Former CFTC Commissioner & Kalshi Board Member Brian Quintenz Talks Lifetime Ban

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0:39Available on Plus and Pro plans. Bloomberg Audio Studios. Podcasts. Radio. News. It is a day that ends in Y, so there's a lot going on with prediction markets. The latest is that ex-Congressman George Santos won't be able to place another wager on Calci after the platform banned him for life for allegedly manipulating wagers on his attendance at this year's State of the Union address. Brian Quintens joins us now. He's a former CFTC commissioner. He's former head of policy for A16Z Crypto. That's the VC firm Andreessen Horowitz. He's now advising finance and tech companies. He's a board member at Calci Exchange.

1:17So this is the CFTC regulated derivatives market. It's a position he's held since 2021. He joins us here in the Bloomberg Businessweek studio. Brian, welcome. Thank you. Thanks for having me. So this is the first such ban by Kalshi. The company announced the action on Monday, along with a fine of over$71 ,000. What does it take to get banned by the platform? Well, I think in this case, what we saw was a deliberate lack of cooperation. I mean, it's one thing to violate the rules. and you always want to see an exchange enforce those rules. We can't live in a minority report society where we just expect nothing bad to ever happen.

1:56Something bad will happen, but it's important that the exchange prosecutes that, surveils it, finds it, discovers it, refers it to the CFTC. But in this case, what we saw was a complete lack of cooperation after being caught. And if you're not going to respect the enforcement process after you've been caught doing something bad, why should we think that you're going to respect the market integrity if you're allowed to trade again? So in this case, I think a lifetime ban was very appropriate. And the more examples we see of these kinds of things happening, hopefully the more of a prophylactic impact it has to prevent it from happening again in the future.

2:32Yeah, I mean, how effective do you think it's going to be as a precedent? Is it a strong enough signal to, as you say, other potential elements or people who might attempt something like this? Do you think that will give them pause now that this is the first such example of a lifetime ban? Yeah, I think as a former regulator and now being a part of the Calci Exchange Board, you never want to see bad things happen. You never want to see people violate the rules or unethical people try to compromise market integrity. But the reality is that it happens. And so, you know, the flip side, you know, to having these things reported on and, you know, possibly indicating some kind of, you know, negative issue with the market is that there are being caught and they do provide, you know, that story that if you do something bad, you know, we're going to come after you.

3:23From a civil perspective, not from a criminal perspective. Well, yeah, Cauchy can enforce the rules on its own exchange. The CFTC, as the regulator, can enforce civil penalties. but it would be up to the DOJ to prosecute criminally. Do you think we start to see that? It's possible. I mean, I think when I was at the CFTC, it always depended upon the impact of the behavior. Meaning the number of people who are affected, the amount of money, that sort of thing? Exactly. And obviously fraud is a lot easier to prosecute than manipulation, but certainly manipulation cases were brought by DOJ. So I think it's based on an order of magnitude of the impact.

4:04So you would refer something, Kalshi, you would refer something to the CFTC. The CFTC would then decide whether or not to refer it to DOJ. That's correct. OK. I want to talk a little bit about some other news that we got late last week. And this is the Ninth Circuit opinion that we got on Friday. Kalshi took a hit when the U.S. Court of Appeals for the Ninth Circuit said that sports bets are not swaps. Here's what Judge Ryan D. Nelson said, quote, For Kalshi to deny its sports event contracts or sports bets under a reasonable person's understanding is disingenuous. That sports events contracts are in reality sports bets is not just an I know it when I see it.

4:42Rather, everyone, including Kalshi, knows it when they see it. How do you respond to that? Well, unfortunately, in my view, I mean, I think the Ninth Circuit opinion provided more confusion than clarity. If you really look at the issue and you look at what the casino industry and the states that have allied with them in prosecuting these cases have charged or claimed, it's that states can control or dictate what kinds of contracts are listed on federally regulated exchanges. And U.S. law does not preempt that. And number two, you know, as that opinion described, these events aren't actually events and therefore they don't qualify as swaps.

5:24I think the interesting part about the Ninth Circuit opinion is that on that first point, it actually agreed with the Third Circuit, which ruled in Cauchy's favor, that the CEA, the Commodity Exchange Act, does preempt states from regulating or dictating what kinds of contracts can be listed on federally regulated exchanges. But then again, it made the, in my view, I think confusing determination that, for instance, whether or not the Super Bowl occurs is an event, but who wins the Super Bowl is not. And I can't necessarily comport those two things. Ultimately, this is going to come down to the Supreme Court, and it's going to be an issue that requires their intellectual firepower and patience and discipline and attention to the law, as opposed to working backward from a result.

6:11Yeah, well, I guess one of the questions that the decision brings up, right, is that whether it does undermine the basic legal foundation for offering sports markets nationwide, that making that determination between sports bets and distinguishing them from swaps. What do you think? So I view betting as something you do against the house, where the house always wins. It sets the odds. Its incentives conflict with its customers, right? Not a marketplace where traders are engaging with each other and there are market prices for outcomes. And I think the other important thing to mention is that the states and casinos are pursuing a zero-sum outcome here.

