▶ 0:02:26Are gathering that it tells you what a policy guy I am, that I'm just downright giddy for today's hearing, because I think it's an opportunity for us to elevate, uh, the iq of this committee and the broader U.S. house on a topic that's really a pretty hot topic. You don't have to be a policy guy to understand how important the event, contract and prediction market space is becoming. And of course, prediction markets aren't new.
▶ 0:02:51Uh, the idea of using markets to capture the wisdom of the crowd dates back centuries. And at the cftc, prediction markets have long been a part of the commission's work. Uh, in 1988, the agency first provided registration relief to iowa electronic markets for their innovative political prediction market. Think about that, 1988.
▶ 0:03:13But as with all derivatives products, the landscape has changed a lot in the last 40 years, and I suspect it's going to change a lot in the next few years to come. And it's because technology has supercharged the growth of these prediction markets. Today, tens of billions of dollars in transactions occur each month across both registered and offshore exchanges.
▶ 0:03:39They've grown to a size and a scope that few of us could have imagined even just two years ago. As with many emerging technologies, our laws are being asked to answer questions that we had never really contemplated when we wrote. When we wrote the laws years ago. And yet, despite all the attention. Event contract markets represent a small fraction of the activity across the markets regulated by the cftc.
▶ 0:04:08The reason we've got so much interest. We've got. The hearing today is that although they're a small portion, uh, there's tremendous growth and the growth of sports related prediction markets have raised unique questions. And those are the questions we want to get to the heart of today. Uh, to many americans, these products look an awful lot like sports betting. To others, they're an innovative financial product that can help aggregate information and provide insight into future events.
▶ 0:04:36Drawing that line and determining whether our laws and regulators are equipped to do so is the central driving question before us today. Derivatives are tools. They're a means to an end. They're not an end to themselves. While products aren't regulated on merit, they should, according to the cea, serve a purpose. Uh.
▶ 0:05:00Whether managing risk or surfacing useful information, they're not wagers. And the cftc is not a gambling regulator. And most important, we want customers to be protected and markets to be sound. Today's hearing is about the unique nature of protecting customers and building healthy markets in prediction markets, specifically sports related prediction markets. It's also about whether the cftc has the right rules to do the job.
▶ 0:05:30How we address these risks is essential to building fair and safe markets, and making sure that we draw that line in the right place. Customer protection has been a cornerstone of the commission's work for more than five decades, and today's discussion will help us better understand where the law is working, where it may be falling short, and whether congress has more work to do.
▶ 0:05:57We have a terrific panel of witnesses today, and I'm certain we'll have no shortage of thoughtful discussion and lively debate. In fact, I'm kind of looking forward to that part, and I want to thank their witnesses, these witnesses, for their preparation and their willingness to share their expertise with us today. Uh, with that, uh, I'm happy to yield to my partner, ranking member davis. Speaker 2: thank you so much, Mr. chair. And to the witnesses for being here today.
▶ 0:06:27As prediction markets continue to evolve, discussion is not simply about technology or financial innovation. It's about whether our regulatory framework is keeping pace with new products while continuing to protect consumers, preserve market integrity, and provide certainty for everyone involved.
▶ 0:06:52I approach this issue without the assumption that every new product is inherently good or inherently bad. Instead, I believe our responsibility is to ask whether existing safeguards are sufficient, whether regulatory responsibilities are clearly defined, and whether consumers understand the protections available to them. Mr.
▶ 0:07:17Chair, we've worked on many issues together, and I wish the american people could see how we function and have functioned as a committee. But so many across the country see, washington, D.C. is divided. And in fact, many that I have heard from believe that we're not only divided, but also are dealing with corruption.
▶ 0:07:42We must ensure that when we are talking about any events, there's not manipulation. Insider trading. The american people, regardless of what happens, demands fair play. As a representative of eastern north carolina's.
▶ 0:08:02I also remain mindful that the commodity futures trading commission has an essential mission supporting agricultural markets and that our farmers rely upon that to take place every day. As new products emerge, we must ensure that the agency remains fully capable of carrying out that core mission.
▶ 0:08:27Meanwhile, I appreciate the commission's ongoing rulemaking process and look forward to hearing from our witnesses about where congress may be able to provide greater clarity, regardless of where members ultimately come down on this issue.
▶ 0:08:41I hope today's discussion helps to identify practical ways to strengthen consumer protections, improve transparency, and provide greater certainty for both consumers and regulated markets. Thank you, Mr. chair, and I look forward to a wonderful discussion today. Speaker 1: uh, we're honored to have both the chairman and the ranking member of the full committee with us today.
▶ 0:09:09Uh, we would yield to chairman thompson for any remarks he desires to make. Speaker 3: well, thank you, chairman johnson, ranking member davis. Uh, uh, thank you both for convening this hearing. It's an important hearing on a complex set of issues. It's the first hearing, but not the last hearing, that this committee will undertake to examine prediction markets. As I said this spring, this is a transformative time for the commission and financial markets.
▶ 0:09:37This is due in no small part to the growth of new types of derivatives instruments offered in U.S. markets, including event contracts. This hearing provides us with an opportunity to address the confusion and debate around the role and the authority of the commission in these markets. Over the last 100 years, congress intentionally constructed a federal framework for offering products and trading within derivatives markets.
▶ 0:10:02As I have said before, the commodity exchange act is clear the commission's authority is broad and deep. The definition is a commodity and swap or sweeping and commission's authority over transactions on registered exchanges is complete and exclusive, ♪and it is important that this robust jurisdiction is protected and respected. But understanding the commission's jurisdiction is not the end of the public policy questions that we must consider.
▶ 0:10:30Many members have raised important questions about the rules for trading event contracts and the appropriateness of certain contracts to be listed for public trading, especially those around sports related event contracts. The commission has significant tools currently and at its disposal to address many of these concerns. Just last month, the commission proposed the first of potentially several rulemakings focused on bringing clear rules to prediction markets.
▶ 0:10:57This one was focused on defining the public interest and implementing the special role for event contracts. Most relevant to today, the proposed rule explained how it seeks to determine when a contract involving gaming is contrary to the public interest. Uh. This is an important rule making, and I am encouraged by the thought and the work which went into the draft.
▶ 0:11:22It provides clear standards for the public interest and workable definitions for the key terms which have lingered on defined for so long. Where the commission's authority is found to be insufficient to meet its mandate to support responsible innovation and protect market participants, we will consider legislation as may be appropriate. But first, the committee must understand if such gaps exist.
▶ 0:11:46We must also consider federal preemption and any impact to the federal regulatory framework which congress clearly provided under the cea and has reaffirmed for a century. I believe that the markets overseen by the commission must be fair, safe and useful. Uh, today's hearing is another step in that process. Testimony received today will help our members to further understand the law and the commission's authority. And, uh, thank you so much. And I yield back.
▶ 0:12:17Speaker 1: wise words from the legend of howard, pennsylvania. Uh, with that, we would turn toward the honorable ranking member from minnesota, miss. Craig. You're recognized. Speaker 4: thank you, chairman johnson and ranking member davis for leading this hearing on this most important subject. In less than two years, we've seen explosive growth in event prediction market trading. Most of it driven by contracts on sports related events.
▶ 0:12:41We've all seen also seen a number of pieces of litigation over sports event contracts with states suing markets, markets, suing states and the cftc, also weighing in with its own litigation. I think it's safe to say that among the witnesses here today and even among members of this committee, we will hear a divergence of views on the questions of sports prediction markets.
▶ 0:13:07However, one thing I think everyone here can agree on is that the cftc needs a fully appointed commission, additional resources and increased expert staffing to do their job effectively. Unfortunately, I have serious doubts as to whether the agency has the capability to police these markets. Last year, after this administration's doge efforts, the agency saw its staff reduced by 20%.
▶ 0:13:36That means the cftc must try to protect consumers, not only in these fast growing prediction markets, but also in the rapidly evolving digital assets assets industries with one fifth less staff. If someone tries to tell me that in the seven months that Mr.
▶ 0:13:56Selig has been chairman of the agency, that they have acquired all the expertise necessary to understand and surveil these different events traded on prediction markets, including sports. Frankly, I wouldn't believe them. And of course, the solution from some of my colleagues to all of this is simple.
▶ 0:14:16Cut the agency's funding from its currently low levels, as indicated by their $10 million cut to the cftc budget in their fiscal year 27 agriculture appropriations bill. This cut came despite the administration's request for an increase in the agency's current budget.
▶ 0:14:36Just last year, we heard from farmers, ranchers, cooperatives and others that have traditionally relied on commodity markets that stagnant or insufficient funding at the cftc undermines market certainty and raises risks across the system.
▶ 0:14:54If we want safe markets, if we want innovation without exploitation, if we want risk management tools that serve all americans, then we must give the cftc, the staff and the funding it needs to do its job. Recently, chairman selig put forth his personal vision since he is the only commissioner there for how to impose some structure and parameters on prediction markets.
▶ 0:15:20While I recognize that the proposal contains some positive elements, it does not go far enough. I look forward to hearing the witnesses views on this. My primary interest in this space is protecting consumers and maintaining market integrity. These should not be partizan issues. Again, I want to thank the subcommittee chairman and ranking member for conducting this hearing, and I look forward to hearing from our witnesses. With that, Mr. chairman, I yield back. Speaker 1: thank you, ranking member.
▶ 0:15:49Of course, you're exactly right about us needing more cftc commissioners. One is chairman steele is wonderful, but we would take four more. You're exactly right, ma'am. The chair would request that other members submit their opening statements for the record, so the witnesses may begin their testimony. And to ensure that there's ample time for questions just for our witnesses, we'll introduce you and then we'll let you get started. As has been our practice. Mr. davis and I will run this, run this hearing together.
▶ 0:16:17And so don't be alarmed if the ranking member begins to call on you. Otherwise, instruct the traffic flow. A coup is not afoot. We're just working together. Indeed, you should only be concerned if we physically begin fighting over the gavel. That is the would be the only particular problem. In fact, with that. We'll alternate introducing today's witnesses. Speaker 2: thank you, Mr. chair. Our first witness today is Mr.
▶ 0:16:43Robert schwartz, who is a partner at morgan lewis in about us. He is also the former general counsel at the cftc. Speaker 1: our second witness is Mr. david, been the chairman of the indian gaming association. Speaker 2: in. Our third witness is christopher silky, who is the senior president of the government relations at the american gaming association. Speaker 1: fourth, we have Mr. karl kennedy, a partner and co-chair of the financial markets and regulation practice at katten muchin rosenman llp.
▶ 0:17:15Speaker 2: and next we have our final witness. Mr. um, assaf meir, the founder and chief executive officer of solas labs. Speaker 1: thank you to our witnesses for joining us again today. You're, uh, you're an august group and we're going to proceed your testimony. You're each going to have five minutes. You understand the drill. The timer in front of you is going to count down to zero, at which point your time has expired. Uh, just so we can keep moving, we don't provide a lot of grace time on that. Mr. schwartz, with that, you may begin.
▶ 0:17:48Speaker 5: thank you. Good morning, chairman johnson, ranking member davis and chairman thompson and ranking member craig. Uh, as you said, chairman johnson, I'm rob schwartz, a partner in the commodities and derivatives practice at morgan lewis and bockius, uh, before joining the morgan lewis law firm last year, I spent 13 years at the cftc, including as its general counsel under chairman russ benham.
▶ 0:18:13I covered a lot of ground in 13 years, but beginning in around 2020, prediction market regulation emerged as a key focus. And now in private practice, it's a key focus of mine still. So thank you for the opportunity to appear before you to support your work. Uh, now, the disclaimer the views I share are my own and do not represent those of morgan lewis, my colleagues or clients, or any other person or organization.
▶ 0:18:40Controversy over whether prediction markets are legitimate trading platforms or a form of illegal gambling is, in a sense, new sports event markets launched just last year. But in another sense, we've been here before. The trading versus gambling question has come up from time to time, not just for decades, but for centuries and all over the world. Some examples. In 1688, joseph de la vega, a dutch author, wrote that the amsterdam stock exchange were.
▶ 0:19:11Futures and options were traded was. And excuse me for this a gambling hell he called trading a game brokers card sharpers and speculators, skillful gamblers who put up wheels of fortune. But de la vega wasn't just an author. He was a trader on that exchange. And in the very same pages, he explained how he used futures and options to hedge commercial risk.
