The Breakdown - Judge Declares Prediction Markets Legal in US

Episode Date: October 4, 2024

Or at least...they're not illegal based on the CFTC's arguments. A Judge has rejected the CFTC's appeal to keep Kalshi from posting a presidential election market. The decision has led to numerous platforms coming online almost immediately. Plus, the SEC's Head of Enforcement heads out. Unlocking Bitcoin DeFi with ExSat The exSat Network aims to unlock and scale the Bitcoin ecosystem without compromising Bitcoins Ideology. The network has partnered with the largest mining pools in the world, major custodians and exchanges, Cefu, Cubolt, Matrixport, Copper, OKX and aims to have over $200M TVL at mainnet launch on the 23rd of October.  Follow exSat’s Twitter to stay up to date @exsatnetwork or visit the testnet exsat.network Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, October 3rd, and today we are talking about the legality of prediction markets in the United States. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to Bit. down pod. All right, friends, well, today we are talking about something that is slightly perhaps orthogonal from the main crypto topics we cover, because ultimately it's about how people have control and autonomy over what they spend their money on, and how they interact with services and markets

on the internet. Specifically what we are talking about is prediction market platform Kalshi that has been through a legal roller coaster. They won their court case against the CFTC, with the judge ruling that the regulator had stepped far outside their jurisdiction and blocking political prediction markets, and based on that order, Kalshi had launched a market on the result of the presidential election. A few hours later, however, the CFTC filed an appeal and obtained an administrative stay of the decision. Now, the appeals court has dissolved the stay, allowing Kalshi to relaunch their markets with just a month left until the election. The judge found that the CFTC had failed to show that the public will, quote, suffer irreparable injury if the stay

is not in place and therefore removed it. The appeal will presumably still go ahead, but with a hearing likely falling after the election, it's questionable how much value there is in the CFTC continuing to pursue this issue. In making her ruling, the appellate judge pointed out that there are other steps the regulator could take, writing, if the commission felt the risks of election contracts were as concrete and pressing as it argues here, it has long had and still has the power to forbid them on the exchanges it regulates. Specifically, the commission is empowered to find through a formal rule or notice in comment rulemaking that certain types of event contracts, such as electronic contracts, are quote contrary to the public interest and to forbid them. She noted that election

interference through the spread of misleading poll data is not a new phenomenon. Referring to a 2017 incident where a fake poll showed that Kid Rock was leading in the 2018 Michigan Senate race. Kid Rock was in fact not on the ballot and the election was easily won by Democrat Debbie Stab now. The judge noted, in the seven years since the fake Kidrock poll was used, the commission has not invoked the very tool Congress gave it to head off such harms. Kalshi insiders were relieved to see this lawsuit finally resolved. Founder Terak Mansour tweeted, U.S. presidential election markets are legal, officially, finally. Noah Sterning, a member of the operations team hung the court order on the office wall. The question now is how rapidly political prediction

markets will launch in the wake of the ruling. International brokers has already filed notices with the CFTC that they intend to launch markets today. Several other firms also signaled their intention to enter the space last month following the original decision. In her ruling, the judge noted that the CFTC is able to enforce market manipulation and insider trading rules around these markets and encouraged it to do so. It's unclear exactly what would constitute insider trading on a presidential election, but we might find out soon. Leo Schwartz, a reporter at Fortune said, I cannot wait for the first electoral betting insider trading case prosecuted by the CFTC. Classic internet-hating blowhards better markets predictably didn't like the decision. They tweeted,

the court's order today in the Kalsh case will allow betting on an incredibly close and contentious race just weeks before the election. That makes this a sad and ominous day for election integrity in the United States. The record clearly includes concrete examples of election interference, which substantiates the threat of irreparable harm. Under these circumstances, and with so much at stake, the court could have and should have gone the other way. The court's reckless ruling will allow betting on the final weeks of an incredibly close and contentious election. Calciah's gambling with our democracy and all concerned citizens should consider what's at stake. Unsurprisingly, I'm sure, to all of you who are listening, this strikes me as a wholly unconvincing argument that seems to

rest on the idea that people are so stupid that they're just going to take what a betting market says is gospel and not make up their own minds about something as important as a presidential election. I don't buy it, and I'm glad the courts are giving it no countenance as well. This episode of The Breakdown is brought to you by XAT Network. As regular listeners know, one of the things that I think is really exciting right now is all of the new builder energy around Bitcoin, and XSat Network is a great example of that. XAT Network utilizes a combined consensus mechanism of POW and POS enabling miners to earn revenue and stakers to earn Bitcoin yield. Their state data index mirrors Bitcoin UTXO data, creating a venue for BTCFi to flourish

