Examining Customer Protections and Market Integrity in Sports Event Prediction Markets

Good morning, everybody. I was telling our witnesses as we were gathering that it tells you what a uh policy guy I am that I'm just downright giddy for today's hearing because I think it's an opportunity for us to elevate uh the IQ of the this committee and the broader US house on a topic that's really a pretty hot topic you don't have to be um a policy guy uh to understand how important uh the event contract and prediction market space is becoming. And of course prediction markets aren't new. Uh the idea of using markets to capture uh the wisdom of the crowd dates back centuries. And at the CFTC prediction markets have long been a part of uh the commission's work. Uh in nineteen eighty eight the agency first provided registration relief to Iowa Electronic Markets for their innovative political prediction market. Think about that. Nineteen But as with all derivatives products, the landscape has changed a lot in the last forty years, and I suspect it's gonna change a lot in the next few years to come. Uh and it's because technology has supercharged the growth of these prediction markets. Today, tens of billions of dollars in transactions occur each month across both registered and off-shore exchanges. They've grown to a size and a scope that few of us could have imagined, even just two years ago. As with many emerging technologies, our laws are being asked to answer questions that we had never really contemplated when we wrote, when we wrote the laws uh years ago. And yet, despite all of the attention, event contract markets represent a small fraction of the activity across the markets regulated by the CFTC. The reason we've got so much interest, the hearing today is that although they're a small portion, uh, there's tremendous growth. And the growth of sports-related prediction markets have raised unique questions and those are the questions we want to get to the heart of today. Uh, to many Americans, these products look an awful lot like sports betting. To others, they're an innovative financial, uh, product that can help aggregate information and provide insight into future events. Drawing that line And determining whether our laws and regulators are equipped to do so is the central driving question before us today. Derivatives are tools. They're a means to an end. They're not an end to themselves. While products aren't regulated on merit, they should, according to the CEA, serve a purpose, uh, whether managing risk or surfacing useful information. They're not wagers. And the CFTC is not a gambling regulator. And most important, we want customers to be protected and markets to be sound. Today's hearing is about the unique nature of protecting customers and building healthy markets uh in prediction markets, specifically sports related prediction markets. It's also about whether the CFTC has the right rules to do the job. How we address these risks is essential. to building fair and safe markets and making sure that we draw that line in the right place. Customer protection has been a cornerstone of the Commission's work for more than five decades and today's discussion will help us better understand where the law's working, where it may be falling short, and whether Congress has more work to do. We have a terrific panel of witnesses today and I'm certain we'll have no shortage of thoughtful discussion and lively debate. In fact, I'm kind of looking forward to that part. And I want to thank uh their witnesses, these witnesses, for their preparation and their willingness to share their expertise with us today. Uh with that, uh I'm happy to yield uh to my partner, Ranking Member Davis.

Thank you so much, Mister Chair, and to the witnesses for being here today. As prediction markets continue to evolve, Discussion is not simply about technology or financial innovation, it's about whether our regulatory framework is keeping pace with new products while continuing to protect consumers, preserve market integrity, and provide certainty for everyone involved. I approach this issue without the assumption that every new product is inherently good or inherently Instead, I believe our responsibility is to ask whether existing safeguards are sufficient, whether regulatory responsibilities are clearly defined, and whether consumers understand the protections available to them. Mister Chair, we've worked on many issues together. And I wish the American people could see how we function and have functioned as a committee. But so many across the country see Washington DC as divided. And in fact, many that I have heard from believe that we're not only divided but also are dealing with corruption. We must ensure that when we are talking about any events, there's not manipulation, insider trading. The American people, regardless of what happens, demands fair play. As a representative of East and North Colonies, I also remain mindful that the Commodity Futures Trading Commission has an essential mission supporting the agricultural markets and that our farmers rely upon that to take place every day. As new products emerge, we must ensure that the agency remains fully capable of carrying out that core mission. Meanwhile, I appreciate the Commission's ongoing rule-making process and look forward to hearing from our witnesses about where Congress may be able to provide greater clarity. Regardless of where members ultimately come down on this issue, I hope today's discussion helps to identify practical ways to strengthen consumer protections, improve transparency, and provide greater certainty for both consumers and regulated markets. Thank you, Mister Chair, and I look forward to a wonderful discussion today.