▶ 0:19:32At around the same time, rice futures markets developed around osaka, japan, in 1705, the tokugawa shogunate shut one down as a gambling den, but 25 years later, it formally recognized the dojima rice exchange as japan's first officially sanctioned futures market. Our experience in the us was similar. In 1867, police stormed the floor of the chicago board of trade and arrested seven members for gambling offenses.
▶ 0:20:01Later, congress nearly banned futures nationwide, but competing bills died in conference committee. We gained $0.02 per bushel in the 20th century. The tide turned.
▶ 0:20:14Justice holmes famously rejected the idea that transactions on that same chicago board of trade were mere wagers in 1922, in the grain futures act, congress asserted a national public interest in healthy futures markets and in 1974 gave the cftc exclusive jurisdiction over exchange traded futures and options. Then in dodd-frank, swaps entered the mix. That was big, because the definition of swap is extraordinarily broad.
▶ 0:20:43It identifies dozens of types of swaps. It expressly reaches event contracts, and it has a particularly open ended provision for any transaction that, in the future, becomes commonly known to the trade as a swap. The definition is virtually agnostic as to the subject matter. It could be a farm product, a benchmark, an election or most anything else an event, contract, litigation. You often hear justice scalia quoted that congress does not hide elephants in mouseholes.
▶ 0:21:12That's true, but the definition of swap is not a mouse hole. The definition is sweeping, and as a result, so is the cftc exclusive jurisdiction. Now, interpreting the cea is a legal matter that is separate from the policy debate, and people of good faith question the wisdom of allowing these markets on cftc regulated platforms. But what's critical to understand is that congress channeled that kind of question to the cftc, not to the 50 state gambling regulators and not to courts.
▶ 0:21:41For its part, the cftc has strong tools to implement policy. It has the power to keep problematic contracts off of exchanges, and it has the authority to stop an exchange from listing a contract that involves gaming, among other things. If the contract violates the public interest. Part of what's animating the controversy today is that the agency hasn't done that for sports. But what it has done is to propose new rules that, if adopted, could limit what's listed when they're final.
▶ 0:22:09If the agency has stumbled, it can be taken to court. Congress, of course, has any number of ways to put the controversy to bed like it did in 1958, when it prohibited onion futures, or in 2010 when it forbade futures on box office receipts. If congress wants to prohibit sports event contracts, it should say so clearly in the cea.
▶ 0:22:29But as things stand, and consistent with congress's many decades of refusing piecemeal regulation of these national markets by the 50 states, the cftc's jurisdiction is exclusive. So I thank the subcommittee for its work and for the opportunity to assist in any way that I can. Speaker 1: thank you, sir. Uh, chair beam, you are recognized. Speaker 5: uh, we'll see you up. Good day.
▶ 0:22:57Honorable friends and relatives. It is an honor to be here as chairman of the indian gaming association before this committee. This has been 18 months in the making, and we're thankful for this opportunity. Up front, I want to make clear that indian country is rural america. We are many things, among them farmers and growers. We support responsible innovation, the use of futures to hedge risks and to ensure ensure fair pricing.
▶ 0:23:23However, we strongly oppose the prediction markets that have manipulated a weak regulatory agency to offer nationwide online sports gambling to kids as young as 18. We view this issue from a governmental lens, so I'd like to share some historical context. In the 1970s, tribal governments turned to gaming to generate revenue, to fund services and programs to its citizens.
▶ 0:23:52During that same time, nearly a dozen states. Engaged in lotteries to fund services to their citizens. Indian gaming is governmental gaming. Every dollar generated by indian gaming goes to fund healthcare. Education for our children, housing for our elders, public safety and infrastructure. Indian gaming also generates jobs. In 2020 alone, we generated over 682,000 rural american jobs.
▶ 0:24:22These jobs provide a stable income and a path to the middle class for our tribal citizens and nonmembers alike, in areas where jobs otherwise do not exist. We worked under igra framework for nearly four decades, carefully negotiating agreements with states to strictly regulate gambling. Every tribe engaged in gaming regulates to maintain strict age requirements.
▶ 0:24:51We invest in problem gambling gambling programs that include treatment, education, self-exclusion and staff training. Prediction markets threaten these rural jobs and revenue generated to tribal and state government budgets. By violating our laws and regulations. They claim that they're innovators, yet they have invented nothing. Prediction market apps offer bets identical to those in legal regulated sports.
▶ 0:25:18Book money lines, totals, parlays, and prop bets. The only difference is that prediction markets avoid our regulatory systems designed to protect consumers and the integrity of american sports. Another big difference is that they ignore the strict age requirements and problem gambling programs that we've established. Prediction markets target young people and those in jurisdictions where sports betting is prohibited.
▶ 0:25:45They advertise on tiktok and hire influencers who claim that they are a side hustle without revealing the true risks of gambling. In fact, one ceo attempted to equate sports contracts to financial literacy. This is both misleading and dangerous. Today, thanks to a one person agency, every teenager with a smartphone can now lose their shirt without losing, leaving their house or or dorm room.
▶ 0:26:13We're only starting to see the devastating impact on our kids mental health and financial security. No one voted for this. Congress has not passed any new laws on this matter. This is happening because one person has declared that online sports gambling is legal in every state and on every reservation. One man has taken the cftc from crops to props. Tribal governments are not alone in this fight.
▶ 0:26:39We are proud to be here beside our relatives at the american gaming association. We are glad to be joined by unite here, with more than 1 million casino workers throughout the united states who are fighting to protect good paying american jobs. And finally, we're joined by at least 40 state attorneys general who have filed legal briefs and comments to the cftc. The list includes ags from nearly every state, from every member of this committee.
▶ 0:27:07They are fighting to enforce laws of their states. Your states, some of those laws prohibit all forms of gambling. Some prohibit online gambling, and some rely on revenue from gambling to support their communities. In closing, I leave you with these three requests. One, we urge you to advance. H.r. 7840. The event contracts enforcement act, which has been referred to this committee.
▶ 0:27:37Two we ask that you ensure that the clarity act stops sports and casino gambling through prediction markets and provides that igra and state and tribal gambling laws have full force and effect. And three, we urge you to stop the outrageous cftc proposed rules that constitutes the height of regulatory agency capture. Again, we thank you for this opportunity. Speaker 2: Mr. silk is recognized for up to five minutes.
▶ 0:28:07Speaker 1: chairman johnson, ranking. Speaker 6: member davis, chairman thompson, members of the committee, thank you for the opportunity to testify today on behalf of the american gaming association. Sports betting on prediction markets like cal, she and polly market makes a mockery of congressional intent, is stripping your constituents of important consumer protections and costing your communities a fortune in lost tax revenue. I'll start with a statement that goes to the heart of the issue. Quote, the legislative history directly confirms congress did not want sports betting to be conducted on derivatives markets, end quote.
▶ 0:28:39The ag agrees. But here's a striking part. That argument was made by corky in federal court less than two years ago. Let's be clear so-called sports event contracts are sports betting. A customer puts money on a sports outcome and gets paid if they are correct. 41 state attorneys general agree these products are sports betting and must be subject to state gambling laws.
▶ 0:29:01Litigation has reached nine federal appeals courts and lawmakers across the country are responding for one simple reason these platforms are running backdoor sportsbooks. The ag supports responsible financial innovation. But what prediction markets are doing with sports gambling is not innovative.
▶ 0:29:20Prediction market platforms are using cftc registration to offer nationwide sports betting, while bypassing the state and tribal gaming laws that congress, states, tribes, regulators and voters have spent decades building. That matters because legal gaming industry is an important part of the american economy. It supports 1.8 million american jobs, contributes approximately 329 billion to the us economy, and produces roughly $53 billion in federal, state and local tax revenue each year.
▶ 0:29:52Those benefits exist because gaming is licensed, taxed, monitored, and accountable. Prediction markets thumb their noses at that framework. They make sports betting available nationwide, including in states that have rejected sports betting, and in jurisdictions where tribal governments negotiated exclusivity through compacts, they avoid the taxes, licensing fees, responsible gaming obligations, advertising rules, consumer protections and integrity safeguards that licensed sportsbooks must follow.
▶ 0:30:21We estimate states and tribes have already lost more than 1.2 billion in critical gaming tax revenue since these platforms began offering sports event contracts. This sum is snowballing by the day, and that money should be supporting education, infrastructure, public safety, responsible gaming programs and tribal communities. The consumer protection gaps are just as serious.
▶ 0:30:45Legal sportsbooks are built around age verification, geolocation, responsible gaming tools, complaint processes, suspicious activity reporting and regulator oversight prediction market sports betting is not subject to comparable gaming specific requirements.
▶ 0:31:01These products can reach users as young as 18, even though nearly all legal sports betting in this country is limited to adults 21 and older, marketing sports contracts as investing is also misleading and dangerous, especially for younger consumers who may believe betting on sports is a financial strategy rather than entertainment, with a real risk of loss. This also threatens sports integrity.
▶ 0:31:25Licensed operators monitor wagering patterns, report, report suspicious activity and coordinate with regulators, leagues, integrity monitors and law enforcement. If sports betting migrates to platforms outside those gaming specific systems, the risk is that suspicious activity goes undetected. Consumers are confused and confidence in the games is weakened. The cftc has an important mission. It oversees commodities, futures, derivatives and emerging digital asset markets.
▶ 0:31:54But it was not created to regulate gambling, police, responsible gaming, referee sports integrity or become america's national sports betting regulator. The united states already has more than 8400 state and tribal gaming regulators, with decades of experience doing exactly that work. Congress should act immediately, immediately, and make three things unmistakably clear. First, sports wagering is gambling. No matter what label a platform puts on it.
▶ 0:32:23Second, gambling policy belongs to states and tribes, consistent with federal laws congress has enacted to protect consumers, markets and sovereignty. Third, cftc registered entities should not be permitted to offer nationwide sports betting or casino style gambling through self-certified contracts. Acting now will protect your constituents, respect tribal sovereignty, preserve state authority, safeguard sports integrity and ensure the cftc can focus on the mission that congress assigned it.
▶ 0:32:53Congressional intent was clear sports betting should not be traded on financial markets. I know it, you know it and causes lawyers made clear in federal court that they knew it. I look forward to our discussion today. Thank you. Speaker 2: Mr. kennedy. You're recognized for five minutes. Speaker 7: chairman thompson and johnson, ranking members, craig and davis, members of the subcommittee. Thank you for having me.
▶ 0:33:18I'm a derivatives partner at katten muchin rosenman, a large international law firm with a well recognized financial services practice. I'm here in my personal capacity, not on behalf of any client or firm. You've heard a lot today about whether sports event contracts should be allowed or banned. I want to suggest that that's the wrong question. The right question is whether a given contract meets the rules the cftc already has on its books.
▶ 0:33:44Let me explain why and then respond to some of what you've heard from the other witnesses. Chairman johnson, I really appreciate your opening remarks that this isn't new territory for the cftc. Since 1974, congress has repeatedly asked this agency to regulate products nobody could have envisioned in advance. Things like financial futures, energy swaps, credit index swaps, weather futures and futures and swaps on crypto.
▶ 0:34:14That's why congress wrote the words commodity and swap broadly, not because it wanted a free for all, but because it knew new products would keep showing up and it wanted the cftc to be ready for them, making room for that kind of innovation is exactly what congress demanded of the cftc. Sports event contracts are just the newest product to walk through that door.
▶ 0:34:37Second, federal jurisdiction over these contracts doesn't erase state or tribal authority over gambling. You've heard from the indian gaming association and the american gaming association that this is a sovereignty and revenue problem. I understand that concern. But think about gold as an example. You can buy gold from a local dealer under state law, trade gold futures on cftc exchanges, or buy a gold etf that the sec oversees three regimes.
▶ 0:35:07Same underlying asset operating side by side for decades without controversy. Sports event contracts work the same way. A person who wants to get exposure to sporting events through a state license or tribal sports book remains completely free to do so. Recognizing that the cftc also has a lane here, doesn't take any away anything away from the states and the tribes lane.
