the securities markets. In this case, the Spagnuolo case, the charges are commodities fraud and wire fraud. So, commodities fraud on the on the theory that a fraud was committed with respect to the trade and that the instrument uh of the trade was a commodity a swap rather than a stock which is a security.

Wire fraud um Judge Rakoff Southern District Judge once called the wire fraud statute um uh the a prosecutor's Colt 45. What he meant by that is uh it's a generic statute. It's very broad. Any misrepresentation or failure to disclose something that is material when you have a duty to disclose in a situation that involves interstate interstate transfer of wires like email, telegram messages, a wire transfer of funds can be prosecuted under the wire fraud statute.

>> Yeah, I remember actually um uh I think we first got to know each other a little bit when you appeared on Laura's show during the the SBF trials and uh and wire fraud charges so I think there were several of them um were part of of that uh indictment and ultimately conviction so um certainly rings a bell the whole I guess the uh fungibility of that type of charge that you're referring to. >> And the the money laundering they've also charged money laundering um Title 18 US Code Section 1956 but really that's kind of an ancillary or subsidiary charge because the the predicate is you committed a crime and then you moved the money and tried to conceal the source of the money. So they

have to prove either they have to prove up the commodities fraud or wire fraud charge to win the money laundering charge. >> Yeah, that makes sense. And I I I think in both of those cases uh again correct me if I'm wrong they tried to cover their tracks like deleting their account. I I I think SBF tried to cuz ev- on Polymarket everything is in USDC they tried to sort of move it through various like DeFi protocols things like that to sort of hide the progeny of them so so I certainly understand that. >> That right. >> Yeah, and this reminds me a lot of uh the OpenSea insider trading case that that I believe was actually ultimately dismissed. And that that was brought as a quote-unquote insider trading case as you mentioned, but but again, uh if NFTs aren't securities, like it can't be

securities fraud and it For Please remind me which um prosecutorial office brought that Maybe it was yours, but >> It was the Southern District. >> Yeah, Nathaniel Chastain. >> Right. >> And you're absolutely right that the Second Circuit Court of Appeals, that's the intermediate court between the trial court and the Supreme Court, um reversed the conviction. And the reason they reversed it is they said the the court said that the the information in that case is not the type of property that can be the subject of a wire fraud prosecution.

So, in Chastain, at that time, we were in the middle of the debate in the courts about whether or not digital assets were securities. Uh you know, are they a commodity? Are they a security? Uh and the the Southern District got around that debate by just saying "Look Chastain was an employee of OpenSea. He knew which NFTs would be listed. He knew that the listing would have a material impact on their price. He used inside company information, confidential information, to trade the NFTs ahead of the the public release of the listings."

>> I think it was the carousel in particular that was part of the case, the ones that were prominently featured on the home page. >> That's right. Um and you know, the court said, "This is not the type of information. This is not the type of property that is the proper subject of a wire fraud prosecution." And I think that that precedent, Chastain, is definitely something that the defense in Spagnuolo is going to look at. And for different reasons in Van Dyke, uh the the soldier case with Maduro, um there's a similar type of argument based on a different line of precedence including a case called Blaszczak uh, that that raises the question of whether

government information is the type of property that can be uh, purloined, stolen, and then traded on for an insider trading prosecution. >> Yeah. And And we're going to get into that because it really raises a fascinating question. I mean, not to uh, um, keep everybody in suspense, but uh, it's sort of well known that there are many ways to legally trade on quote-unquote proprietary information when it comes to commodities markets, not unlike securities markets. There There's different types of information asymmetries. Uh, I know there's a lot of qualifications in what I just said, but but that is sort of at least my understanding and >> Yeah, I think you're I think we could give three examples. Okay. Just to make it very concrete. So, one example would be you the the Many people think of insider

trading as a crime on the market or a crime on other traders because I have an unfair advantage if I have inside information. That's not how the law thinks about it. >> Mhm. >> So, the way the law looks at insider trading is if I work for a company or if I am a lawyer for a client or if I'm an investment banker for a client and I have a duty of trust and confidence to the source and I take the information that I'm supposed to keep in confidence and use it for my personal gain to trade for my own profit or to tip someone so that they can profit that is a breach of my duty. That is the essence of the crime. It's not about me

