Key Takeaways

• Prediction markets are increasingly integral to pop culture and consumer engagement.
• The regulatory landscape for prediction markets is expected to become more liberal.
• Unresolved issues in prediction markets include ambiguous outcomes and insider trading concerns.
• The CFTC is at a pivotal moment to shape the future of emerging markets like prediction markets and crypto.
• Exchanges operate as self-regulatory organizations with CFTC-approved rule books.
• The definition of commodities is broad, covering almost everything except specific exclusions.
• Contracts related to events like the Super Bowl halftime show should not be categorized as true financial instruments.
• The CFTC has authority to police insider trading in commodities markets, similar to the SEC.
• Insider trading in commodities markets can involve different mechanisms compared to traditional company-related insider trading.
• The distinction between games of chance and games of skill is crucial for understanding economic implications.
• Prediction markets can produce valuable information, sometimes more accurate than traditional polling.
• Regulation is necessary to ensure prediction markets flourish in the US while providing investor protections.
• The structure of derivatives markets differs significantly from betting against a house, providing more market integrity and liquidity.
• The regulatory framework for derivatives markets is more stringent compared to informal betting operations.

Guest intro

Michael Selig serves as Chairman of the US Commodity Futures Trading Commission (CFTC). He most recently served as chief counsel of the Securities and Exchange Commission’s Crypto Task Force and senior advisor to SEC Chairman Paul S. Atkins, where he helped develop a clear regulatory framework for digital asset securities markets. Prior to government service, he was a partner at Willkie Farr & Gallagher, advising CFTC-regulated clients including digital asset firms on derivatives compliance.

The role of prediction markets in pop culture

• Prediction markets are truly becoming part of like pop culture and how we interact with pop culture.

  — Michael Selig

• Prediction markets are shaping public engagement with events and entertainment.
• The influence of prediction markets on cultural phenomena indicates a trend in consumer behavior.

• The degree to the liberalization of these markets has been pretty remarkable.

  — Michael Selig

• Ongoing changes in the regulatory framework could impact the growth and accessibility of prediction markets.

• There are still some issues that people are trying to work out you have ambiguous outcomes… concerns around insider trading.

  — Michael Selig

• Challenges faced by prediction markets include regulation and ethical considerations.
• The complexities and potential pitfalls in prediction markets are crucial for their credibility and development.

CFTC’s pivotal role in emerging markets

• The agency is really at this unique moment where it has the opportunity to shape the future of these new and emerging markets and and it’s really exciting time to be in the seat.

  — Michael Selig

• The CFTC’s evolving role and regulatory power are significant in emerging markets.
• Exchanges function as self-regulatory organizations with CFTC-approved rule books.

• The unique thing that the the great thing about the way that we regulate the markets is that the exchanges themselves similar to on the security side are self regulatory organizations.

  — Michael Selig

• Understanding the structure of market regulation and the role of exchanges is important.
• The CFTC’s authority is similar to the SEC’s in policing insider trading in commodities markets.

• The authority at the agency is very similar to the authority at the sec under our anti fraud anti manipulation rule we do have authority to police insider trading in the commodities markets.

  — Michael Selig

The broad scope of commodity regulation

• The definition of commodities extraordinarily broad it includes virtually everything except for a few things have been carved out onions and motion picture box office for c cent.

  — Michael Selig

• The expansive nature of commodity regulation is crucial for understanding market dynamics.
• Contracts related to events like the Super Bowl halftime show should not be categorized as true financial instruments.

• What is the basis for this being categorized as a true financial instrument regulated by the cftc because it certainly just feels like prop betting to me.

  — Michael Selig

• The distinction between financial instruments and prop betting raises important regulatory questions.

Insider trading in commodities markets

• The way that insider trading is carried out is oftentimes different from a situation where you have informational asymmetries relevant to a company but there are situations where you have informational asymmetries related to the markets.

  — Michael Selig

• Insider trading in commodities markets involves different mechanisms compared to traditional company-related insider trading.
• Understanding how insider trading operates in different market contexts is important.
• The CFTC has authority to police insider trading in commodities markets, similar to the SEC.
• This provides a clear understanding of the regulatory powers of the CFTC in relation to insider trading.

Economic implications of games of chance vs. skill

• There’s definitely a difference and and i think when we look at what’s a commodity it’s possible that you could construct some sort of contract an esoteric derivative but really the underlying in in a game of skill is very different.

  — Michael Selig

• The distinction between games of chance and games of skill is crucial for understanding economic implications.
• Prediction markets can produce valuable information that is sometimes more accurate than traditional polling methods.

