Former CFTC enforcement chief Ian McGinley on prediction market regulation, sports betting litigation, and insider trading risks

Speaker 2: Our next guest is already in the waiting room. We have Ian McGinley from Sidley Austin LLP. He's a partner there, former head of enforcement for the CFTC. Are you doing, Ian? Welcome to the show.

Speaker 1: Hey. Thanks for having me,

Speaker 2: guys. Thank you so much for taking the time.

Speaker 1: Great to have

Speaker 6: you.

Speaker 2: I would love for you to set the stage for us with a little bit of of your back story and career and what's on your mind in terms of prediction markets. We we we talk about prediction markets all the time. Sometimes they're really useful. There's a whole bunch of complicated issues that I'm sure you can help us unpack. But we'd love to start with, like, your background.

Speaker 3: Yeah. Yeah. And by the way, there's a lot of prediction markets on TBPN stuff, you know, including who's gonna be your guests,

Speaker 8: you know

Speaker 6: That has happened

Speaker 2: to a few times. Also, it's

Speaker 1: happened Yeah. I would say some of the some of my least favorite moments around the show on the show were when I realized that there had been a prediction market set up Yeah. Around things that one of our guests would

Speaker 2: Say.

Speaker 1: Would say because the people Then you would get a bunch of people in the chat that weren't here Yeah. Didn't care about the content at all. They only cared about trying to manipulate us. Exactly. Ask about Bitcoin or whatever. Normally,

Speaker 2: the chat's really helpful and actually providing really great it just sort of like ruined our chat. Anyway, we're already starting with the gripes, but kick us off with the backstory.

Speaker 3: Yeah. Yeah. So so right. I'm I'm at a law firm called Sidley Austin right now. Yeah. But before that, I was the head of enforcement at the CFTC. Yeah. That's the Commodity Futures Trading Commission. I don't think people had really heard of it until recently. Yeah. You know, because it was really regulating agriculture. And now it's involved in prediction markets, crypto, and some of some of really the the hottest topics around in finance. Yeah. And before that, I was at SDNY for a long time doing white collar crime insider trading, you know, back in the day. And so Mhmm. I've seen it from all sides. And now I help people try to navigate, you know, what's going on in the regulatory environment, which is active. You know, there's there's so much going

Speaker 2: on. Active is it? It feels like the game's over to me. I don't know. How do you feel about the prediction markets? It feels like they're here to stay, that, you know, you love them, you hate them. Saga and Jetty, not a fan clearly. Other people have a lot of money riding on these companies, but it feels like it's mature. It feels like it's decided. Is are there more points to decide at this point?

Speaker 3: Oh, definitely. Yeah. I mean, think top line, they are here to stay. I mean, they've captivated the public's imagination both retail and institutional. Right? Yeah. But there are a few issues being worked out. Chief among them is sports. Yeah. Right? Sports event contracts, there's a lot of litigation over them.

Speaker 2: Yeah.

Speaker 3: The states, right, which have regulated gambling, you know, for long time are filing lawsuits, right? They stand to lose, they stand to lose revenue. And those cases are working their way through courts. And you know how, you know, courts are reaching different decisions. We have district courts, appellate courts and the Supreme Court. The district courts have come out both ways. Some pro prediction markets saying federal preemption applies, meaning this is the CFTC's jurisdiction and not the states. And then we've had one appellate court weigh in saying also CFTC's jurisdiction, but more courts are going to weigh in. I bet that goes to the Supreme Court. And so we'll see, you know, the future of sports contract. Meanwhile, you got the CFTC, which is regulating in the space. They put out some rules. You know, there have been issues with contracts. Like, you mentioned, you know, mentioned markets and and insider trading. There have been some cases involving, you know, people using information that they shouldn't have to go trade in prediction markets. So that's very much a focal point of the government right now.

Speaker 1: Yeah. So so there's a question on on should they exist specifically for sports. There's also the, like, all the different ramifications of prediction markets being popular overall. Think with with the Venezuela military operation, you know, that felt like, you know, a really significant moment because you had a armed serve you know, one of our our service members that had a financial incentive to put his entire crew at risk by sending a signal to the world that, hey, this operation is gonna happen. Right? And that that was just like probably one of the darkest moments that I can remember. But then there's almost infinite markets on every possible topic. So as somebody who's been working in enforcement and working on a bunch of, you know, things like insider insider trading, which I think provides a lot of precedent for this, Can this can all these like we're we're creating a bunch of new problems where where all these type of real world events can be potentially influenced by individuals that have a direct financial incentive where where maybe before there wasn't one at all. What what's the what's the sort of broader solution or framework that you think would would be effective at maybe curtailing some of these issues?