having an unfair advantage. It's about me misusing and violating the trust of whoever gave me the information. And if you understand that premise, that runs a line through how all of this works. So, for example if I'm in a taxi cab or a better example, I'm I'm at a bar and the CEO of IBM is on a call. He's be speaking too loud. He says, "Buy buy Dell. Do it tomorrow." I overhear that. I can trade on that information. That is material. It is non-public. But I have no duty to this guy at a bar. I can trade on it. A second example, which is very typical in commodities markets, is let's say I'm a

farmer and I know my crop my orange crop is going to be down this year. Right? I have that information. I can go It is well accepted that I can go buy a future um speculating that um you know, hedging my bet. Um and and indeed that's like the archetypical example of how the derivatives markets >> It's what you're supposed to It's what you're supposed to do. >> Um and then a third example is suppose there's public information.

But I'm better at analyzing it. Maybe I have an algorithm that is just better at understanding and synthesizing signal and and weeding out noise from signal and then trading on it or does it faster. That's not inside information even though the secret sauce of my algorithm is non-public. >> Yeah, I get that. Um I don't I think I I always makes me think um the Lewis and Billy Ray example from Trading Places uh um that would be seen as I'm not sure what what sure the right the right term is but but seeding thought fake information to somebody so that they can

trade off of it. That that I would I would imagine that uh whoever was the CFTC chair back in the 1980s might have had something to say about that. >> For sure. >> The movie didn't have to wrap up in two hours. >> The so-called Eddie Murphy rule, which is one the statutes that was charged against Van Dyke. >> Yeah. Okay. So, yeah, we're going to I want to get into all that a bit more because it is pretty It is pretty fascinating. But, there's one other recent example that I wanted to talk to you about in relation to like I I guess the spirit of of our discussion so far.

Um that relates to our good friend George Santos, who uh had got out of prison. I believe his his sentence was commuted by President Trump, and now he is reportedly being investigated by the DOJ uh for I don't know maybe you know the exact term, but again, it's manipulation or or or related to a prediction market stemming from his attendance of a State of the Union address. Um he uh prominently said that he was going to attend, and then uh I guess it was a few hours before it was about to begin, uh said that there uh travel issues or something, and he's not going to be able to attend. And it turns out that he bet heavily on himself not attending, um sort of uh going against

the grain of of what the market was doing based on what he had said previously. Uh I'd love to get your your thoughts on this, and it really raises the the interesting question of the like what type of responsibility is there like in this case, he actually was able to directly uh affect the outcome of of the market. He wasn't trading on any inside information. He was the like he was the primary actor. What do you make of that? >> Yeah, it's a great question. So, I think your the the first part of your question or the the last part of your question, I think is a good place to start, which is this may not be insider trading because he's not He is the source of the information. He's not betraying a duty to somebody who told him what his travel plans are. He is the

creator, the maker, the definer. He is the principal, right? So, it doesn't fit the conduct the the fact pattern doesn't really fit into It's like a square peg round hole as to an insider trading legal theory for a prosecution. But, then you have the question of was there some other type of crime here? And I think there's two possibilities. I'm not saying these that he committed a crime. I don't know. I don't know the facts well enough that >> Well, that ultimately have to decide that, I would imagine. >> Right. Um but, you know, taking the allegations as we have them, one possibility is let's say hypothetically that Santos knew

he was not going to attend, said he was going to attend, uh placed the bet that he wouldn't, and then disclosed that he wasn't going to make it. That fact pattern is what is known sometimes as scalping or a pump and dump. Uh when I was at SDNY, I prosecuted John McAfee, the McAfee antivirus creator, uh for a similar type of fraud. He He had a um He had two things He had a Twitter feed where he would It was called coin of the day. He would buy a token, say on Twitter, uh I have no position, but I strongly recommend this coin.

Uh and while he was recommending other people buy it, he would sell it. Pump and dump. Scalping. That is uh a fraud That is a type of fraud that can be prosecuted as wire fraud, can be prosecuted as commodities fraud if the instrument's a commodity, can be a securities fraud if the instrument's a security. In a different situation, if let's say he told the truth when he said, "I'm going to come." And he intended to come, and that was a true statement. But, then he realizes he's not going to make it, and decides, "Let me place a bet, um and then I'll just not come, and profit from this."