▶ 0:35:34Third, self certification is not a rubber stamp and it's not a loophole. The a g a testimony you've heard suggests that self certification lets any through anything through unless the cftc scrambles in time to stop it. That's not how it works. And as required by congress and cftc rules, every contract listed on an exchange already has to meet 23 distinct core principles, including a core principle that requires that the contract, excuse me, not be readily susceptible to manipulation.
▶ 0:36:04On top of that, the special rule which I fully described in my written remarks gives the commission real a real backstop. Within ten days of a listing, it can open a public interest review within a defined 90 day process. And if the agency finds the contract contrary to public interest, the contract comes down. That's not a loophole. That's active oversight with real teeth.
▶ 0:36:31Fourth, despite what you've heard from other witnesses, customer protections already apply in these markets, as they do in other derivatives markets. Additionally, brokerage firms that carry customer accounts must register with the cftc, keep customer money segregated from their own, hold it with approved custodians, provide all customers with important disclosures about trading risks and answer to yet another regulator, the national futures association.
▶ 0:36:57These same protections apply to every other product listed on cftc exchange. Nothing about calling a contract sports related removes those safeguards. Now you've heard the iga and point to statements she made in earlier litigation, suggesting that the industry itself once conceded sports betting doesn't belong on these markets.
▶ 0:37:16But what one company has argued in one lawsuit doesn't change the commodity exchange act with the commodity exchange act expressly requires, congress wrote, broad commodity and swap definitions on purpose. They then gave the commission a tool to conduct a public interest review for each contract when it's warranted. That tool is exactly what the commission's june proposal would sharpen. This type of innovation is what has made the U.S.
▶ 0:37:44Derivatives markets so successful and the envy of other countries. Since the establishment of the cftc in 1974. So my bottom line is this a categorical ban on sports event contracts would take away the express judgment congress gave this agency.
▶ 0:38:02Right when the commission's proposing solutions to address the specific concerns you're hearing today, and a ban wouldn't make the demand for these contracts go away, it would just push the demand offshore to platforms with no cftc oversight, no segregated customer funds, and no one to call when something goes wrong. The better path is to let the commission do the job. Congress gave it hold every contract to the core principles.
▶ 0:38:29Apply the public's interest review when warranted, and keep working through the rulemaking process that's already underway. That would be consistent with the agency's long history and its purpose of fostering responsible innovation. Thank you, and I look forward to your questions. Speaker 1: thank you sir. Um, Mr. amir, you may begin when you're ready.
▶ 0:38:52Speaker 6: chairman johnson, ranking member davis, members of the subcommittee, thank you for the invitation and opportunity to contribute to this important dialog about the future of american commodity markets. My name is assaf meyer, and I'm the co-founder and ceo of solidus labs. Before founding my firm, I spent my career at goldman sachs, the best boot camp I can imagine for the intersection between finance and technology. Testifying today is particularly touching for me. Since two years ago, I was proud to be naturalized and become an american citizen.
▶ 0:39:19In preparing this testimony, I was thinking about my two american daughters. The opportunity that brought me here, the opportunity my daughters in the next generation of americans will have. I am a firm believer that much of that opportunity is rooted in america's league of their own capital markets, strong capital markets and commodity markets in particular, have played and still play an instrumental role in power and american innovation and growth. That innovation is always rested.
▶ 0:39:46A uniquely american combination of freedom and guardrails, freedom for entrepreneurs to innovate, and for consumers to choose guardrails that are strong and sensible, that keep bad actors out and our markets fair. Maintaining this combination is central to my firm's mission. Saldus helps keep markets safe and fair by providing trade, surveillance and market integrity technology designed to detect and prevent market manipulation and other forms of crime.
▶ 0:40:14Our solutions were originally designed for the digital asset space, one of the world's most complex and fragmented trading environments. Today, we work with many of america's and the world's leading financial services institutions, as well as with federal and state law enforcement and regulators. While we cover many asset classes, we specialize in navigating frontier markets where the rules of the road are still being harmonized.
▶ 0:40:38Over the past two years, prediction markets have become one of our fastest growing client client segments, and we are proud to work with many of the leading platforms, including cftc, regulated, dcms and fcms. In my testimony, I make three main points. First, strong prediction markets. Strong prediction protections already exist within the commodity exchange act and cftc regulation, both on paper and in practice.
▶ 0:41:05Our day to day is spent alongside compliance and teams that are deeply committed to applying these protections effectively. They do so by maintaining highly sophisticated risk monitoring programs staffed by highly trained teams, empowered by best in breed monitoring technology.
▶ 0:41:23As one example from one of our dcm clients in q2 of just this year, their compliance analysts monitored more than 120,000 alerts across more than 20,000 individual markets, opened more than 400 formal investigations, and referred more than two dozen cases to law enforcement.
▶ 0:41:38To argue that a cftc regulated prediction market inherently offers no protection is akin to arguing that the largest cftc regulated exchanges, which settle trillions of dollars in transactions each year, inherently don't offer sufficient protections to consumers. It is a working system, tried and tested over decades, subject to oversight by the cftc and required under federal law.
▶ 0:42:02All of that being said, my second point is that prediction markets and sports contracts specifically do raise new challenges and pose unique risks to market integrity. The sheer number of contract listed in the millions, the short lived nature of most of these contracts on average 2 to 3 days, the nonstandard symbology and the lack of market reference data create a novel data topology that introduces specific architectural challenges right off the bat.
▶ 0:42:30Beyond this, the market abuse surveillance landscape is different. The binary nature of outcomes, the combinatorially expensive connections across related contracts and underlying markets, the expanded surface area of insider information leakage, and the highly differentiable and often fragmented liquidity across markets and market categories demand a shift in detection, technology and surveillance mindset. To make these points, my written testimony draws on real world examples and proprietary research. My third point is that these novel challenges are very much addressable.
▶ 0:43:00Our team at solidus built a multi-dimensional trade manipulation detection system to identify bad actors. Our software natively gathers otherwise siloed data sets that are traditionally overlooked. Those include open source intelligence, transactional data, account and kyc data, social sentiment analysis, as well as market events, news, and blockchain data. When appropriate. We then combine them in real time with order and trade data in order to employ a holistic pattern recognition behavioral analysis.
▶ 0:43:32This provides exchanges and other operators within a comprehensive view of trading activity on their platform. This approach is exactly what allows innovators to build while maintaining effective guardrails. It is a true pleasure and honor to provide testimony to this committee, and I look forward to answering your questions. Speaker 1: thank you sir.
▶ 0:43:52I should have mentioned that pursuant to committee rules, members of the full committee are allowed to waive on to this committee here, and we will allow them questioning time as well. I will start my five minutes and we'll go to Mr. davis. Mr. thompson, then on deck. Uh, Mr. silk, I just want to start by underlining something that you had said about. And I don't know how many young people are watching this hearing. I suspect not very many. But I hope they all heard you.
▶ 0:44:20And I hope they all hear me when we say that, you know, sports betting is not a financial strategy. And I think that is really important to keep in mind, which is why customer protection, customer protection has to be at the heart of many of these conversations. I think before we understand, uh, any particular deficiencies in the, in the customer protection framework, we need to understand where we're at today. So, Mr.
▶ 0:44:42Kennedy, give us a sense, what are the, uh, what are the obligations imposed on fcms and dcms when we think about derivatives, uh, activity, we normally think about a relatively sophisticated, uh, end user. Do the obligations on the fcms dcms, do they change at all for maybe a less sophisticated user?
▶ 0:45:08Speaker 7: well, the obligations of fcms uh, in terms of disclosure, um the fcms have to provide disclosure that relates to the particular types of products that they offer, um, to their, um, uh, to their customers. And so if there are additional disclosures relating to particular types of instruments. Yes, the answer to that question is yes.
▶ 0:45:29And so with respect to event contracts, um, you will see is that many clearing brokers do add specific disclosures relating to the trading of those event contracts. Speaker 1: and so, uh, talk to us a little bit more. I mean, give, give the committee a sense of what, um, what are the, what are the obligations imposed, uh, that might help protect customers in the current regime?
▶ 0:45:58Speaker 7: well, so clearing brokers must also, uh, in addition, just talking about some of the registration requirements, they have to meet a significant number of cftc compliance requirements before they're able to even be registered. And then once registered, they must continue to demonstrate those requirements.
▶ 0:46:13Some of them include, um, also, um, having to, uh, provide risk management programs with respect to the various risks that they face, um, ensuring that customer funds are segregated and protected with and held at, um, custodians. Um, they also must, in addition to the disclosures, um, they must provide complaints. I heard, uh, in one of the other witnesses testimonies that they have to have some kind of complaint hotline.
▶ 0:46:43They must have a complaint procedure clearing brokers must also have complaint procedures. So and then the most important piece which I heard in there was a suggestion that perhaps there isn't a requirement with respect to anti-money laundering. And know your customer rules for clearing brokers must have anti-money laundering and know your customer rules that are consistent with the bank secrecy act.
▶ 0:47:04So I think there are a lot of parallels between the types of customer protections and knowing your customers and understanding the risks assigned to the particular customers that you service that are existing in current, uh, requirements for futures commission merchants and clearing brokers. Speaker 1: yeah. Thank you sir. Mr. schwartz, we'll start with you. And if we've got time, anybody else can can chime in. It seems to me that if courts.
▶ 0:47:29Uh, allow states or in essence, if they exclude exchange traded and cleared derivative products from the authority of the commission because they resemble or are competitive with sports wagering products that are regulated under state law, that is that feels a little bit like state preemption of the federal government. And maybe there might be a consensus on this committee that that or the subcommittee that that might make sense in that area.
▶ 0:47:54Is there a limiting legal principle that would say that if states then moved into the regulation of other non-sports betting areas, that that wouldn't in other ways erode the authority given to the commission by congress? Speaker 8: thank you for the question. It's not a hypothetical in the litigation that's going on right now. Uh, sports contracts are sort of the best known subject matter, the most common in those cases.
▶ 0:48:26But there is other subject matter at issue. Um, elections, entertainment, uh, natural disasters. So I think there really is no limiting principle. And if the courts ultimately carve out on their own sports contracts, I think you will see it's difficult to see an end to court involvement in this question, and difficult to see an end to state's assertion of jurisdiction over different
▶ 0:48:57Products. Speaker 1: it's only 10s left. I don't think we can probably get another voice, but perhaps somebody, some other member will pick up the baton, because I think this is a really important legal conversation with that. Mr. davis, the floor is yours. Speaker 2: thank you so much, Mr. chair. I want to start with Mr. schwartz and then Mr. kennedy. As we've seen, an evolution of prediction markets, this expansion, so to speak.
▶ 0:49:27What steps would you suggest congress to take to ensure the cftc has the resources and focus necessary to carry out its responsibilities? Speaker 8: uh, well, uh, for my part, I've said many, many times that the cftc has, in my opinion, been understaffed since I was there, since it was implementing the dodd-frank act. And certainly now that staffing levels are down 20%.
▶ 0:49:57The agency, though, has a history of doing more with less. Uh, it's been able to be flexible and adapt over time as new financial products have come online. Uh, and it has partnerships with the exchanges with the national futures association that, uh, are a force multiplier. But you won't hear me disagreeing that the agency has less in the way of resources than it needs.
▶ 0:50:26And the public deserves. Speaker 7: thank you for the question. I agree with rob. I also worked at the agency. Actually, rob and I worked together, um, several years ago when he joined and I was there, um, during the, the time when president obama signed dodd-frank into law. And, um, the commission received new responsibilities, um, to oversee the trillion dollar, um, um, uh, swaps market.
▶ 0:50:54Um, the agency, to rob's point, has done a lot with a little, um, and just the two years I was there, the agency adopted almost 100 rulemakings under then chairman gensler. Um, which was a remarkable feat, um, with just, you know, maybe a little over 700 staff members.
▶ 0:51:17Um, and its oversight during that time also included significant, um, enforcement of, of cftc rules, both the rules that existed before dodd-frank. And then the new authorities that received under dodd-frank. Um, the agency though, um, is short staffed.
▶ 0:51:35Um, and, um, but I do believe that with, um, additional resources that are about to perhaps receive additional authorities under the clarity act with additional resources to address these new asset classes. Um, you know, the cash markets and crypto, uh, as well as to deal with the explosive growth in prediction markets. I think that the cftc certainly should receive additional resources.