• We are seeing the information used in particular a great example is the election in 2024 where the president had a very large victory and that was not necessarily forecast in many of the polls but of course the prediction markets got that right.

  — Michael Selig

• Regulation is necessary to ensure that prediction markets flourish in the United States while providing investor protections.

Differences between derivatives markets and betting

• You’re betting against the house and there’s a lot of different rules when you’re betting against the house you don’t have the liquidity of being able to offset your position or sell out of your position.

  — Michael Selig

• The structure of derivatives markets differs significantly from betting against a house, providing more market integrity and liquidity.
• The regulatory framework for derivatives markets is much more stringent compared to informal betting operations.

• We regulate a nearly 500,000,000,000,000 notional market with the swaps market we have very stringent requirements and controls around our exchanges.

  — Michael Selig

Blockchain’s impact on exchanges

• I think blockchain is going to really change in particular how some of these existing exchanges operate how they settle transactions and so forth.

  — Michael Selig

• Blockchain technology is poised to significantly change how existing exchanges operate and settle transactions.
• The economic similarities between traditional futures markets and new prediction markets are increasing.

• Economically they’re very similar and they’re getting more similar because we know that say like the cali sheet and poly market they’re trying to get into to do parlays and stuff so like it’s getting closer and closer.

  — Michael Selig

Regulatory consistency across market types

• We’re not gatekeeping particular categories of markets elections or sports and having different standards that’s not how we’ve typically done things.

  — Michael Selig

• The regulatory approach to financial markets should not differentiate between categories like sports and traditional securities.
• The CFTC is facing challenges in maintaining adequate staffing levels to effectively regulate fast-growing markets.

• We’ve gotta make sure that we have adequate staff to police the markets.

  — Michael Selig

SEC and CFTC: Distinct roles

• The sec is a capital markets regulator they’re focused on somebody wants to go raise capital for a great idea… the cftc was established in the seventies but the purpose of the cftc is to regulate risk mitigation risk management very different areas.

  — Michael Selig

• The SEC and CFTC serve fundamentally different regulatory purposes in the financial markets.
• The SEC has established a regulatory regime to address market chaos following the Great Depression.

• After the great depression there was a lot of chaos in the markets and the agency really was a great answer to that issue and has put a great regime in place to regulate all of that.

  — Michael Selig

Coordination between SEC and CFTC

• What doesn’t make sense and what chairman atkins and i have been very clear on is the lack of coordination between the agencies so it’s it’s coordination not consolidation we need to harmonize the two regimes to make sure that there’s not inconsistent and incompatible rules.

  — Michael Selig

• There is a critical need for better coordination between the SEC and CFTC to avoid inconsistent regulations.
• A memorandum of understanding is essential for effective coordination between the SEC and CFTC.

• A memorandum of understanding is something that we’ve committed to execute and we’re looking to execute very soon and that really set all the ground rules for coordination between the staffs.

  — Michael Selig

Joint rulemaking for traditional and decentralized finance

• I think a lot of the general like crypto related issues are really calling for joint rulemaking joint work between the agencies because we’re seeing nvidia tokens on chain… those worlds are gonna collide and then they are in fact colliding today.

  — Michael Selig

• The collision of traditional finance and decentralized finance necessitates joint rulemaking between regulatory agencies.
• Incompatible standards between regulatory agencies could harm the market and consumers.

• If we set incompatible standards then it’s gonna be a real disservice to the market and that’s gonna harm all Americans.

  — Michael Selig

Holistic regulatory thinking

• My view on a lot of this stuff is that we need clear rules of the road we need to do things through notice and comment rulemaking and actually think holistically about our markets and not focus on these little patchwork no action letters…

  — Michael Selig

• We need clear rules and holistic thinking about our markets rather than relying on patchwork regulations.
• The current regulatory framework is a result of ad hoc decisions made by regulators, leading to inconsistencies.

• It really is just a result of the the kind of ad hoc way that regulators in the past have gone about establishing exceptions for certain things in the markets…

  — Michael Selig

Institutional interest and market structure

• We’re seeing more institutional interest in these markets they would prefer to be able to put up margin and go through a broker or have a model where you don’t have the broker at all but you’re able to use margin.

  — Michael Selig

• Institutional interest in markets is increasing due to the desire for margin trading options.
• The current market structure should have been established years ago, and reliance on no action letters has hindered progress.

• It’s a really interesting time as i said to to be thinking about market structure for things that really just probably should have been done many years ago.

  — Michael Selig

• The regulated markets have stringent requirements and are actively policed for fraud and manipulation.

• These are designated contract markets like any other we’ve regulated these markets for for many many years for decades they have some of the most stringent regulatory requirements… we police fraud and manipulation in these markets.