There, you could you could potentially have market manipulation. Um market manipulation can fit under a variety of statutes. There are commodities fraud statutes uh that criminalize that conduct. There is wire fraud. Uh so, there are various theories that could be used to prosecute that depending on what it looks like. Uh but then there are two sort of core issues that you usually get down to as a prosecutor looking at that type of case. One is was this an artificial manipulation of the market?

And number two, was there any deception? Generally, whether or not the government could legally bring a manipulation case, they like to see a lie, deception. >> Mhm. >> I think for for a variety of reasons, uh both because of what an appellate court might do, what would be compelling to a jury, and other reasons, prosecutors have discretion over whether to charge a crime. >> It It makes me think of uh legally blonde, which I'm I'm sure you've seen. Uh mens rea. The I I don't know if that's the right term here, but they like the intent to commit a crime. You Yeah, you have to kind of get it there. Is Is that That's basically what you're talking about here?

>> Yeah, it's a big part of it. Mens rea, willfulness. You have to show criminal intent. And without an intent to break the law, uh very difficult to convince a jury to put somebody behind bars. Um so, prosecutors like to see In a manipulation case, which is harder than a traditional insider trading case or a traditional uh uh like in the Bankman-Fried case, right? FTX. There were lies. There were direct lies. Hey everybody, your money's safe. He knows it's not. When we're talking about manipulating the market, then we get into, well, what if a trade was a hedge? What if a trade, you know, there's a variety of legitimate reasons why certain trades could be appropriate.

Much harder case. >> Yeah, I I remember the FTX case. I mean, one of the things that SDNY walked walked the jury through was how there were plenty of off-ramps where Sam could theoretically try to end this and and limit the damage and he chose not to and that that I think that also spoke to the willfulness of of of what he was doing during the last days of of FTX. So, let's I want to start looking at I want to turn to a couple of other topics, but before we do just to tie a bow on sort of the whole {quote} the how insider trading matches up with um with prediction markets, which are essentially commodities market swaps regulated under the under the Commodity Exchange Act.

Uh can you just perhaps like neatly tie that in a bow cuz we talked about a lot of different a lot of different uh ways it could apply, but also a bunch of different mitigating circumstances. And really just like help everyone understand um like if if you are a prosecutor working at the DOJ or CFTC, like what are the like the two or three things that would be like glaring red flags that you would look for to get a sense of a a potentially criminal act. >> Sure. I think uh and it doesn't have to be limited to commodities.

And I think if you um are privy to non-public information that could affect the price of an asset, whether that asset is a bet on Polymarket, real estate, stocks, a gambling bet. If you have material non-public information, information that could really be market moving as to the value of an asset, it's not available to the public, and then critically, you received it in confidence from someone that you have a duty of trust and confidence to.

>> Like like Google or the US government for the two cases that we mentioned. >> Right. In the case of Google in the case of the government, the the the soldier, Van Dyke, had signed paperwork that he had to comply with um the classified classification and confidentiality requirements. The complaint in the Spagnuolo case, the Google employee, is less clear on whether there was some type of non-disclosure agreement. But generally, employees have a a fiduciary duty to their employer, uh and there's and they they reference in the complaint that the information was marked confidential. So, um if you have material non-public information, inside information, if you got it from a source that expects you to

keep it secret, trading on that information could be a crime. That's the basis. That that is the undercurrent, the simple core essence of these cases. >> Yeah. And it's it's interesting too, cuz I I mean thinking like people, I know there's been some very curiously timed trades related to oil markets and White House announcements, et cetera. And I I I I back when I was still a journalist, I mean we talked we reported on this a little bit that if you overhear something in the White House, but you didn't receive it in quote-unquote in confidence, what's the gray line there? And and I think that's also why we're talking about um sort of I don't know if new laws are necessary or just new guidance to to make sure things like that can't happen because nobody would argue that that type of

financial trading is is appropriate. >> Yeah, and I think that this is clearly an area both regulators, the CFTC, um the Department of Justice, and legislators, policy makers in Congress, are focused on this issue. I think a week or two ago, um House Oversight Committee Chair Comer sent a letter to um Polymarket and Kalshi demanding information about what about steps they're taking to prevent insider trading on those prediction market platforms. Uh so, you know, for Comer, a Republican, to send that letter to a predict to prediction market operators, which is something the president has said. This is a market he supports. His Truth Social platform is going into the