▶ 0:52:02I'm not going to disagree and suggest that the commission has all the tools that it needs. I think it needs more resources. And as a former cftc alum, um, I think more smart, good people could join the agency and be helpful in its mission. Speaker 2: so both of you have said that the commission has done a lot with a little punch, I guess above his his weight. Um, what happens if the resources are not there?
▶ 0:52:31And we continue to see the evolution that we're seeing today? What impact is this as a result of the understaffing? Speaker 8: uh, I can start, um, the cftc has always had to triage enforcement matters. There is a triage unit and it applies criteria to, uh, complaints that come in. It can come in from the office of the whistleblower.
▶ 0:52:58Um, and it has to, it has to make hard decisions because these are all serious matters. But I assume that it would continue to do the same. It would just have to, um, it would just have to focus its resources where they were available. Speaker 2: miss kennedy.
▶ 0:53:19Speaker 7: yeah, I agree with what rob said and, and would also suggest that, you know, within, you know, newer technologies, the commission in fact, just recently, within the last couple of years, improved its surveillance technology after having the same technologies for over a couple of decades. Um, I think the commission could use additional technologies to drive efficiencies and its oversight of, of derivatives markets broadly. Um, that is certainly, uh, helpful. Um, rob would have better knowledge and I think he's mentioned the triage unit.
▶ 0:53:50Um, but I have seen the, the commission do a lot with, with a little remarkably so. So, um, I think the commission would continue to operate. It would do the best job that it could, but consistent with my earlier statements, I think the commission could always use additional resources. Speaker 2: I yield back. Mr. chair. Mr. chair. Recognized for five minutes. Speaker 3: well, thank you so much. And thanks to all the members of the panel here.
▶ 0:54:21Really, really important. Um, hearing topic. Mr. kennedy, in your testimony, you said core principles three and four make the designated contract market dcms the first line of defense against manipulation and disruption. Uh, please describe the obligation exchanges must meet under cftc oversight, how they satisfy these core principles. And if concerns raised today are addressed by these core principles.
▶ 0:54:49Speaker 7: well, the core principle regime was added to the commodity exchange act in 2000 under the commodity futures modernization act, and it was a decision to, um, allow the exchanges, which are also regulators, their self-regulatory organizations that are empowered to oversee the markets and the participants on their markets, much like, you know, we refer to the national futures association or the securities market, finra being a regulator.
▶ 0:55:17So, um, these exchanges were, um, uh, given authorities to police their markets. They have core principle, a set of 23 core principles that they must comply with. The core principles are principles. They're not prescriptive rules detailing how these exchanges must meet regulatory outcomes. So think about the core principles as achieving particular outcomes, not as a prescribed formula for every exchange.
▶ 0:55:44Financial markets are complex and requiring every exchange that lists a whole variety of different products to the same prescriptive rules would not be efficient and not be an effective way of managing the unique risks of every exchange.
▶ 0:55:57So to address your point, chairman, uh, the concerns that are being raised here, there are specific core principles that deal with fair access, that deal with ensuring that, uh, the participants on the exchange aren't subject to abuse, which could include abuse relating to promotions or marketing. Um, it requires that the contracts have financial integrity and can meet their settlement objectives.
▶ 0:56:20It requires that the exchange, um, uh, root out market manipulation and prosecute within the context of their rules, how violators of those, um, of those rules would be treated. That's all to say alongside of the exchanges having this sort of policing power, the cftc could also step in.
▶ 0:56:43And what you have seen traditionally in derivatives markets is these exchanges working hand in hand, cooperating with the cftc to police and go after bad actors. So, you know, these concerns can definitely be addressed by the core principles. They're intended to be flexible so that every exchange can tailor its its specific rules to address the unique concerns and risks on its exchange. Speaker 3: so am I hearing that, um, that these or other core principles be, uh, be further interpreted?
▶ 0:57:12Um, or could they be further interpreted to address additional issues raised here today? Speaker 7: that is correct. The cftc could, for example, there are some core principles that the cftc has appended to its rules, best practices. Those best practices could be enhanced to address the unique concerns of these particular instruments. Um, and so I think that the cftc proposal is, to your point, earlier, you mentioned is the first rulemaking you talked about in your opening remarks about the goals of that rulemaking.
▶ 0:57:40We could see further rulemakings to address the concerns raised here around customer protection and market integrity insider trading. Um, you could definitely see a lot of that coming from future rulemakings. Speaker 3: so, so what is the benefits to our markets of a principles based regulatory approach? And is it your observation that this principles based approach has been effective? Speaker 7: it is.
▶ 0:58:05And my opening remarks here today, I mentioned that, um, after the 2000 amendments, the commodity exchange act, that the cftc regulatory regime, its principles based regime, has become the envy of global markets in terms of the way that these markets are being regulated and its flexible approach in giving exchanges, which again, are self-regulatory organizations, regulators, essentially the tools that they need and the, the, you know, flexibility to address these concerns.
▶ 0:58:33And so, uh, it's, it's my view that our markets are some of the most vibrant and best in the world. Speaker 3: um, Mr. mayor, um, some stakeholders have suggested prediction markets operate without know your customer protocols, anti laundering safeguards, integrity monitoring and accountability or age verification. Has that been your experience with the cftc regulated exchanges that your firm has worked with? Speaker 6: um thank you for the question.
▶ 0:59:02No, that has not been my experience. Um, dcm licensed cftc venues are gathering all the information you've just mentioned. In fact, compile it into a larger superset of data to understand whether or not market, um, manipulation is taking place. Um. Speaker 3: very good. Thank you, I yield. Speaker 2: Mr. basinski is recognized for up to five minutes. Speaker 9: thank you, ranking member davis and and chairman as well.
▶ 0:59:31Um, good morning and thank you for the to the witnesses for being here today. Appreciate it. You know, when it comes to prediction markets, I have two priorities that are at the top of my list. One is consumer protection. And the second is market integrity. And more often than not, they lead back to the same place, stopping people from exploiting a market with information or influence. The average person just doesn't have.
▶ 0:59:55It's why I introduced the predict act, which is a bipartisan bill to bar government officials and families from trading on the outcomes of policy decisions and government actions. If you have access to sensitive information, you should not be able to turn a personal profit on. That is my belief. But elected officials aren't the only people who can move a market they're supposed to play be playing straight in.
▶ 1:00:19This extends to other markets like sports events, prediction markets. And so to start with my line of questions, I'd like to focus on the structural piece first. Um, because of how the cftc's framework works, the exchanges self certify their own event contracts. The structure is meant to let legitimate project products reach the market without regulatory bottleneck.
▶ 1:00:44But as more of these products come online, some of them can start to look very different from a position on which team wins the game. If you can take a position on whether one pitcher throws a ball on his next pitch, or whether one player makes his first free throw, you built a contract that a single person can decide the outcome of. So my question is about the front end of this process.
▶ 1:01:07The information these companies put in front of the cftc when they self-certify. So I'm opening up this first question to to any of the panelists. Um, how important is it that these that those submissions spell out exactly what conduct a contract turns on in enough detail that a regulator can quickly understand what's being offered and judge whether it's ready, it's readily susceptible to manipulation.
▶ 1:01:38Speaker 6: thank you for the question. Um, there's a lot here to unpack. I'll try to do this quickly. Um, so first of all, I would say that there's a lot of data sharing agreements today already in place between companies such as ourselves and other companies in this space that gather, uh, the names of individuals that should be barred from trading on specific markets. Those static lists are then consumed by software that wouldn't allow them to trade on specific markets. We actually have examples.
▶ 1:02:05We found multiple, um, manipulation scenarios where due to the fact that we consume both names as well as focus on behavioral analysis, we found groups of individuals that were colluding, manipulating, let's say one market. And then we found one individual that was splitting their bets between multiple different kind of event contracts, trying to, um, using leakage information that he had to kind of stay below the threshold.
▶ 1:02:31So say that when you combine otherwise very siloed data feeds between know your customer information, transactional data that's both deposited with roles, then static lists of individuals that should not even be trading on those markets alongside order and trade. That's your buy, sell, replace, amend, cancel all that. You get a very, very, very comprehensive view into the kind of the fraud journey. I would actually say just to kind of double click that, that's actually relatively simple to solve. The complexity arrives.
▶ 1:03:01And I think someone mentioned, do you see the related sports sports contracts? So around every tournament, there's multiple other event contracts that, um, essentially expand the attack surface, um, where you also need to be able to correlate those contracts to the main event contract and understand whether or not that actors are possibly manipulating cross product, um, in that regard. And so that's really the comprehensive, um, approach that we take today with some of our clients. Speaker 9: Mr. kennedy.
▶ 1:03:32Speaker 1: yeah, yeah. Speaker 7: and, and just to build off what assaf said in terms of the types of information that, uh, that the commission expects be in the self certifications, the commission has made clear not only in the proposal that it released in june, but also in an advisory that it issued in, I believe, march of this year, that they do expect that those self certifications to be comprehensive, to explain the risks, to address settlement risks, especially around single actor contracts, that the single actor could influence
▶ 1:04:04Inappropriately the outcome of of the event contract and the settlement of that contract. In fact, in the um, proposal that was just issued, the commission did expressly state that it's highly unlikely that a contract of that nature would meet the public interest threshold. That's in the special rules. So that's the expectation. The commission has been signaling that that's their concern. And I believe that the proposal once adopted, if, as proposed, would address the concern that you're raising. Speaker 9: okay, great. Thank you. I'll yield back, I appreciate it.
▶ 1:04:38Speaker 2: we have, uh, Mr. lucas, oklahoma is recognized for five minutes. Speaker 10: thank you. And thank you to our witnesses for being here today. And I apologize for the voice. It is not late life, puberty. I promise. It is critically important that we have this conversation, as many of our witnesses have noted, that the popularity of these products continues to grow exponentially.
▶ 1:05:01Our derivative markets function as risk management and price discovery tools, especially for the ag and energy economies, and we must diligently protect their depth, liquidity, and resilience. My number one priority for is maintaining the accessibility and the affordability of our derivative markets, so that our producers can continue to supply the food, fiber, and energy our world runs on. I want to thank the chairman for making this topic a priority for the committee.
▶ 1:05:32Today, we are specifically discussing sports related events, contracts, and how we can assure that the cftc has an enduring framework for novel derivative products. We have a diversity of opinion represented today, and I look forward to that discussion. Uh, let's begin with you, Mr. schwartz and Mr. kennedy. You might want to join in on this, too. It is important that our regulatory framework for derivatives supports innovation, while safeguarding the strength and the integrity of our existing financial markets.
▶ 1:06:01In your view, does the current self-certification process serve this function well, or can it use refinement? Speaker 8: thank you for the question. I think the best way to answer it is to look at what the how the system function before the self-certification process was, uh, was established by congress.
▶ 1:06:23Uh, time was that it was a burden on the exchange to make a showing that a contract was not contrary to the public interest. The cftc interpreted that to include an economic purpose test, which it defined as. You had to show that the contract reasonably can be expected to be or has been used for hedging and or price basing on more than an occasional basis.
▶ 1:06:47And that was immediately controversial, uh, precisely because it's very difficult to make that demonstration if the product doesn't exist yet. And over time, uh, the test, the cftc began to recognize the weaknesses in that test and began to apply it, uh, with a lighter and lighter touch, uh, until congress ultimately, uh, polished and reversed the, the burden so that it would be the cftc that would have to
▶ 1:07:18Demonstrate that a contract was contrary to the public interest. Now, uh, you get thousands and thousands of contracts self-certified every year. And I think the problem is not to be a broken record, the resources available to the commission to deal with that. Uh, but I think also, as discussed, it's helpful if the, if the certifying exchange includes enough information at the front end so that the commission can evaluate it efficiently. Speaker 10: any thoughts, Mr. kennedy?
▶ 1:07:44Speaker 8: yeah, I agree with what rob said in terms of the history and post 2000, when the commodity futures modernization act was passed, it took a few years. But once exchanges recognized the process within the burden flipped. You did see explosive growth in the number of contracts traded. And that explosive growth did lead to end users being able to benefit from having additional methods to risk manage their contracts.