Speaker 3: Yeah. So so you mentioned that that Maduro case. Right? And I think I think what what gets lost in that is while the the the market is different, right, that conduct has always been illegal, a 100% illegal. Right? It's like knowing the the answers to the test before you take it. And that's just allegations now. So, you know, he'll have his day in court as he deserves. But I think, you know, when you think about insider trading, a lot of it boils down to common sense. Like, you can't use information that's not yours. You can't, you know, take out an event contract ahead of time when you know you're going to be the guest and there's an event contract on that. Right? I think the challenge is that there's event contracts on everything, right? So we're talking about, know, if you're if you're thinking about equity markets and and commodities markets, there's a very well established playbook for how you handle that. Right? I'm thinking like, you know, big financial institutions. They train employees. There's policies and procedures, you know, addressing kind of everything under the sun. The prediction markets have got to catch up in terms of everyone in an industry impacted by prediction markets needs to be made aware that you can't do that because the consequences are just enormous, right? I mean, you wind up prosecuted by the DOJ, then the CFTC as well. And so there really is an education aspect of it that I think we all need to grapple with. In terms of the promises, right, I mean, you see the information and why why people absolutely love it,

Speaker 6: and it's great, you know,

Speaker 3: for a news source. It's Yeah. It's great to have. I mean, look at look at how it how it did on elections, you know, twenty twenty four election was a watershed moment. A lot of people think in prediction markets because the polls and the experts had it very close. Prediction markets showed that the sitting president had a pretty comfortable lead in all the swing states. And, you know, it's an interesting question on how these prediction markets interact with normal or traditional exchanges, right? And we've seen an integration of both because it's very helpful to have that information alongside other financial decisions you're making, right? Like will the Fed raise the interest rate in in September? Right? That that's a that's that's a metric that I think has a lot of implications for other instruments. And you can you can track that. You could ask people. You could ask experts. You could talk to someone in DC and find out, you know, or you could go on one of the prediction markets and see what, you know, what the most likely scenario is.

Speaker 2: There's a new lawsuit. Flight flight tracking platform FlightAware is suing Kalshi alleging the prediction market companies using the data without permission to let users bet on flight cancellations. The when this news hit, people immediately jumped to, well, what if someone calls in a bomb threat and then the flight's delayed or canceled just because they wanna win in the prediction market. But I was expecting the airlines to be pushing back on this or the FAA or the TSA or someone else that would be more directly in the affected line. It doesn't seem to affect FlightAware's business. They seem more worried about brand damage from having the registered trademark linked over there. But do you understand more about the different participants who are pushing back against being dragged into the prediction market world?

Speaker 3: Well, I haven't I haven't heard much about that lawsuit. I think it was just today Yeah. That that it came out. I think that one area to watch is what the CFTC does. Sure. They they put out they put out a proposed rule.

Speaker 2: Yeah.

Speaker 3: And what they're trying to prohibit is contracts that could be potentially manipulated. Mhmm. Right? And you you don't wanna create any perverse incentives. Mhmm. And that's what the CFTC is is grappling with and how to how to separate contracts that we all are are really enjoying and and and finding informational and and economically useful to hedge in in some situations. But also just make sure you're not creating a situation where someone tries to manipulate the contract for their own good. Right? We just saw a recent case involving George Santos. Different Yeah. Different context. Right?

Speaker 2: Right.

Speaker 3: But but the manipulation piece, now this is again, you don't Yeah. There was no admission of liability.

Speaker 2: It's alleged.

Speaker 3: Yeah. It's alleged but like, you know, the the allegation was the contract was whether he was gonna attend the State of the Union. Yeah. And he he obviously knows that and and according to the allegations, you know, went on

Speaker 2: Yeah.

Speaker 3: Social media and made certain statements to change the odds of the contract so that he could that he could profit. And again, new market, but that con that kind of conduct has always been illegal.