market. Um for the Republican Party to be investigating this, that is a clear signal that there is enormous pressure on legislators to do something here and make the rules clear. It and it isn't just about market integrity, right? We We do have a market integrity issue. We want to make sure that bets are fair. But there's also, as you pointed out at the beginning of the show, there's a national security issue. If If Van Dyke If If our enemies uh if we're at war with Iran and or in conflict, as the president would say, with Iran and Iran can look at Polymarket and and and if they think people are going to trade on inside information and that they can get a signal on when a military

operation's going to happen, that jeopardizes the security of the United States. This is something we have to think through. >> Of course, and seconds or minutes can matter in something like that. >> For sure. >> Um okay, so we need to take a very quick break so we can hear from from some additional sponsors, but we're going to come back and talk about sports betting and and how that overlaps with with prediction markets and the big MicroStrategy Bitcoin sell selling uh debate or controversy. So, stay around. >> Before we dive back in, a quick word about something we make ourselves. If you like the way we cover crypto on this show, clear-eyed, no shilling, just what actually matters, you'll like the Unchained Daily. It's our free newsletter that lands in your inbox every weekday with the most important stories in crypto written by

journalists, not marketers. No jargon, no hype, no number go up cheerleading. Just the news you need to stay ahead in the time it takes to drink your coffee. Subscribe for free at unchainedcrypto.com/newsletters. >> All right, welcome back. So, one other big uh I guess uh area of one big competitive landscape when it comes to prediction markets is uh, sort of the way it fits within state gambling laws, particularly as it pertains to sports. Uh, a lot of states and too many for me to to count have sort of I'm not sure what the right word is, but

they're trying to um, press the right to in order to sort of enforce their own state gambling laws. Uh, the CFTC especially under new chair Mike Sellick is arguing that um, these types of contracts which are swaps and as thus regulated under the CEA preempt state laws and a bunch of different cases are working their way through the courts. Can you um, Sam give us a sense of the size of of of these markets? Like what's really at stake and sort of level set where things stand? >> Uh, we're talking about billions of dollars of transactions and and these are projected to become you know, these could easily become multi-trillion dollar markets um, over time.

And it So, this is enormous and and for a variety of stakeholders, right? New Jersey, Nevada, states that derive a significant amount of tax income from gaming, the question of how gaming is is operated, what licenses you need is a critical critical question. Many uh, casinos and then online, you know, uh, operators like FanDuel and DraftKings have placed bets, so to speak, on the regime. They have um, uh, based on the view that certain types of bets on outcomes have to be done through a gambling license, they have gotten licenses from a variety of state

regulators. Uh, now, you know, I think the the commodity the commodity futures trading commission, chair Sellick, the president of the United States have very forcefully taken the position that when a CFTC regulated um designated contract market, a derivatives exchange, offers a binary contract on an event, which could include a sporting event, something that was previously thought of as gaming or gambling, um when when that type of futures contract or swap is placed uh as a trade on a derivatives exchange, that falls under the exclusive purview of the CFTC's jurisdiction under the Commodity

Exchange Act, and that regime preempts controls in favor of any state gambling rules, and thus, if you're um Kalshi or Polymarket, and you're operating a DCM, a designated contract market, or uh on a that is CFTC regulated, you don't have to get a gambling license. You don't have to comply with the state gambling rules. This is derivatives activity, not gambling activity. And courts uh right now, that that issue This is um a reminder This takes me back to the Howey case. You know, a a year or two ago, when when Chair Gensler was the head of the SEC and President Biden was in office, we were debating in the in the crypto

market, uh we were fighting in court with the SEC and civil plaintiffs over whether or not digital asset transactions were regulated as securities or not. Now, I think the big question for courts that is adjacent to crypto markets is um is this activity, the type of activity we see on Polymarket, on Kalshi, is that appropriately regulated at the federal level by the by the CFTC, or is this an issue that should be regulated by the states, uh by state gambling gambling regulators?