▶ 1:08:14But one thing I want to highlight, too, is that in addition to risk management and all that, in 2010, congress then came back to the commission's purpose and adjusted its purpose to expand it to include additional purposes that the commission can, you know, can allow contracts to address purposes beyond just the risk management purpose. So I it's just to add that the commission believe that there could be additional benefits of having more products listed than less.
▶ 1:08:46Speaker 2: continue to miss you, Mr. kennedy, and perhaps Mr. schwartz thoughts as well. Let's discuss the definition section of the proposed rule. The sec and the cftc have issued a joint request for public comment on definitions related to swaps and security based swaps, and how those may affect the treatment of novel products like event contracts. What factors should regulators consider when defining sports related event contracts as swaps, security based swaps, or other types of transactions?
▶ 1:09:13Speaker 9: I think the best way is to hew to the statutory text, which if a event contract is to be characterized as a security based swap, it has to directly affect the financial condition or the financial statements of the issuer. The definition of event contract is much broader. It allows for a potential to be associated with a potential economic effect.
▶ 1:09:35So I think the presumption ought to be that it's a cftc jurisdictional product, but with a carve out for the traditional role of the sec to police the financial disclosures and the like, uh, of, of, of securities issuers. Speaker 2: Mr. kennedy, if you have thoughts, I guess you'll have to respond in writing with I yield back, Mr. chairman. Speaker 1: the honorable gentleman from alabama. You are recognized, Mr. figures. And then we have Mr. scott on deck.
▶ 1:10:06Speaker 11: thank you, Mr. chair. And thank you to the ranking member for holding this hearing. Uh, today this is actually, I think, like the the best, most balanced, uh, you know, group of witnesses that I've been a part of in my time in congress on a hearing. It's kind of like a two on one, kind of like a three on two sort of setup here, but it's, uh, but it's good for the intellectual, uh, debate and good certainly for policy consideration to have such a balanced panel. So I look forward to getting into this.
▶ 1:10:32Um, we've held several hearings, both in full committee and the subcommittee on the importance of ensuring that cftc is is fully funded, fully staffed, and equipped to oversee our evolving financial markets. Uh, yet despite recognizing these challenges, we have not acted on cftc reauthorization or provided the resources the agency needs to meet its growing responsibilities. Uh, cftc was was obviously created to oversee agricultural commodity markets and ensure they remain fair, transparent, and competitive for producers, consumers, and businesses.
▶ 1:11:00Uh, but we're still asking the same agency with the same limited resources to oversee increasingly complex products, such as some of what we're discussing here today, uh, including prediction markets, uh, and other emerging forms of speculation. Uh, if we continue to expand the agency's responsibilities without expanding its capacity, something inevitably will get left behind. I think that is something we can all agree upon. Uh, and for the farmers, businesses, consumers, and investors who rely on these markets, that is simply unacceptable.
▶ 1:11:29Um, we need a well-regulated commodity market, uh, to manage risk and for investors and producers to be able to plan for the future. Uh, and as congress, we have to sit here and acknowledge both the potential benefits and potential harms created in the products that they regulate, including in prediction markets.
▶ 1:11:47Um, so we have to, you know, ask ourselves, you know, individuals who cannot legally purchase alcohol, uh, may still be able to participate in financial products that closely resemble, I think we can all agree to at least that basic understanding, uh, even if we can acknowledge differences, there are certainly some very strong resemblances between sports betting, uh, and prediction markets on, on sports events. Um, and that obviously can result in significant losses.
▶ 1:12:12Uh, we must also consider the broader ethical questions surrounding markets tied to injuries, natural disasters or geopolitical events, some of which have been in the news here lately. Uh, these products raise legitimate concerns about incentives, manipulation, and whether financial interests could encourage harmful behavior. As these markets continue to evolve, congress has a responsibility to ensure that cftc has the resources, staffing, and authorities necessary to protect consumers while also preserving the integrity of markets.
▶ 1:12:41I, uh, I want to begin by asking this because I try to simplify issues. And this hearing is, you know, kind of focused around sports betting or sports markets and predictive markets is the solution we seek here, uh, for predictive markets to be more regulated, like traditional gaming markets or for traditional gaming markets in the context of sports betting to be regulated similar
▶ 1:13:11To predictive markets. I'll start with with you, chair. Been. Speaker 6: um, thank you for the question. That's one of our, our biggest concerns, the impact of these prediction market, online sports betting impact on our youth, our tribal youth in general. I was mentioning to the chairman that I was just at a tournament this weekend in arizona. Um, and my nephew was playing, he goes to a high school in seattle and he, he and his classmates, many of his classmates were talking about how they're gambling online and how they're kicking butt. Now, these, these are young kids.
▶ 1:13:40And that's who these prediction market folks are advertising to. So with respect to your question about who should regulate or what should be regulated, these prediction markets are sports betting and should be regulated as. As such tribes and states have regulatory um policies in place. We have agreements with states that prevent underage gambling, responsible gambling.
▶ 1:14:04And right now with these markets advertising towards kids, it's it has a devastating impact on their, their. Speaker 11: I'm gonna cut you off just in the interest of time and hearing from the other heavyweights here. Uh, so I want to, uh, Mr. kennedy, can you respond to that? Is the, is the ultimate issue here giving sports betting in the traditional gaming context? Uh, do you guys see it that, that they basically want the same sort of freedom that you guys have? Um, or is it the other way around? How do you respond to that?
▶ 1:14:32Speaker 8: I think I go back to my opening statement where I use the example of gold. You have different lanes, everyone has a different lane. So the states have a lane. If you want to buy gold bullion, you would do that under state law. If you want to buy a gold future, you would do that on a cftc market. If you want a gold etf, you'd buy that. And that's regulated by the sec. Or should we say that the cftc rules should supplant the sec rules because it's the same underlying or should it supplant the the state?
▶ 1:14:58I think choice at the end of the day for a customer that's looking to get that exposure, whether it's gold, an interest rate, or another asset or event is should be left to the user. And, you know, we're a society of free choice and competition. And, um, I can also use the example of insurance. It's state regulated, or you can enter into a weather future that provides you the same coverage. It's all about choice. And I think that there are different rules that should apply to different regimes.
▶ 1:15:29Speaker 11: well thank you, I yield back. Mr. chair. Speaker 1: Mr. scott, you are recognized. Thank you, Mr. chairman. Speaker 12: I want to pick up where miss buczynski left off. Uh, but first, I would like to submit for the record a wall street journal article dated july the 18th of 2026, the new washington temptation inside information and prediction market account. Speaker 1: without objection, it is inserted into the record.
▶ 1:15:52Speaker 12: um, I normally wouldn't do that, but since it is the wall street journal, which is one of the last, I think, papers that actually engages in real journalism anymore. Um, I think I will, and there's a very specific accusation made. I won't get into who it's made against in there of, um, political, uh, disclosure leading to poly market bets. And, um, that is certainly one of the things we're concerned about. We saw it with the issue in venezuela.
▶ 1:16:23Uh, and certainly if members of congress are engaged in that same activity, the consequences for them should be no less than they are for, um, a soldier that is putting his life on the line. I want to go back to you, peter mayer, because this gets to the question of the integrity of the system. Uh, you've talked a lot.
▶ 1:16:42You pretty much answered the question that I have, which is, you know, information sharing between parties to stop abusive behavior, uh, such as insider trading and the prediction markets. But this, this, the commission agree with your understanding of the importance of the information sharing. Speaker 7: um, I'll say the following.
▶ 1:17:02First of all, in your example, um, I think it's very important to draw a line between onshore regulated cftc venues and participants and offshore, um, unregulated, uh, venues. And the news we're seeing from both, we oftentimes conflate them. And by the way, there's a way to solve what we're seeing also in offshore arena, but it's very different than when we're talking about a cftc regulated venue.
▶ 1:17:26Um, I, what we're doing today in order to detect manipulation, I think goes beyond sometimes the principle. Speaker 12: I'm, I'm two minutes in a five minute question. Does my question specifically was, does the commission agree with your understanding of the importance of information sharing? That's kind of a. Either they do or they don't. They do. Okay. Thank you.
▶ 1:17:47And, um, I, I've never used cash other than to look at things, you know, lebron james next team, $180 million bet on that. Seems like miami or cleveland is probably where he's going. I'm not sure that that's any of our business. Um, but you get into some of the other things on here and, and they are kind of our business. I mean, the commodity markets have to have to function. Uh, you can't keep. Mr.
▶ 1:18:16Figures from betting on his losing alabama team against me with my winning georgia bulldogs. Some of that stuff is going to happen and really doesn't doesn't it's none of our business. Um, but the kids issue is our business. And, um, I want I want to give you, Mr. bean, you, you mentioned the lottery a little bit. You mentioned the, the national indian gaming commission.
▶ 1:18:39Uh, is it true that, I mean, your revenues are still going up though, right? I mean, everything I see shows that with kaushi and all of the other things, your revenues went up 5%. I think people are still buying more lottery tickets than they ever have. Did your revenue continue to go up? Speaker 6: it did. And, you know, the the tribal leaders who visited dc last week to talk to senators, you had different scenarios where their revenues went down.
▶ 1:19:07So while overall it may have went up, um, many tribes and different regions are experiencing losses, the increase is nowhere near the explosive increase that we've seen in prediction markets in the last 18 months. Speaker 12: um, all right, Mr. silk, federally, federally regulated exchanges are required to administer real time market surveillance staff, internal investigations teams and make timely referrals to enforcement division of a designated regulator.
▶ 1:19:33There's a specific set of federal laws and regulations designed to punish bad actors on federal exchanges. What is the state law framework for punishing bad activity on state regulated entities? Speaker 1: well, thank you for the question. Um, certainly there's an ecosystem that's grown since 2018 when states began to legalize. Unfortunately, georgia, north alabama have legalized sports betting yet. Um, but it involves state gaming regulators, involves integrity monitors. It involves the leagues themselves.
▶ 1:20:02It involves prosecutors. And the federal government is part of, um, you know, prosecuting right. Speaker 12: criminal activity because I'm short on time. I appreciate your answer, but why are the fbi and doj bringing cases, applying federal fraud laws and not state regulators using state laws? In the sports book corruption cases we've seen? Speaker 1: well, there there have been states that have have brought cases themselves. But certainly, I think the federal government's involvement in prosecuting misdeeds as it relates to sports betting is welcome.
▶ 1:20:31We've actually the american gaming association been, um, in asking for congress and for the federal government to get more actively involved, not only in integrity side, but policing, offshore legal gaming, uh, that's still prevalent across the country and accessible. Speaker 12: all right. Thank you. Speaker 3: Mr. chair. I don't know if Mr. figures get a response. I don't know if time allows on that. I mean, look, look, we're going to recognize. Speaker 11: I, I.
▶ 1:21:00Do think predictive markets should limit betting on mediocrity in georgia football. Speaker 3: I do think that gentleman is out of order. Um we recognize Mr. jackson of illinois at this time for five minutes. Speaker 13: thank you, chairman johnson. Thank you, ranking member davis. Uh, thank you, esteemed panelists, for sharing your insights on this, uh, growing and dynamic market. I, too, am very much concerned about the vulnerability that the youth will experience.
▶ 1:21:28Very much concerned about the easy accessibility of young people being able to gamble. And I do appreciate the necessity for market innovation. So let me just jump into the question. Uh, while individual sports contracts may appear relatively small, uh, interconnected markets can produce unexpected concentration of exposure.
▶ 1:21:52Uh, what stress testing capital and liquidity standards should exchanges maintain to ensure that the market disruptions never threaten customer assets or confidence in their regulated derivatives market? That if there's a sudden draw, uh, how do we know that the liquidity will be there? Uh, probably to you, Mr. kennedy? Speaker 8: sure. Thank you, congressman, for the question.
▶ 1:22:19Um, so in derivatives markets currently, um, all of these contracts are immediately cleared and they are sent to a clearinghouse where the margins are kept until settlement of the contracts. So under the cftc regime, in the event that there is any sort of insolvency of any party that's holding customer funds at any time, there is a regime that protects those funds from the funds, uh, that are of the actual entity, the custodian.
▶ 1:22:48Um, so whether that's a clearinghouse or whether that's a clearing broker that holds the funds, those funds are segregated. And in the event of the insolvency of the custodian, those funds can be dispersed and moved either to another solvent entity. Um, or perhaps return to the customer. Speaker 13: okay. Speaker 8: thank you so much for, for, for that. Speaker 13: I appreciate that. I'll probably ask a follow up to Mr. schwartz.