6:50They're saying that the only place these kinds of financial activities can occur is in a casino or a state-regulated sports book. Calshi and the CFTC are saying, well, that's fine, you can do that, but if they also qualify as derivatives, they can be listed on federally regulated exchanges subject to CFTC rules. It seems like the sports question is a real headache for everybody except the lawyers who are working on this. Truly, I mean, it seems like it's a game of whack-a-mole between Calshi and different states that are coming up with this, that are working on these cases. Do you guys ever talk about saying, okay, we'll put sports on the back burner because it is so contentious and we'll kind of focus on everything else?

7:35I think the thing that I think about is what does the law allow for and why? And the law was written very deliberately to say that an event that has any financial, commercial, or economic consequence can have a valid derivative listed upon it because it poses risk. And the whole purpose of derivatives markets is to allow for risk management and price discovery. I think one of the points of your question is that it's a perception issue. And I think that's what the quote that you just read from the judge kind of indicated. But if you go back in time, corn contracts were traded in bucket shops in Chicago, and they sued when corn contracts ultimately got listed on federally regulated exchanges also, and they called it gambling.

8:20So whenever you take a product that was traded in the dark rooms and in bucket shops and in casinos and you bring it onto a federally regulated exchange that poses a threat to that business model, you will see these kinds of dynamics. Do you think that decision then ultimately belongs to the CFTC? What would constitute as an event contract that's economically useful enough to belong under their jurisdiction as opposed to what it currently is? I mean, I believe so. I believe that the CFTC is the ultimate arbiter of what the CEA says when it comes down to an event that can qualify as a swap. And there has never been kind of a sufficiency test of economic value for any derivative.

9:03You know, and the law was written very broadly to allow for that because it incentivizes innovation for exchanges. And there are thousands of products that are listed by exchanges that don't get liquidity, that don't find useful markets, and that ultimately get delisted. You know, a lot of states restrict sports betting to 21 and up. Kalshi and other prediction markets platforms make it available at 18. We did see an analysis from CNN that showed users in the 18 to 21 age group have traded$5.4 billion on Kalshi just so far. this year. Novig recently launched its exchange. It said it would be restricting to age 21 and up.

9:38Would Kalshi consider following Novig's League? So I can't speak for the founders or the board, at the company level on that. I think that's a good conversation to have internally. I would note that you did say not all states are uniform in how they approach that age limit. And a lot of states have made that decision because you combine casinos with liquor. And the liquor drinking age is 21 and therefore enter into a casino and gamble is also therefore 21. But states like Rhode Island, D.C., where I live, Montana, Wyoming, all have an 18 plus year old threshold for that kind of activity. So it's not uniform right now as it is.

10:17Yeah. One of the other things that we want to ask as well is mention markets, right? So this is where, you know, users can place wagers on whether public figure will say certain words or phrases and speeches. We did just get a White House teleprompter settling an insider trading probe related to, you know, betting on President Trump's speeches. Is this, what do you think of this niche area? Is this something that should be reined in, can be reined in at this point? So again, I think that the breadth of these markets reflects the breadth of the law. And so, you know, if they need to be reined in, in my view, it's up to Congress to decide where that line should be drawn.

10:57I mean, the regulator might be able to try, but I think it might be hard to do that in a way that isn't arbitrary and capricious, which is a standard under the Administrative Procedures Act and how agencies can make decisions. But to your point, I think when the Fed chairman has a news conference, the entire stock market turns into a mention market. So it is the case that people that say certain things in a high publicity way can have a financial, commercial, economic impact into what words they use and what they talk about. And ultimately, these markets are gauges. They're gauges of opinion. They're gauges of sentiment.

11:35And they provide useful data, in my mind, in terms of what the impact of mentioning certain things are. If President Trump only mentions Iran one time in a news conference as opposed to the prior time where he mentioned it 10, does that indicate anything? If then he mentions it zero times in the next public appearance, does that mention, does that create a, you know, appearance or a, you know, a correlation that needs to be paid attention to? So ultimately, it's hard to draw lines in this space. I'd like to start broader than narrower, and then we can let Congress come in and decide. Brian Quintanz, you got to come back.

12:10We appreciate your time. I'd enjoy it. He advises finance and tech companies. He's a board member of Calci Exchange. He's a former commissioner of the CFTC. He joins us here in the Bloomberg Businessweek studio. Healthcare doesn't always work great. If you've ever waited on a refill or couldn't schedule an appointment, you get it. That's the kind of stuff Optum is changing. They're using data and technology to integrate patient care, pharmacy, and everything else. So healthcare is connected, not complicated. What's that look like? Cheaper prescriptions that are easier to get and care that looks at the whole person, how you need it.

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