Summary

Nick Hogan: Howdy Dan and happy New Year. How'd the holidays treat you? Dan Cherry: Well, it's been great. I know we skipped December. It's great to be back. Happy New Year. New year, new start, right? Nick Hogan: Yeah, for sure, for sure. And let's see. So, here we are in mid-January, Dan and industry media and a very sizable chunk of media generally are absolutely rammed with stories about prediction markets. Also, a topic that several listeners have asked us to tackle. So, again, we're going to combine this episode's news segment with listener questions. So, now our guest today is going to do a deep dive in this topic, so I don't want to steal that thunder, but as our podcast tends to be very slot focused, I thought it'd be a good idea to set the table a bit for those who aren't tracking the story and their surrounding controversy. So, without going too far into the technical details, these prediction markets are basically platforms where anonymous users can create so-called event contracts. So, typically they're binary propositions such as, let's say, the outcome of an election or a sporting event, then they can bet on it with other anonymous users. Now, these platforms are structured, positioned, and regulated by the Commodity Futures Trading Commission as financial services products. So, individual propositions are treated like swaps or, let's say, like a binary option where the users trade them and the volume and value of these trades determines probabilities and payouts. So, in short, it's bets masquerading as commodity trades, basically. Now, two big issues here, legality and integrity. So, first on the legality point, really the core criticism is that most of the trades on these platforms are sports related. So, it was actually 90% of Kalshi's volume in December. So, the argument is basically these companies are nothing more than illegal bookmakers that are circumventing state laws and taxes. And on the integrity front, there's been a lot of what appears to be insider activity on these platforms. So, perfect example is this so called Maduro whale scandal, huge story right now. But in short, just after the US military apprehended Nicolás Maduro down in Venezuela, it was revealed that someone who appeared to have highly detailed insider knowledge of the operation opened an account on December 27th, created bets that included the operation specific date and then escalated an initial position of about 1,500 up to 35,000 just a few hours prior to the capture. So, even in our casino universe, 35,000, a decent bet, for sure, big fat bet. And when the apprehension occurred, the user walked away with 436 grand and then immediately deleted the account. And Dan, you sent me also a fascinating Substack article about what appeared to be a Google Insider. You want to summarize that one just quickly? Dan Cherry: Yeah. I mean, just at a high level, I mean, the article talked about this idea that these are being pitched as "truth finding" platforms and that there's this benefit, and these actually create a positive community benefit because they're helping regular Joe's like you and me get at the truth and that both Kalshi and Polymarket have actually been pretty vocal in creating these platforms and saying they're not calling it insider trading, but it's called insider something that basically you should, this should be encouraged, which is obviously the complete polar opposite to expectations around either traditional trading or sports betting that by allowing insiders to place, I'll call them bets, but place bets on things that they're familiar with, that that helps the public get at the truth, which has a positive economic benefit. And that's obviously becoming a huge deal now that no one knows who this Maduro whale was, but the idea that anybody in their industry that they're an expert at can now has an advantage over the public seems completely contradictory to how we think about sports betting and regulations and fair and responsible gaming. At the end of the day, this is not just an opportunity for insiders to make money at the expense of the retail trade. Nick Hogan: Yeah, for sure. And that case in that Substack article, I know it was to your point there, it was what appeared to be a Google Insider. They had highly specific bets about the biggest search term on a given day, specific release dates of applications and all that, and the person walked away with two million bucks. And in that Substack article, it just said, in a trading universe, there's a possibility this would raise a flag, SEC would go out and probably somebody would go to prison. This is the way it goes. But in this one, it's completely opaque. And well, anyway. So, as I mentioned, our guest today is going to walk us through this in a lot more detail, but I just wanted to get some of this out there so our listeners have some context. Also, I think it's important for industry people to follow this topic closely. And as I was doing homework on it, the implications of it for our industry became clear and clear to me. But not only is it truly challenging state and tribal sovereignty, but also I would argue the entire regulated gaming model in many ways. And the other thing is it's growing. So, the markets are seeing weekly volumes now of around $3 billion. And in November last year, of course, both DraftKings and FanDuel left the American Gaming Association with each of them launching a prediction market product fewer than 30 days later. So, if it's not already a factor in your market, it may be soon. I think the Reach of DraftKings right now is what? 38 states, something like that. I don't know if these will be permitted, but whatever. But Dan, with that, I think we move on to today's guest here. He's going

Transcript

In this first episode of our fifth season, Nick and Dan do a deep dive on legislative topics with Brendan Bussmann, legislative expert and Managing Partner of B Global Advisors. Tune in as we examine legal efforts surrounding prediction markets, sweepstakes and online casinos, as well as the latest legal developments in IRS reporting / deductions, European “re-regulation”, and the state of legalization efforts in Utah, Hawaii, Texas, Georgia, and South Carolina. Also in this episode: Is the UAE the industry’s next Gold Rush?