▶ 1:23:14Um, and we know that innovation oftentimes moves a lot faster than the regulation, as we can see here on many fronts. Um, how should the responsibilities be divided in your estimation? Probably open to the other panelists between the cftc, state gaming regulators, sports leagues, um, any number of exchanges. Any thoughts on that? Speaker 9: sure.
▶ 1:23:40Well, I think I referred to the exchanges as a force multiplier for the cftc and the enforcement space. Uh, their interests are very much aligned in preventing abuse of trading and wrongdoing on the exchanges. Because of course, if people view the markets as rigged, they're not going to want to participate. And that applies to retail and institutional participants. That applies to sports event markets and traditional derivatives markets.
▶ 1:24:08So I think they can work very well in tandem as to the state regulators, as I've maintained, um, the the cftc has exclusive jurisdiction, but the cea also allows, uh, states to prosecute violations of the commodity exchange act with the cftc participation if it wishes. But, uh, it's state law that's preempted. So there is a role.
▶ 1:24:34Um, but, but the system I think fits together fits together nicely. Speaker 1: congressman, could I jump in for a second here? There are 8400, uh, state and tribal gaming regulators that are enforcing fit for purpose regulations every day. And so I've heard a lot about sort of triaging different, uh, you know, enforcement capacities and underfunded agency that is currently operating with one commissioner.
▶ 1:24:57Um, I think our answer to your question would be leave it to the states and tribes to regulate, because gaming policy has always been arrested by congress with, uh, with those entities. Um, and then you can, uh, have more bandwidth at the cftc to enforce regulations in these other areas, including event contracts that I think, as people have pointed out, beyond sports, raised some very significant regulatory concerns, whether it be elections or insider trading, um, or manipulated markets.
▶ 1:25:24And so that's, I think our position on that is leave it to the states and tribes to regulate. And you don't have to worry about the cftc having the capacity to do so. Speaker 13: yes, sir. Um, excuse me, Mr. bean, did you have something you wanted to add? Speaker 6: I did. Speaker 13: thank you. I could barely see you. I'm sorry. Speaker 6: yes, sir. When an action violates our laws, it is our business. This is an innovation. This is online sports gambling that one person now says is legal in every state and on every indian reservation. Speaker 13: okay.
▶ 1:25:53Uh, any other comments? Yes, sir. Speaker 8: I just want to jump in to say that I don't disagree. When we were talking about gambling with a bookie or a house, that it certainly is their business, but we're talking about financial contracts on regular federally regulated markets. It's exclusive jurisdiction of cftc. If someone were to manipulate an interest rate swap or corn future, that's the cftc's job to police its markets.
▶ 1:26:17And, um, it does not change if the subject matter of the contract is a sport event, political event or financial related event. Speaker 13: I thank you, gentlemen very much. I yield back, and in the future, I hope that we can also find some other females to be participants to participate in this burgeoning market, I yield back. Speaker 9: uh.
▶ 1:26:45Speaker 14: there is no shortage of, uh, hot button issues facing congress. Sometimes there is a shortage of members who are really willing to roll up their sleeves and dig deep to understand, uh, the complexities of a situation. Uh, Mr. mann is, uh, working hard to be a leader in this space. We're grateful to have him here. Mr. mann, you are recognized for five minutes. Speaker 15: thank you, Mr. chairman. Thank you to you and ranking member davis for your leadership on this. A much needed and healthy discussion, I believe. Um, so kudos to you both.
▶ 1:27:14I represent the first district of kansas, which is roughly 60, uh, not roughly. It is 60. Um, rural communities in the central and western part of kansas. You know, my ag producers rely heavily on ctfc, cftc regulated markets to hedge risk every day. So we got to make sure that the cftc is able to do that job as, as the role. And the strain on that agency continues to get pushed to the max.
▶ 1:27:40Well, it's incumbent on us to properly fund them and make sure that they have the resources they need to do their job. Like I said, appreciate the discussion. Just a couple of questions. Um, for you first, uh, chairman, been in your testimony, you raise concern that the clarity act would permit sports event contract through the language related to protecting decentralized finance software developers. That concern is at odds with the careful work the committee did to limit any relief in the decentralized finance safe harbor activities related to the spot markets.
▶ 1:28:10The language in the bill reflects a careful compromise between the emerging defi community and the traditional derivatives industry to protect software developers, promote innovation, but also ensure that businesses cannot act or use a software protocol to avoid registration as a dcm or as an fcm. Can you expand on your concern with clarity? Give us your concerns with clarity and where you feel like the legislation missed the mark? Well, this this bill. Speaker 6: thank you.
▶ 1:28:38This bill stands up decentralized finance systems without guardrails, and it could authorize the central prediction markets to issue smart contracts on sports, gambling or even casino games. We are urging the senate to include simple savings clause that preserves the indian gaming regulatory act and state and tribal gaming laws, and codifies the current cftc regulations that prohibit dcms from listing contracts relating to, involving or referencing the language in the clarity act opens the door to expand beyond its current illegal activity in
▶ 1:29:08The sports betting space into the gaming space. Uh. Speaker 15: I think the support of Mr. schwartz. Um, would you care to comment? You've examined the clarity act. Do you believe the defi provisions provide an opportunity for the unregulated offer of derivatives? Speaker 9: thank you. Congressman, I read the language the same way you do. I think the defi carve outs are for spot, uh, spot transactions and swaps are also carved out of the definition of digital commodity. So I, I don't share that concern. Okay.
▶ 1:29:40Speaker 15: um, well, I appreciate, um, you know, two opposing views on it, but I think it's something this committee needs to continue to, to look at and take into consideration. Um, next question for you, Mr. kennedy. Despite the seemingly clear wording of the current rule 4011, it is not without controversy, which we all know. Some, including former commissioners, argue that 4011 a does not faithfully execute the law as congress has written it. Can you explain the concern and how the commissioners current.
▶ 1:30:10How the commission's current rulemaking seeks to address the issue? Yes, yes. Speaker 8: excuse me. Thanks for the question. Um, so in 2010, dodd-frank added a provision, uh, to the commodity exchange act called the special rule, um, which essentially gave the commission what clarified that the definition of swap is quite broad, but then it said it could include a number of event contracts and included a list of enumerated activities that the commission said, we know our definition is
▶ 1:30:41Broad, but we're going to give you commission, the authority to decide if, with respect to these specific activities, these contracts should be against or are against public interest. And if it is, we're going to give you the authority to require that those contracts come down. The commission in 2011 adopted a rule, um, where the language wasn't as clear.
▶ 1:31:02I think when you look at the commission's actions, you know, inconsistent, consistent with the statutory language, they in two instances did try to take actions to determine whether those contracts were against public interest.
▶ 1:31:16But I think some people who are reading the existing language in 4011 think that it's a complete per se ban of all event contracts that relate to those activities, and they've made those statements in court and they've made those statements in public. Um, but the commission's actions following the adoption of the 2011 rule aren't consistent. So the new rulemaking that you cite would address that concern.
▶ 1:31:44It would match the language of the rule with with the statutory authority. And in fact, the commission states in its proposal that to read in the interpretation that some people are claiming is ridiculous, it would be a per se violation of the administrative procedure act for the commission to decline to make that determination where congress required them or said like, look, this is the way you have to do it on a case by case basis as opposed to a whole cloth ban. Speaker 15: got it. Thank you all. Thanks for the clarification.
▶ 1:32:13Thank you all for being here. And I yield back. Speaker 3: thank you. The honorable mcdonald rivet of michigan's recognized for five minutes. Speaker 16: thank you very much. Um, this question is actually for Mr. kennedy and schwartz. Uh, I represent michigan part of it anyway. So a week ago, the chairman of the cftc issued an order directing kelce to ignore a court order to cancel contracts entered in by michigan residents in violation of michigan law.
▶ 1:32:42And the chairman has every right to disagree. Um, but what he did not just urge them to appeal. He issued an order forcing callsheet to defy the court's orders, which puts kelsey in a really unenviable position, um, of having to choose between ignoring a court order or ignoring a commission order.
▶ 1:33:05Um, both of which actually, uh, put kelsey at risk to civil penalties. Um, so I'm just, I would love for you to comment on what that says, particularly when I'm writing this down. We need to leave things to the states and look at the regulation of state law. Um, this seems contrary to that, particularly when we have a singular federal official, uh, to just order registrants to ignore court orders. He disagrees with.
▶ 1:33:34Speaker 9: I think certainly it was an extraordinary action. And I think more than anything else, it speaks to the need for clarity in this space. Because you're right, an exchange like that is caught in the middle of its federal regulator and a court order. I don't know what I don't know what the best advice would be. I think under the in this situation, she actually had followed the court order. By the time the commission issued its order telling it not to. So it was too late, but it certainly was. Uh, it certainly was a flex.
▶ 1:34:06Speaker 16: okay. So when you're asking this committee to, uh, to have faith in a system that relies on, uh, state laws, state regulation, this notion of a, a, a group of regulators that are working together. And you see the head of the cftc say, oh, well, just yes, but ignore everything that I disagree with. Um, it, it's, uh, it, it, it stretches credulity about the ability to actually do what you're suggesting.
▶ 1:34:38Speaker 9: I think we'd all like to see better cooperation. Uh, the, the explosion of litigation is not something that we have seen before. Just as the order that came out from the commission, chairman seelig, was not something that we have. It had been 46 years since the commission had issued any order under its emergency authority. So we are in an extraordinary situation, and I think everybody would like to see better cooperation. Speaker 16: likely a also an indication of the lack of staffing and other members of the commission. Mr. kennedy.
▶ 1:35:09Speaker 8: um, not much to add. I, I agree that um additional clarity is probably best here and um, we would, we would like to, to see more cooperation. I, I think a lot of these issues are being debated right now in the courts about federal, um, exclusive jurisdiction over these markets. Um, but yes, I think, um, these are, you know, extraordinary acts and extraordinary times. So I, I think, um, it would be best to, to have more cooperation.
▶ 1:35:39Speaker 1: congresswoman, could I jump in for just a second here? Um, so I think it's important to point out that last fall before the government shut down the cftc, actually, one of the, the only things that they did, uh, in this space back in 2025 was to issue a memo to all their registrants, uh, basically to tell them to plan for this exact sort of situation where a state court or another court, um, would have an adverse ruling that would impact, uh, you know, positions of their customers and they should be prepared to unwind those, uh, chairman seelig, who testified before
▶ 1:36:10The senate in the fall that he would defer to the courts on these policy matters, uh, rescinded that memo, but I don't think it should have been a surprise to kaushi, um, that this happened. Um, and certainly as, as others have pointed out, I think it's a extraordinary flex, if you will, that the cftc has gone from, uh, from not being involved in this space and allowing the courts to decide to now telling one of their registrants to intentionally ignore a ruling of a court.
▶ 1:36:39Speaker 16: that potentially ignored the directive was to absolutely ignore. I think that it's a, um, it is a stark reality of when we have philosophical conversations here, um, in this committee room and then what we see actually implemented and the complete violation of good faith in many of the things that are being offered to us today. Thank you. I yield back. Speaker 3: the gentleman from indiana, Mr. smith, thank you for five minutes. Speaker 15: thank you very much. Appreciate that. Um, I want to start off with a response to Mr. figueroa's question.
▶ 1:37:08When he was dealing with derivative markets and the cftc and Mr. Mr. kennedy said the cftc should leave it up to the consumer to make the decisions. I'm a little troubled with that, and I would like maybe to elaborate on what you meant. Speaker 8: right. I was saying to leave it to the to the customer to decide what type of, um, regulatory lane in which they'd like to see exposure to reach the exposure.
▶ 1:37:36So if I go back to my gold example or to my state insurance example, if a customer decides that they want exposure to gold and they want to purchase an etf, they are certainly free to do so. Um, they pick a regulatory lane. It's subject to particular rules. In order to buy a share of an etf, they have to follow certain rules. They have to deal with certain sec registered brokers. There are rules that apply. There are tax rules that apply. There is a regime for that.