  — Michael Selig

The clarity act and US leadership in crypto regulation

• I really do think we’re at a critical moment where we’ve got genius now as law regulation by enforcement’s done… I think that’s gonna set a really future proof framework for for crypto here in the us.

  — Michael Selig

• The clarity act is critical for establishing a future-proof regulatory framework for crypto in the US.
• The US must not allow European countries to lead in the crypto space without American involvement.

• We can’t allow european countries and and others to lead in this area without us involvement and leadership.

  — Michael Selig

US leadership in setting crypto standards

• We really want to bring it back with clear rules of the road so it’s really important that the us leads and that we set the standard that other countries are going to follow rather than just allow this stuff to to flourish offshore with potentially less regulation.

  — Michael Selig

• The US should lead in setting clear regulatory standards for crypto markets to prevent offshore exploitation.
• Contracts without physical delivery dates can be more susceptible to manipulation, affecting supply and liquidity.

• We have to consider the susceptibility of each contract to manipulation so there might be unique considerations around a contract that doesn’t have a physical delivery date for example pork bellies or other things and that can create issues within the supply and and liquidity for for the futures contracts.

  — Michael Selig

Legal treatment of financial products

• There’s a great law journal article by professor hazen… comparing derivatives futures contracts securities insurance products gambling these are all products that you can take similar economic positions in but they have different legal treatment and it’s because the products are structured different ways.

  — Michael Selig

• The legal treatment of financial products varies significantly based on their structure, even if they share similar economic attributes.
• There are societal responsibilities regarding the age at which individuals can participate in financial markets.

• The reality is that today we allow 18 plus in our financial markets and there’s responsibility associated with that.

  — Michael Selig

Age restrictions and regulatory authority

• I think this more paternalistic question of what age should be the age to be able to participate in the markets… I think that’s not really for the regulator to decide.

  — Michael Selig

• The decision on what age individuals should be allowed to participate in markets is not for regulators to make.
• The agency is focused on hiring the best talent to revitalize its operations and is leveraging technology to improve efficiency.

• We are evaluating based on competence and the highest quality… we are relying a lot on technology as well because there’s just so much that many years ago really had to be done manually that can be done very quickly through new technologies.

  — Michael Selig

Congress and prediction markets

• I don’t necessarily think you need to kick everything to congress… if you really wanna set some sort of more paternalistic rule around you have to be 18 or 21 to participate in the markets that sort of thing sure you can talk to congress about.

  — Michael Selig

• Congress should not regulate every aspect of prediction markets, but there is a role for them in setting certain age restrictions.
• The regulatory framework for derivatives markets is distinct from state gambling laws, allowing for different operational rules.

• I do think our derivatives markets are a separate area within government and within the law as opposed to the state gambling and the the rules and requirements that govern a state casino are very different.

  — Michael Selig

CFTC’s role in prediction markets

• It is very doubtful to me that someone needs to manage their exposure to Cardi B performing on stage at the Super Bowl, so it’s not even entirely clear to me that like this is an industry that the CFTC should be regulating.

  — Michael Selig

• The CFTC’s role in regulating prediction markets is questionable given the nature of the events being bet on.
• Different market structures require different regulatory treatments.

• Different market structures warrant different types of regulatory treatment.

  — Michael Selig

• The moral considerations surrounding sports betting influence regulatory decisions more than financial risks.

• Part of the reason that states have sort of in many cases either no sports betting or very stringent rules about who can engage in sports betting has nothing to do with financial risk and everything to do with the sort of moral choice about who gets to sports bet.

  — Michael Selig

Prediction markets and financial decision-making

• I think there’s a lot of useful signal from them… it’s also true that the platforms are largely sports betting at this point.

  — Michael Selig

• Prediction markets can provide useful signals for financial decision-making, but their current focus is largely on sports betting.
• The involvement of influential families in prediction markets raises questions about policy-making in the industry.

• The trump family is very invested quite literally into this space and I think that quite reasonably should… raise some questions about like how policy is being made about the growth of this industry.

  — Michael Selig

Insurance policy exclusions and consumer trust

• The very policies we trust can deliver the biggest financial shocks across america millions of claims are denied every year not because people did anything wrong but because policies quietly excluded the things that happened.

  — Michael Selig

• Insurance policies often contain exclusions that policyholders are unaware of, leading to denied claims.
• There is a significant information gap between insurers and policyholders regarding what is covered in insurance policies.

• The psychology of trust tells us we assume the contract is fair but in insurance the information gap is massive the insurer knows every detail of what’s covered the policyholder rarely does.

  — Michael Selig