>> Yeah, and where do you fall on that? Because it it it I can understand both sides. I mean, for one thing, I don't think many people feel a lot of sympathy for FanDuel and DraftKings, anyone who lived through their just inundation of ads 10 years ago when they were fighting with each other um um to get mind share. But, at the same point, like it certainly one I could see an argument to be made that there's a loophole in just the way that these contracts are structured. The fact that they are swaps, that there are binary outcomes, that like does it I could see one argument it's against the spirit of what gambling laws are are supposed to protect. But, I can also understand how if the contract structured in a particular way to fall under the CEA, they have a strong case.

I mean, where where do you fit in this? And I know laws are really like they have to have like actual guidelines and rules people can follow, but they're meant to sort of protect like functions, like the spirit of things, so they don't have to always be updated. Like, where where do you stand? >> I think the um you know, I I represent um direction market operators. I'm firmly in the camp that the Commodity Exchange Act controls and preempts, and I think that side has the better of it. Um the third circuit uh not in in a definitive ruling, but in a in a ruling on a preliminary injunction, signaled that they agree

with that view. Um but, there's a disagreement among judges. First of all, in the third circuit, in that particular case, which I believe was a litigation involving Kalshi um there was a split panel. So, two judges, the majority, said the Commodity Exchange Act preempts. And the dissent gave all the arguments for the other side. The ninth circuit in California um has not ruled, but at oral argument in one of the pending litigations, signaled through the questions of the judges that they're probably going to come out the other way.

And trial courts in other circuits, including the fourth circuit and the sixth circuit, um have reached different outcomes on these issues. So, I think that there is a tremendous uncertainty as to how this will play out in the courts and who's right. And unless Congress legislates and clarifies this through a statute it'll probably have to be resolved by the US Supreme Court. >> Yeah. And I know there's a lot of talk about different guidance interpretation. The Clarity Act, correct me if I'm wrong, I don't believe it mentions prediction markets really at all.

>> Correct. It does not. The Clarity Act doesn't resolve this issue. >> Yeah. I I know that there is like I could I I don't even know like I can imagine there could be some overlap when it comes to like the treatment of certain like DAOs and and DeFi protocols which perhaps could be a bit more appropriate to a construct like Polymarket as opposed to Kalshi which which is fully centralized and Polymarket is smart contract based and uses USDC, but um yeah, but it certainly seems I can't imagine the crypto industry wants anything else added to it as they're racing to get Clarity Act done anyway.

But uh it certainly, as you mentioned, it looks like this will need to be adjudicated by courts because that that seems to be the only pathway to to get some sort of quote-unquote, no pun intended, clarity on the subject. >> Yeah, I think the That's right. The That's how I see it because look, um absent a change forecasters believe, if you were to take a bet on Polymarket, uh on who's going to win control of Congress I think the the bettors favor the majority of folks on Polymarket or Kalshi are betting that Democrats are going to win the House maybe the Senate, too. Mhm. So, the opportunity, the runway to get legislation like this done is probably this year. We have a crammed agenda. Um I'm very hopeful that that the Clarity Act will pass and give

crypto markets the regulatory clarity and structure that we need. Um and that would get a whole bunch of institutions to come out of the sidelines and get into the market uh finally after so many years. So, I don't think we're going to have legislation on this, certainly not in the near term, and yeah, I think it's going to be the Supreme Court that has to resolve this question. >> Okay. And let's talk about one other big news item before we start to wrap up here. And that is the controversy surrounding uh the strategies selling of of of Bitcoin for the first time I don't think it was the first time in its history, but the first time in years and years and years. And we'll we'll sidestep because I know this is not your role, the the impact on the market,

which although this was sort of pre-telegraphed during I think Saylor's Q1 earnings uh call, the the market is obviously reacting poorly to it, but there is a real debate about how a contract on Polymarket tied to the timing of that sale is resolving. And and it creates a whole another It opens up a whole another suite of issues that we haven't even touched on when it comes to the operation of these platforms. So, so why don't you walk us through that really quickly? >> So, I believe the issue is that the there was a a market on Polymarket where you could place a a trade as expressive view on whether or not by a certain date um

>> Through the end of May. It was through the end of May. >> Mic- MicroStrategy would sell Bitcoin. And the there was a disclosure that they filed, an SEC filing. The SEC filing was made was made in June. But it revealed that prior to June, in May a sale had taken place. And so, there were there is a dispute right now with, you know, big money at stake on whether or not who is correct. For purposes of this trade is is the controlling date the date of the trade, the date of the sale of the Bitcoin, or is it when it was made public through the SEC filing?