▶ 1:38:06If instead that particular customer wants to purchase a gold future, they would go through a cftc broker to an exchange that's regulated by the cftc and they would receive certain tax treatment that was determined under dodd-frank for that particular instrument. Um, and so if they want gold. Speaker 15: that's, that's helpful. Speaker 8: yeah. Speaker 15: but then, um, I would clearly delineate that sports betting has proper lanes as well. And, and.
▶ 1:38:36Speaker 8: agreed, agreed, agreed. And so exposure to a sport event, if someone wants to choose to go to a casino and deal with a house and have the house set the odds and wager they can do that too, for entertainment purposes, but they see a different purpose for choosing a cftc regulated market. They can do that too. And so they have choices. And with those choices come consequences. Regulatory consequences. Speaker 15: okay. Mr.
▶ 1:38:59Schwartz, uh, some of the special rule on events contracts under section five c of the commodity exchange act as a prohibition on event contracts that involve relate or reference gaming. Uh, can you, given your experience as a regulator and litigator, could you explain how you interpret section five c of the of the cac? Speaker 9: right.
▶ 1:39:21Uh, so the way it is written, it is not a prohibition, but a delegation of authority to the cftc to scrutinize certain contracts for consistency with the public interest. It is discretionary authority. Uh, I have called it a yellow light rather than a red light. Clearly, congress had concerns with the kinds of contracts that are are enumerated in the statute.
▶ 1:39:43But, uh, again, that was a judgment that was channeled to the cftc rather than to other, uh, other decision makers. Speaker 15: okay. If congress were to prohibit contracts involving those five enumerated categories in section five c, how challenging would it be for the commission to implement? Speaker 9: well, I mean, I think it would go about its business the way it has always gone about its business.
▶ 1:40:10So, you know, to use the onion and box office receipt examples, uh, you know, those are if they receive a self-certified onion contract, it's easy to, to toss it out. There are difficulties inherent in identifying certain contracts that fit within these categories. For example, uh, what constitutes gaming or how are you going to apply a, the, the category contract on something that violates state law?
▶ 1:40:40Are we going to, you know, is one state enough or are we going to look at antiquated, uh, statutes? But the cftc, to its credit, has actually started to address that in its its proposed rules. Uh, it has a history of dealing with complicated prohibitions that it has to apply to a given contract contract readily susceptible to manipulation. It's not readily apparent, uh, how you assess that. But the cftc has a body of experience to do that, and it's able.
▶ 1:41:10Speaker 15: okay. Thank you, Mr. kennedy. In his testimony, Mr. mayor addressed the fact that not all sports related event contracts are created equal and therefore posed different regulatory risks. The cftc proposed rulemaking works to confront these risks by bringing clarity to the public interest test prescribed by congress. Mr. kennedy, can you explain how the commission distinguishes different types of sports related event contracts under the public interest standard? Speaker 12: sure.
▶ 1:41:38Speaker 8: within the proposal issued on june 12th, uh, the commission made a difference, uh, in terms of its public interest factors that it would consider between broad sports outcomes and contracts tied to single actors or integrity sensitive sporting events like injuries or officiating, um, contracts. Um, and so those would be, or would include contracts that deal with final scores and point differentiations.
▶ 1:42:03In contrast with single actor officiating, um, contracts or injury contracts, those would be held to a highly likely to, uh, be contrary to public interests. Speaker 15: okay. Thank you. I yield back. Speaker 3: and Mr. of hawaii is recognized for five minutes. Speaker 17: thank you, ranking member Mr. chair. Um, Mr.
▶ 1:42:22Bean, um, real briefly, if a sports book fails to protect consumers or prevent insider betting, do tribes and state regulators have the ability to investigate, to find and to revoke a license? Speaker 6: thank you for that question. Yes, yes we do. We have regulations in place that have been scrutinized by the national indian gaming commission, scrutinized by state gaming commissions and our own gaming regulatory bodies within the tribes. Speaker 17: okay.
▶ 1:42:48We've seen recently very egregious acts of insider betting and prediction markets, most recently the president's teleprompter technician placing $100,000 in bets on kalki on his speeches. Is there any established oversight and safeguards for accountability, for prediction markets, like what tribes and states currently have for gaming? Speaker 6: we don't see any safeguards in place.
▶ 1:43:13As you heard today from the testimony that cftc is short staffed and lacking in resources, so they simply don't have the regulatory system in place. They rely on these prediction market companies to self certify. Speaker 17: Mr. kennedy briefly, yes. Speaker 8: um, as I mentioned in my remarks that exchanges are self-regulatory organizations are not just free enterprises. They're like finra and the in the securities market and the nfa and the futures and derivatives market. So they're regulators.
▶ 1:43:41And in fact, that, um, exact violation that you're mentioning was found by kalki. They surveilled it. They had systems. Speaker 17: Mr. kennedy, respectfully have a couple of other questions. Um, I do believe you can put lipstick on a pig. It's still a pig. You can even ai that pig. It's gambling. It's gaming. I know you've got different lanes, like the types of goads and higher trading and for what purposes and what not. But I think at the end of the day, we are talking about gambling on a sports event here. Mr.
▶ 1:44:08Bean, I do want to just continue off of that line of questioning, though. Tribes have invested and states have invested significant amounts of resources to social welfare programs to combat, um, you know, problems with gambling, consumer protections, responsible gaming. Um, how has these event contracts and the rise in prediction markets undermine, quite frankly, the ability for you to enforce your own gaming laws, to be able to actually have these programs be to the benefit of community and people.
▶ 1:44:37It's almost like they acknowledge double standard right now. How has that made you more ineffective in some of these social welfare programs and your ability to, quite frankly, to enforce those gaming laws you have on tribal lands? Speaker 6: thank you for that question. Tribes and states have, under the regulatory framework of the indian gaming regulatory act, tribes and states have negotiated compact agreements to regulate activities like prediction market online.
▶ 1:45:02Illegal online sports betting undermine our tribal sovereignty, state sovereignty, and those very agreements in place that were designed to protect the integrity of the game, to protect consumers, to prevent against underage gambling, to promote responsible gambling. And you heard the question from the representative from michigan. You know, the cftc chair promoting lawlessness by advising these prediction market companies to ignore a court order.
▶ 1:45:27That is an example of how tribal sovereignty, state sovereignty is being undermined. Speaker 17: thank you. Um, and I just have a basic question. And it is connected to, to gaming and to prediction markets as well. For each of the testifiers here today, do you believe that we need to respect and should and must respect, especially as congress and the federal government, should we be respecting states rights, yes or no? Speaker 9: uh, of course. Yes. Speaker 1: absolutely.
▶ 1:45:58Speaker 14: yes, speaker 7: yes. Speaker 17: I 100% agree with you. And in 11 states like hawaii, hawaii doesn't allow any kind of gaming gambling at all. But 11 states specifically outlaw sports betting. What this is doing is creating an alternative. And it's been marketed, by the way. So you can talk about how it's a different thing and it's a different lane, a different kind of gold.
▶ 1:46:22But we actually have prediction markets that have been, you know, promoting this extensively publicly, that this is an alternative to sportsbook, this is gambling at the end of the day. And this flies in the face of states rights for states that have clearly said, we do not want gaming, we do not want sports booking in our states. Um, and I would just end it with this. Thank you very much for letting me move on to this committee. Quite frankly, this is regulatory arbitrage. It's just creating a double standard.
▶ 1:46:48We have a higher standard for tribes and states that have taken the time and invested significant amount of resources to make sure that the ill effects of gaming do not fall on its people. And we have a self regulatory system that, quite frankly, is a danger to our people. Thank you very much, Mr. chair. Ranking member, I yield back. Speaker 3: and Mr. taylor is recognized for five minutes. Speaker 18: thank you.
▶ 1:47:14Chairman thompson and subcommittee chair johnson and ranking member davis for holding this hearing, and I want to thank the witnesses for appearing here today. And though it's a considerable imposition on your time, we appreciate you being here with us today. Um, in a short period of time, prediction markets have become a multibillion dollar industry, and some experts anticipate the prediction markets will be $1 trillion industry by the end of this decade. Uh, what was once a once a nascent industry is now here to stay, which makes hearing like this, like the one we're having today even more important.
▶ 1:47:42Uh, this hearing is vital to the financial future of americans. So I apologize for my colleagues earlier bringing in the ugly relics of the past, like the relevance of sec football. Mr. kennedy, I'll start with you. Um, it's been noted that the cftc is significantly smaller than the thousands of state and tribal employees involved in gambling regulation. I think this undercounts a number of people involved in derivatives market regulation.
▶ 1:48:10Can you please explain how the fcms, the exchanges and the national futures association all work cooperatively with the cftc, uh, to police derivatives markets? Speaker 8: uh, thank you for the question, congressman. Um, yes.
▶ 1:48:24So, um, I think rob's, um, the term he coined the regulatory sort of multiplier helps, uh, explain what exchanges as self-regulatory organizations, the involvement of nfa with the clearing brokers, um, how you have multiple regulators and registered parties surveilling these markets, looking at customer trading, identifying instances of potential manipulation, escalating these issues and working
▶ 1:48:55Collaboratively and collaboratively talking to each other regularly. Um, so to suggest that we're by looking only at the cftc employee numbers, um, that that's the only sort of a part of the analysis I think is misleading. Looking at the, um, the, uh, cooperation and the collaboration between multiple regulators, including the exchanges, which are regulators, I think is a better assessment of the capabilities of these markets to enforce and surveil. Um.
▶ 1:49:26Speaker 18: thank you, Mr. schwartz. During your time as general counsel of the commission, how did you see the interactions between cftc, nfa and dcms working in practice? Speaker 9: well, on the enforcement front, it's very impressive. As I alluded earlier, uh, the agency's interests in preventing wrongdoing on exchanges are very much aligned with the exchanges interests in preventing wrongdoing on exchanges.
▶ 1:49:48If the markets are viewed as as rigged, it's bad for business, uh, for the national futures association's part, if the industry falls into disrepute, that is contrary to its core mission. So there are referrals all the time. You have seen one of the exchanges, uh, very proudly trumpeting the referrals that it's made to the cftc. And you have seen the cftc going after what apparently are the worst of the worst imaginable violations to send a message.
▶ 1:50:19So you can see that working, uh, the interconnections they're working. And, uh, it has worked the same way with traditional derivatives markets for, for years. Speaker 18: thank you, Mr. mayor. One thing we hear a lot about in the news is the acts of insider trading that have taken place using prediction markets. You work very closely with prediction market platforms to detect possible acts of insider trading and to uphold integrity of these platforms.
▶ 1:50:44Do you feel the cftc proposed rule would provide adequate oversight of prediction markets to prevent insider trading? Speaker 7: thank you for the question. Um, I would say there's two angles for it. First of all, from the commission perspective, yes. We believe that the current frameworks that exist today provide the the guidelines for dcms to put in front, uh, compliance program. That's comprehensive in order to detect market manipulation.
▶ 1:51:09Insider trading, to rob's point, also mentioned that it's important to keep in mind that the dcms themselves, uh, before waiting for any additional clarity from regulators or taking the extra step, usually to make sure that there's proper level playing field in order to usher in mainstream adoption. Ultimately, that's their goal is a level playing field and to usher in both retail and institutional one day. And so everyone has the incentive to make sure there's a level playing field. Speaker 18: okay. Are there are you aware of any gaps that congress needs to step in with legislation to address?
▶ 1:51:40Speaker 7: I am personally not aware of any gaps that we've heard from the trenches working with compliance professionals, but I would leave it to the legal experts on the panel to opine on that. Speaker 18: thank you all very much again, for being with us today. And I yield back. Speaker 14: miss mclean. Delaney, you are recognized. Mr. bresnahan, you are on deck. Speaker 19: uh, thank you, subcommittee chair and ranking member. And thank you to all the witnesses here.
▶ 1:52:04Um, really examining how prediction markets and market integrity in sports is an incredibly important issue. And I just want to make sure that we're all cognizant of the impact on the health and well-being of its users. Um, I, uh, spent the bulk of my life in communications and technology, particularly on how, um, media impacts kids health and well-being. Um, in fact, I founded the D.C.