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That's E-X-S-A-T-N-E-T-W-R-K, and unlock Bitcoin Defi with X-Sat. Hello, friends. Before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives, and the reason it's so important this year is that despite regulators' best to be permissionless, attempts to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now we are in a major political party's platform,

which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And perhaps more importantly, I will be there. The location is Salt Lake City. The dates are October 9th to the 11th, and tickets are just $499.99. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.com. There will be links to register for the conference, and again, you can use code Breakdown 10 to get 10% off. Next up, we move over to the SEC, where enforcement director Gerbira Gruel has announced that he will leave the agency

effective at the end of next week. Grue will join the SEC in his current position in 2021, one following a three-year stint as the Attorney General of New Jersey. No replacement has currently been named with Deputy Director Sanjay Wadhwa stepping in as acting director. Chair Gary Gensler said in a press release, We've been incredibly fortunate that such an accomplished public servant came to the SEC to lead the division of enforcement for the last three years. Every day, he has thought about how to best protect investors and help ensure market participants comply with our time-tested securities laws.

He has led a division that has acted without fear or favor following the facts in law wherever they may lead, which is, you will forgive me hard to read with a straight face. The press release unsurprisingly praised Gruewell's record in crypto enforcement. It specifically highlighted his authorization to more than 100 crypto enforcement actions, including lawsuits against finance and Coinbase. Still, it's impossible to read this resignation without the context of other recent departures from the SEC. This is now the third resignation at the top levels of leadership so far this year. In August, David Hirsch, the head of crypto enforcement left to join law firm McGuire Woods. In February, the head of crypto litigation, Ladon Stewart, stepped away to join

White & Case. Reports indicate that Gruewell is also headed for private practice, but the details are not yet public. Crypto-legal commentators were somewhat split on how much to read into the story. Variant Fund chief legal officer Jake Trevinsky is leaning all the way in, tweeting, it's not normal for an SEC enforcement director to get disappeared like this, gone on nine days' notice with no replacement lined up. Perhaps the inevitable end to a campaign of unlawful harassment and misrepresentation, resulting in many embarrassing defeats in court. Investor Adam Cochran joined in, commenting, Gensler's top enforcer out at SEC. This is the guy responsible for heinous enforcement actions that abused the law,

create a chilling effect, and try to lie to the public in press releases. Nine days notice and no immediate replacement announcement means one of a few things. One, the writing is clearly on the wall that Gensler is out next term in either administration and senior people are jumping ship fast. Two, Gensler is taking heat for his BS even from his top supporters, Warren and Brown, and gave up a scapegoat. Also pretty telling that Gensler isn't elevating the career deputy to the role. Likely because he knows his BS cases won't fly with career officials who don't want to

play politics. On the flip side, consensus lawyer Bill Hughes said, My friends, the end of the fiscal year was two days ago, and he served for a couple of years now in a demanding job. Sometimes you know when you are going to exit so you can take some time off before starting your big fancy new private sector job come 2025. Mark Fagel, who previously served as SEC Regional Director for Los Angeles, agreed, adding, Exactly, this is the typical trend in recent administrations. The division director often leaves at this time so that their replacement can be named by the current chair rather than by an acting chair amidst a possible change in SEC leadership.

Republican Housewhip Tom Emmer, for his part, is simply glad to see the back of Griewell, regardless of circumstances, tweeting, SEC director of enforcement, Griewell encouraged lawlessness and chaos at Gary Gensler's SEC. He even admitted it to us on the record in 2022. Good to see him packing his bags. Still, if you think the SEC is just done, tail between its legs heading off in the other direction, think again. The SEC has announced that they will appeal the ripple decision.

They have filed their notice of appeal to the Second Court Circuit of Appeals with more details to come in future filings. An SEC spokesperson said, We believe that the district court decision in the ripple matter conflicts with decades of Supreme Court precedent and securities laws and look forward to making our case to the second court. The major controversy in this case was whether XRP transactions in the secondary market were covered by securities law. On this point, the court ruled against the SEC. They found that XRP sales on exchanges between third parties were outside of the SEC's jurisdiction. This was the first court decision that undermined the SEC's.

theory that tokens themselves are securities rather than the investment contracts that surround token sales. The SEC has since abandoned that legal theory, arguing instead that tokens form a part of a broader investment scheme. Still, the Ripple decision is a major impediment to the current path of crypto enforcement, so an appeal was always likely. Litigator Joe Carlos Raleigh thinks an appeal is ultimately going to be a good thing for the industry, as a step towards legal clarity. He commented, other district courts have issued rulings that contradict Judge Torres' findings in the SEC versus Ripple Labs. Even if you're pro-XRP, you should want the Court of Appeals to review and affirm this decision. The Ripple Labs case took years to build a

comprehensive record, and it deserves to be tested on appeal. With a higher court ruling, the legal framework becomes more solid and reliable. Supporting an appeal isn't about being anti-pro-XRP. It's about solidifying legal precedent, which benefits the entire industry. Then again, just because it was inevitable doesn't mean the folks at Ripple have to like it. Ripple Chief Legal Officer Stuart Alderati said, The SEC's decision to appeal is disappointing, but not surprising. This just prolongs what's already a complete embarrassment for the agency. The court already rejected the SEC's suggestion that Ripple acted recklessly, and there were no allegations of fraud, and of course there were no victims or losses. He also took this opportunity to question the priorities of the