Speaker 1: What what kind of lore did you pick up from, CFTC history, like, when when when you when you took the job? Or like stories, I don't know what you can or can't talk about, but I imagine, like, some of the historical enforcement would like, there has to be some, like, crazy crazy stories of specifically in like agriculture

Speaker 2: Going up against big onion. You're talking about

Speaker 1: Yeah. Trying to get Yeah. I imagine if you would you would have the You probably wore a suit most days. But but maybe if it was like, you know, thirty years prior, you would have had some jeans and a sidearm and some boots.

Speaker 2: Sheriff I'd

Speaker 3: have to I'd have to learn some new skills. I'm I'm the city guy, but yeah, you know, look, it's it's an amazing organization. It's only been around for about

Speaker 1: Seventy four?

Speaker 3: So years. Wow. Right? Yeah. So yeah. I mean, I think I think a great piece of trivia for the CFTC, the the definition of a commodity Mhmm. Is essentially almost everything that you have a futures or derivatives on. There's two exceptions. Box office movie tickets and onions. Onions. And and no one knows the exact reason why they're not, but they are not regulated by the CFTC. And I don't think we could ever see an event contract on them. So so there's that. But, you know, just on in terms of prediction markets, what's really interesting is they've always they've been around for a really long time.

Speaker 7: That's right.

Speaker 3: It's just now they really with sports

Speaker 6: and with

Speaker 3: with political contest, they've really captivated the attention of folks. And I think you're seeing a ride along effect

Speaker 2: Yep.

Speaker 3: In terms of other contracts that are now getting, you know, really popular with the public. And so, you know, for there were on very limited basis some election contests. Yeah. That were experimental. But now you now you see them everywhere. And, you know, even the twenty twenty five mayoral race in New York, they were Yeah. They were very accurate.

Speaker 2: So on on sports betting, when I when we talked to Sagar and Jetty from Breaking Points who's who's very concerned about the the proliferation of sports betting, having a casino in your pocket as he puts it, his his main contention is that it's the availability, it's the ease, it's the lack of the the infrastructure that is was formerly around sports betting. You had to tell your family that you're going to Las Vegas, walk into a casino, it's smoky, it's expensive, put down a bed.

Speaker 6: Did did

Speaker 1: you always

Speaker 3: get that notification?

Speaker 2: This is there were a lot of barriers and also you could do self exclusion. There were gambling hotlines. There were a whole bunch of warnings about the the the economics of what you were participating in. The house always wins. And I'm and I'm what I'm interested in is does the CFTC even have the authority to layer that a similar structure of, hey, if you're gonna be advertising instead of betting on the Super Bowl, you're going to be trading the Super Bowl. You also have to have the same gambling hotline phone number because from our view it's a similar thing. We're going to let it happen but it needs to have the same infrastructure that it had just a few years ago. Or is this something that the CFTC doesn't even have the the tools in the tool chest to make happen if they wanted to?

Speaker 3: No. They have the tools. I mean, they've regulated these markets. Yeah. Just not, you know, in these subjects.

Speaker 1: Right?

Speaker 3: So they basically the CFTC's view and some courts have adopted this is that these are financial instruments. They're called swaps. Yep. An agreement between two parties on the occurrence of an event that has some economic financial consequences how they view it. And so the CFTC has authority if there's fraud, if there's manipulation. Now I do think, and they've made some, you know, some talks about this, that we'll see more rules from the CFTC. It has not traditionally been involved in these spaces. Mhmm. And I think, like, you know, with anything with government, there is a it takes time to catch up with industry. That's just that's just a fact. Mhmm. And so I think I think the CFTC will tackle those issues pretty soon.

Speaker 2: Yeah. It'll be very, interesting to follow. We'll we'll have to have you back on when there's more news. Thank you so much for taking the time to come chat with us. Yeah.

Speaker 1: Thanks for breaking it down.

Speaker 2: Have a great rest of your day.

Speaker 3: Yeah. Talk to

Speaker 2: you soon.

Speaker 1: Cheers. Goodbye. Let me tell

Speaker 2: you about CrowdStrike. Your business is AI. Their business is securing it. CrowdStrike secures AI and stops breaches. Our next guest is going direct, going independent.