>> Yeah. And and like you said, big money. I I think um the the tens of millions of dollars have been bet on this market and uh and yeah, it really comes down again to like how these things how these contracts are are written, how they're structured, how they're designed to resolve. And then we didn't get into the Oracles and then they use a relatively smaller Oracle provider called UMA to actually vote on the outcome of of these events. And I think I've seen some analysis that ultimately nine people control enough voting power on UMA to actually decide, which is not quite as decentralized as I I would imagine many people would want. And and this is just I I see it as another risk as it relates to prediction markets. I mean, we're

excited about the technology. It it does um I I can certainly understand the value of it in sort of crowdsourcing intelligence for important events. Uh I I mean, there are certain vices. I mean, gambling and betting on like like trivial items that maybe we need may maybe we don't, but I can certainly see the the viability of of certain markets. Uh but at the same time, like this is another thing people have to account for when it comes to uh participating in these platforms. And and this doesn't even get into necessarily some of the other issues or risks. Uh I and again, I know this is not your purview, Sam, but I mean, there's been a lot of reports.

The Wall Street Journal had one. There's an academic study really showing how the vast majority of participants lose on these platforms. And and just like a casino, the house the house always wins in in a certain way. Uh a lot of the people that make money are the the professional market makers, the ones running sophisticated algos, and and they prey on on retail uh traders to a large part trying to find like long odds that that could pay off and and just fundamentally misunderstanding risk, which frankly we all I think we all do from from a certain time to time.

But that's a lot of There's a lot of different things for traders to be careful about when it comes to you participating in these markets. Um I'd love for you cuz we're we have to start wrapping up to just what to the to the extent you are able to share and from your vantage point as a former prosecutor and just someone who intimately understands the way these markets operate. In a not official financial advice point of view, like what are some of the things that you for instance would look at look for, try to understand before you might want to put a bet on one of these markets?

>> Sure. I think what I would look at first it as you point out it's very important to diligence how is the bet, who determines how the bet is won? What are the rules for that? You you need to understand that's kind of part of understanding counterparty risk. Right? It's understanding the mechanics of it so that if there you don't want to you want to make sure you're playing on a level playing field, right? Part of understanding the a level playing field. The second thing is um why am I placing this bet? Am I placing this bet because I believe I have better information or better judgment? Is this for fun? What am I what am I doing here? If this is a

serious uh bet then I need to to understand whether I really have some kind of asymmetric advantage that is legal. In other words, I'm not I don't have any asymmetric advantage because I have um inside information but I have an asymmetric advantage because I am smarter analyzing the signal than the rest of the market or maybe it's a hedge. But frankly, I personally find that the the the greatest use of prediction markets is the information.

Not not as a better but as a source of information. >> Yeah. >> Um and obviously that happens because other complete are placing bets, right? But um it it is an entirely new category of data signal. You know, 5 years ago, this is not something that was regular, you know, pervasively available, but now when I'm thinking about an issue, I always look at Polymarket or Kalshi to see what are they saying about it if there is anything. >> Yeah, I I think those are really good points. And and frankly, it's it can be difficult for people to understand the way certain things resolve. I'm sure you remember, and I'm sure many people listening here remember the debate over Zelenskyy's suit. I think when he came

to I guess meet President Trump another time because of what happened when he went to the Oval Office. Was in February of of this year? Was that or was it last year? I This one I I can't remember. Um but there was a whole debate as to whether or not what he wore was actually a suit. And it came down to again, like um these people, nameless people behind an oracle to kind of decide. And I remember that um that resolution was also unsatisfactory to a lot of people. And it's hard sometimes to do diligence those types of things these are very esoteric topics that um that that very few folks are are experts in. But I think your point is is very well taken. And and again, because this is a a trader show, this was a tremendous kind of walk through all the