Gensler SEC, adding, instead of faithfully applying the law, this agency under this chair, continues to engage in litigation warfare against the industry. Now, interestingly, yesterday morning before the SEC appealed the case, Bitwise filed for an XRP ETF. Surrounding the ripple decision and the launch of Spot Ethereum ETFs, many speculated the the floodgates would be thrown open for other crypto-etfs. That hasn't quite played out. We did see Van Eck file for a Solana ETF in June, but nothing else has followed. This filing positions Bitwise is the only major asset manager with an XRP ETF in the works. The SEC's habit of stretching crypto-etif applications out for as long as possible means we probably won't know the likelihood

of approval into well into next year. It's important to note that ETF applications aren't necessarily a huge undertaking, but they still take a reasonable allocation of resources. With that in mind, analysts are wondering what the plan is. BitWise, CEO, Hunter Horsley positioned the move as less about XRP and more about the crypto industry in general. He said, at BitWise, we believe blockchains will usher in new apolitical monetary assets and permissionless applications for the 21st century. It's why for the past seven years, we've helped investors across the opportunities in the space, and we're excited to continue that work with our filing for a Bitwise XRP ETP ETP. Eric Belcuna, senior ETF analyst at Bloomberg tweeted,

you've heard of the Fed put, this is like the Trump call. Filing's for XRP or Solana or any other all coin are basically a cheap call option on a Trump win as Gens will be gone and anything's possible. If Harris wins, no way these get approved and the call expires worthless. Lastly today, a follow-up on our market news. Bitcoin has struggled to recover from Tuesday night's drawdown, stumbling through two small rallies that both came crashing back down to the $60,000 level. This is now the worst ever start to October, although one, two days is admittedly a rather small sample size, and two, it's been a fairly eventful two days. Analysts are taking a look at just how badly the markets have been spooked by escalation in the Middle East. James Van Stratten

of CoinDesk notes that short-term holders were panic selling. According to GlassNode data, around $4 billion has been sent to exchanges by this cohort over the past two days. Assuming it was all solid, around $3 billion was sold at a loss based on the on-chain acquisition price. This is similar in size to the losses visible during the unwind of the Yen-Carrie trade in early August, which saw $2.5 billion in losses sent in a single day. Bitcoin ETFs also saw their worst day since early September, with $242 million drained out of the products on Tuesday. This snapped an eight-day streak of consecutive inflows, which had been the longest streak since August. Leveraged traders were also caught offside with 450 million in long liquidations across all token pairs.

Heading into the drawdown, traders were positioned extremely long and open interest had soared. Bitfinex analysts had suggested on Monday that this positioning, quote, raises concerns of potential market overheating. As for what comes next, crypto-quant data suggests that any serious return in demand could kick off a strong rally into the end of the year. Their key demand metric has basically been flat since July. Any brief uptick has been met with an equivalent drop, but the numbers are all puny compared to the roaring demand earlier in the year. demand has been trending up over the medium term and has become less volatile. The key takeaway from crypto-quant's report was that September's uptrend was linked to a relatively modest increase in demand. They noted that this was not enough to trigger a strong and

sustained rally, but it does demonstrate how demand-sensitive Bitcoin's price is at the moment. QCP Capital is noting how minor the pullback was relative to other moments of panic. Their analysts wrote, Middle East geopolitics could steal the limelight for now, but the shallow sell-off after the intensification of the conflict suggests that the market remains well-bid for risk assets, and this minor setback shouldn't distract from the bigger picture. They did note that their analyst depends on Tuesday's attack fading into the background rather than leading to further confrontations, adding, further escalation could push Bitcoin much lower, possibly to the $55,000 level.

Real Vision's chief crypto analyst Jamie Koutz suggests that the summer chop was essentially a reset for Bitcoin. Surveying his dashboard of metrics, he tweeted, two big takeaways. Bitcoin is near all-time highs, yet the valuation metrics have all declined from extreme overbought in March. Open interest is high in nominal and relative terms, but the funding rates are subdued. Global liquidity is accelerating to the upside, and the six-month pullback has removed the excess bullishness and positioning, creating the reset necessary for a major move higher. From your lips to Satoshi's ears, Jamie, but for now, that is going to do it for today's breakdown. Appreciate you guys listening, as always, and until next time, peace.