▶ 1:52:31Office of common sense media and served as its washington director for almost 15 years. Uh, earlier this year, common sense released a new report on boys and gambling, which shows that more than a third of boys, age 11 to 17 gambled in the past year. And when it comes to sports related gambling, 12% of boys between 11 and 17 said they said they spent real money. So gambling and sports betting is increasingly becoming an obsession.
▶ 1:53:00And I hate to even say an addiction for some susceptible youth, boys and girls, but it seems to hit a lot of boys very hard. Uh. Prediction market operators are not required to follow state responsible gaming advertising rules. This is different from most licensed sports books, which are prohibited from running ads on platforms with a large underage audience. However, prediction markets are increasingly open to anyone 18 and older, as you know.
▶ 1:53:27And recently I was sent by someone an example of a social media advertisement posted through a paid partnership. It's a short video of a cartoon dog dancing on a surfboard while turtles and dolphins jump out of a rainbow colored water with the caption, um, how life is, you know, uh, better with, um, you know, prediction markets rather than sports books.
▶ 1:53:52I don't know about you, but to me, this is like marketing towards our youth and prediction market. Ads like this have been pushed heavily on social media platforms like facebook, tiktok and instagram. Um, with many millions of underage users seeing them. So I ask you all in this panel panel here, and I'm sure you've thought about this issue because it comes up a lot and I'll leave it to you.
▶ 1:54:19But do you believe that prediction market sports wagers do or do not pose any risk of online youth gambling addiction? And furthermore, given what I've shown, should they not warrant the use of responsible gaming message requirements and youth advertising consumer protections, yes or no? And why? And if I have time, I have a brief follow up. Speaker 9: sure. Yeah.
▶ 1:54:43I mean, of course there is an addiction risk, but I think maybe overlooked is when I was at the cftc, I saw a lot of people get into a lot of trouble because they were over their heads in other markets. I think that's, uh, insufficiently appreciated. The cftc also has an office of consumer education and outreach that that may be a valuable tool to help in this space.
▶ 1:55:09If exchanges are on college campuses, maybe the oceo ought to be on college campuses as well. I have two teenagers who not to make light, but they make stupid decisions every single day not to stick it to the two of them. So they need, you know, they need information, they need direct engagement. So it's not limited to sports. Uh, I think it's very important in, in any market that may appeal.
▶ 1:55:36Speaker 19: to, and I might have the people move on down the panel just quickly, but thank you. I, I hear you. Thank you so much. Speaker 6: thank you. The, the possibility for addiction is tremendous. And that's one of our biggest concerns, the impact on, on native youth and youth, youth overall, these folks are targeting all kids advertised on social media. As you stated on sports, gambling. Is money a money hack, side hustle. They're even trying to equate sports gambling to financial literacy. The cftc acknowledged the addictive potential of prediction markets and opted to do nothing about targeting 18 to 20 year olds.
▶ 1:56:07Now, earlier I mentioned I shared a story about my nephew, who's a student at the seattle public schools. He and his classmates have been gambling, you know, through cash apps. You hear of people in. Speaker 19: so do you think we should have gaming message requirements in youth advertising, consumer protections, yes or no? Speaker 6: yeah. And those are present and through the tribal and state compacts that are in place throughout the nation. Speaker 19: thank you. Speaker 1: congresswoman. Yes, I would just say for the state and tribal regulated gaming industry, we take age access very, very seriously.
▶ 1:56:32And obviously, as I stated in my testimony, 21 is the age of access in most states for betting on sports. It's pretty clear that the prediction markets. Speaker 19: know a lot of 11 to 17 year olds seem to be engaging in it. Yes. Speaker 1: well, you know, even we're even successful in finding people who find workarounds through their parents or otherwise. And that's a broader conversation. But I think, you know, one of the the really important elements here is the blurring of the line between gambling and investing. Um, we're very clear about what our product is. It's entertainment. Uh, it comes with risk.
▶ 1:57:01You should not bet more than you can afford to lose. The idea that some of these prediction markets are going around calling this a financial derivative and suggesting that you can pay your rent with it, or going to college campuses and having fraternity brothers market to get people to sign up, I think is, is gross and something that would never be allowed by our industry. Speaker 19: gaming message requirements knew that consumer protections. Yes. Can I just say yes and yes or no and no?
▶ 1:57:26On the other, do you, uh, gaming message requirements and youth advertising consumer protections? Yes or no? I think it. Speaker 20: would be appropriate to. Speaker 7: I think it's an important topic that should be discussed. Absolutely. Speaker 19: um, and I'll I'll submit another question for the record. Thank you. And I yield back. Speaker 14: Mr. rob bresnahan you are recognized. Speaker 21: thank you. Chairman, ranking member, and the witnesses for being here today.
▶ 1:57:51In the past few years, we've seen prediction markets and as an industry grow at a pace that few would have expected. So I think that kind of rapid growth creates new challenges for the cftc, particularly when it comes to oversight, market integrity, uh, and protecting consumers.
▶ 1:58:10So today I'd like to focus my questions on the consumer safeguards that are currently in place and what congress can do to ensure these platforms are operating responsibly, and that americans who choose to use them are adequately protected. Uh, my first question will be for chairman. Been in an interview earlier this year, you were quoted saying, when you look at these sports betting, illegal online, unregulated sports betting contracts, there are no guardrails.
▶ 1:58:39There's no age verification, there's no verification of funds, and you don't really know who's placing the bet. Can you elaborate on the details and what you meant by that? Speaker 6: exactly that that there are children who are allowed to engage. And I just cited and at the time I didn't have the example of my nephew. But, you know, we were a week ago in san diego at a gathering of tribal state legislators in gaming states.
▶ 1:59:05Um, they had a young man, a story of a young man who got into debt, you know, through gambling through these apps and have created a foundation with his mother to promote responsible gambling with respect to the age verification. That's that's what I meant. What was the other part of the question? I'm sorry. Speaker 21: the second there was, can you elaborate on the details of what you meant by that? I mean, was that an example outside of your nephew specific occurrence, or have you had other examples of other younger people that have fallen victim to this? Speaker 6: yeah.
▶ 1:59:34At that time, you know, I was referring to a young man on a, you know, a freshman in college went into $300,000 in debt. Um, that is an example of no safeguards in place, not knowing your customer, not knowing the source of funds, those that's problematic in and of itself. Speaker 21: so, Mr. kennedy, I want to ask you specifically about the idea of verifying the age of users and how you protect consumer funds. Are there rules related to how the cftc registered entities address these issues?
▶ 2:00:05Speaker 8: yes, there are. Um, as I mentioned in my opening statement and a couple of times that exchanges and the brokers that provide access to customers have to comply with the bank secrecy act, anti-money laundering and know your customer rules. You have to indicate your date of birth. You have to provide a lot of information, including in some cases, social security information. They will collect. So they collect a lot of information on their users on the front end, and they know exactly who they are.
▶ 2:00:35If there are fraudulent sort of onboarding, uh, practices that take place, there's technologies that can detect that, um, and, um, and act and procedures that these exchanges and brokers will take. Speaker 21: Mr. mir, do you believe cftc regulated exchanges know who are placing orders on the exchange? Speaker 7: yes. Uh, to say otherwise is, is factually wrong.
▶ 2:01:03Um, in fact, we have examples in my written testimony of manipulation scenarios. We found that essentially we're able to tie together multiple different accounts that were trading in collusion with one another. Um, so not only are we able to know who is the person that's trading, we're also able to then tie them into their kind of neighbors or neighboring accounts in case they're colluding. Speaker 21: have you ever detected someone fraudulently putting information in that wasn't an accurate representation of who they were?
▶ 2:01:34Speaker 7: um, I believe there are cases like that, yes. Speaker 21: Mr. silk, in your statement, you said the prediction market platforms were operating, quote, without the safeguards required of state licensed gaming operators. I obviously come from a state with legalized gambling. Pennsylvania. Uh, what are those safeguards and how does that compare to the prediction market platforms? Speaker 1: sure.
▶ 2:01:58And we appreciate that the pennsylvania gaming control board has been a leader in, I think, articulating just those kinds of concerns directly to the delegation. But certainly I think one of the ones that we've highlighted here that the cftc and the the principles based regulation don't speak to is responsible gaming. I think that's at the core of, uh, of the gaming regulation at the state and tribal level, recognizing that some people may have addiction issues.
▶ 2:02:22Um, and so I think that is one, um, in terms of, uh, the marketing around, uh, the product, uh, certainly self-exclusion lists are a big part of, uh, of, you know, making sure that people who have gambling problems are not exposed to marketing and advertising and can engage with the product. Um, and so I think that's one of the biggest departures where, um, not only is it not addressed, but, uh, the prediction markets say this isn't even gambling.
▶ 2:02:49Uh, and so there doesn't need to be any real fit for purpose regulations there. Speaker 21: uh, I appear to be out of time. I have one more question that I will submit and I yield. Mr. chairman. Speaker 14: normally, the clock plays a virtuous role in keeping us moving. I think, uh, the five minute limitation may be limited. Our ability to fully examine miss mcdonald rivets, uh, line of questioning, uh, with regard to these dueling cftc and court orders. Mr.
▶ 2:03:18Schwartz, let's just take a minute or two to make sure we filled out the evidentiary record here. This is a situation where the michigan court asserted jurisdiction over a federally regulated exchange and ordered them to close existing open positions, which, to my knowledge, is unprecedented. I mean, how did we get here? What happened?
▶ 2:03:41Speaker 9: well, uh, the state of michigan brought an enforcement action against cash exchange, and it sought an injunction against the cash conducting these sorts of activities within the state of michigan. And whereas some states, when they have prevailed in their enforcement actions in other states, they. The remedy has been just to, uh, on a going forward basis, uh, allow only in-state residents to trade out of their positions.
▶ 2:04:10But we haven't seen a remedy like this before that you have to actually close out the, the positions. Speaker 14: tearing up contracts regulated at the federal level. Speaker 9: correct. And I, I said that this was, um, you know, a, an unusual, uh, an unusual instance. It had been 46 years, but it does have some resemblance in some ways to past uses of the emergency authority by the cftc.
▶ 2:04:34Uh, the, in the past have been based on disruptions to cash markets for traditional commodities. But the underlying issue was that you would potentially get prices on the exchange that didn't really reflect supply and demand, and that in this instance, there was a threat that the prices on this and other markets would not reasonably reflect the real forces of supply and demand, because people would have to account for the possibility that their positions would be
▶ 2:05:04Closed out. So it's a very different context. But but some of the underlying issues, uh, there's an echo there. Speaker 14: yeah. Thanks for putting a little bit more meat on that bone. Uh, excellent witnesses. Excellent line of questions. Uh, clearly a high level of engagement by members on the subcommittee. I'm grateful for that. Uh, Mr. ranking member, any, uh, comments by way of closing? Speaker 3: no, thank the witnesses for coming forward today and for the discussion. Thank you so much, Mr. chair.
▶ 2:05:36Speaker 14: yeah. And I would just try to share maybe five, 4 or 5 things quickly that I think we heard today. Uh, number one, uh, the cftc does have some important work before it. It is used to doing more with less. And yet I do think resource adequacy is a legitimate question. The committee should continue to explore. Number two, everybody agrees about the importance of market integrity and customer protection.
▶ 2:06:00Number three, I do think this subcommittee needs to continue to explore whether or not there are sufficient tools to ensure market integrity and customer protection. Number four, uh, maybe finally, I mean, courts are speaking. Courts are acting in this space. The commission is acting in this space. I do not believe that the committee that congress should be silent. I do think there is work for us to do here.
▶ 2:06:29Uh, I agree with chair thompson's statement that this will not be the last hearing we have in this space. I think we have an obligation to try to drive toward finding out what is the common ground. More than one of our witnesses said that there is a need for additional clarity. Uh, it may be that the courts and the commission alone can provide that needed clarity. And yet, if we don't ask whether or not there's an important role for congress, we are not doing our job.
▶ 2:06:56And I'm so grateful that everybody came with a serious focus on attempting to answer those questions. Uh, with that, under the rules of the committee, the record of today's hearing will remain open for ten days to receive ten calendar days to receive additional material and supplementary written responses from the witnesses to any question posed by members, a number of members indicated they would be submitting questions for the record. And with that, um, uh, thank you, Mr. ranking member.
▶ 2:07:23This hearing of the subcommittee on commodity markets, digital assets and rural development is adjourned.