different issues uh pertaining to these markets, but uh for people participating, retail people participating because there is a lot of incentive to participate in these markets given the how altcoins and crypto in general are are are going down a little bit. And uh if you're not going to put money into AI stocks, which are which are booming prediction markets, is an area where you can kind of get that risk on uh fix for for lack of a better term. So, yeah, really understanding like what is the advantage that that you have. And yeah, is it is it legal? There are plenty of legal ways to get for these types of markets to get um to to get um like an informational advantage. And in that way, it's very different and perhaps a little superior

to securities markets, but uh you need to understand kind of what that what your advantage really is or if nothing else make sure you don't bet money that that you can't afford to lose because especially as some of these markets are now going to start offering like leverage trades and and so on and so forth. There's a real possibility to um to to really go up or or go down depending on what happens. >> Yeah, for sure. And I think one other point which in addition to the rules, I think you're hitting on this with the suit example. There's a lot of suit examples. What exactly is the phrasing, right? I went to Hebrew school. We can debate the Talmud both ways, all right? And litigators, I make a living splitting hairs on what the the meaning

of words is what does it mean? Is this ambiguous? Is it not ambiguous? Um and so you definitely have to be is this clearly a binary? Is there going to be a clear winner to this? >> Yeah, that's actually a really good point. I should have brought it up sooner. I mean as a former journalist and intelligence analyst myself, I certainly understand the importance of choosing your words carefully. Are there any laws or or or rules as far as like or standard language for how these things should be structured to to take out some ambi- ambiguity? I mean, I know in the law there's always going to be certain areas of of of grayness, but are are there any best practices that people should look out for or any standards that are being developed that could help answer some of these

questions? >> I think the development of regulations is going to start with CFTC has made clear that they want the the way that CFTC rules work is they basically let a designated contract market certify on their own self-certify. So they want those designated contract markets, i.e. Cal sheet for example, to make the the guidelines, right? To make guidelines that ensure that for example, the market isn't susceptible to manipulation. Um and that may that might, I don't know, covered, you know, down to the level of making sure that this is a concreted enough binary question that there can be a yes or no.

>> Yeah. So, actually it reminds me a good friend of mine is Chris Giancarlo, the former CFTC chair, who I'm I'm sure you know as well. And I remember we were talking, I think a conversation years and years ago about when FTX, I think they were acquiring LedgerX and we're going to launch a US-based uh DCM. And I was talking to him a little bit about what that could offer and he was kind of walking me through cuz this was one of my first times I was back at Forbes and kind of going through this how it's different than the SEC where like you need to get approval to launch a spot ETF. Whereas like CFTC regulated entities, they have sort of the ability to self-license and then CFTC can step in. And I know this is an oversimplification, they can step in if something is is is not right, but

they really give a lot more leeway to um to operators under their purview. So, uh that is a pretty fascinating point. I It's probably worth someone looking into to really understand like where does that kind of go into and and is there any work being done to help standardize some of these some of these outcomes because like like anything, the only risk you want to take on for any investment is market risk. You don't want to take on like like the risk of someone interpreting something else so on and so forth. Uh we have to we have to wrap up, but I want to just give you a chance Sam to to share anything else related to the subject that we didn't get a chance to cover or just anything else on on your mind related to what's happening in crypto today that would be helpful for

our audience to know. >> Uh sure, thank you so much for having me. I think the the core question is, you know, the the the two criminal cases we see are a clear signal from the government that they want to prevent market abuse on prediction markets. This is an area of focus and so folks have to really think about what the rules of the road are. By the same token and by the same token I think it's quite interesting to see that the US government is now saying um trades on Polymarket are commodities not gambling for example, not securities.

That has implications for debates we were having years ago about what is or is not within the purview of Howey. But I think how these cases will play out remains to be seen. There are some open questions. It's about um do these cases apply the laws extraterritorially? You know you know to offshore conduct? um What type of property can be regulated by these statutes? These are all open issues. It's a fascinating time to be in our in our industry. >> Yeah, it always is. Never never a single dull moment.

Um all right, well Sam thanks for for joining us. We'll have to have you back again. Thank you to everybody for watching and listening. And that's it for Bits and Bips the interview this week but please stay tuned. Coming up next Laura's going to be sitting down with Mike Dudas of Six Man Ventures for a full for a full read on the markets. Uh Solana the Solana hyper liquid Ethereum war, Saylor's troubles and why perps are spreading into commodities and free IPO equity. So don't go anywhere.