Uh, we're honored to have both the uh Chairman and the Ranking Member of the full committee with us today. Uh, we would yield to Chairman Thompson for any remarks he desires to make.

Well, thank you uh Chairman Johnson, Ranking Member Davis. Um um thank you both for convening this hearing. It's an important hearing on a complex set of issues. It's the first hearing, but not the last hearing, that this committee will undertake to examine production markets. As I said this spring, this is a transformative time for the Commission and financial markets. This is due in no small part to the growth of new types of derivatives, instruments offered in US markets, including event contracts. This hearing provides us with an opportunity to address the confusion and debate around the role and the authority of the Commission in these markets. Over the last one hundred years, Congress intentionally constructed a federal framework for offering products and trading within derivatives markets. As I've have said before, the Commodity Exchange Act is clear. The Commission's authority is broad and deep. The definitions of commodity and swap are sweeping, and Commission's authority over transactions on registered exchanges is complete and exclusive. And it is important that this robust jurisdiction is protected and respected. But understanding the Commission's jurisdiction is not the end of the public policy questions which we must consider. Many members have raised important questions about the roles for trading event contracts and the appropriateness of certain contracts to be listed for public trading especially those around sports related event contracts. The Commission has significant tools currently and at its disposal to address many of these concerns. Just last month the commission proposed the first of potentially several role makings focused on bringing clear roles to prediction markets. This one was focused on defining the public interest and implementing the special role for contra event contracts. Most relevant to today, the proposed role explained how it seeks to determine when a contract involving gaming is contrary to the public interest. Uh, this is an important role making, and I am encouraged by the thought in the work which went into the draft. It provides clear standards for the public interest and workable definitions for the key terms which have lingered undefined for so long. Where the Commission's authority is found to be insufficient to meet its mandate, to support responsible innovation and protect market participants, we will consider legislation as may be appropriate. But first, the committee must understand if such gaps exist. We must also consider federal preemption and any impact to the federal regulatory framework which Congress clearly provided under the CEA, and has reaffirmed for a century. I believe that the markets overseen by the commission must be fair, safe, and useful. Uh, today's hearing is another step in that process. Test mail received today will help our members to further understand the law and the commission's authorities. And uh, thank you so much, and I yield back.

Wise words from the legend of Howard, Pennsylvania. Uh with that we would turn toward uh the honorable ranking member from Minnesota Ms. Craig, you're recognized.

Thank you Chairman Johnson and ranking member Davis for leading this hearing a on this most important subject. In less than two years we've seen explosive growth in event prediction market trading, most of it driven by contracts on sports related events. We've all se also seen a number of pieces of litigation over sports event contracts with state suing markets, market suing states, and the CFTC also weighing in with its own litigation. I think it's safe to say that among the witnesses here today and even among members of this committee we will hear a divergence of views on the questions of sports prediction markets however one thing I think everyone here can agree on is that the CFTC needs a fully appointed commission, additional resources, and increased expert staffing to do their job effectively. Unfortunately, I have serious doubts as to whether the agency has the capability to police these markets. Last year, after this administration's doge efforts, the agency saw its staff reduced by twenty percent. That means the CFTC must try to protect consumers, not only in these fast-growing prediction markets, but also in the rapidly evolving digital assets assets industries with one fifth less staff. If someone tries to tell me that in the seven months that Mister Selig has been chairman of the agency that they have acquired all the expertise necessary to understand and surveil these different events traded on prediction markets including sports frankly I wouldn't believe them. And of course, The solution from some of my colleagues to all of this is simple. Cut the agency's funding from its currently low levels, as indicated by their ten million dollar cut to the CFTC's budget in their fiscal year twenty-seven agriculture acop appropriations bill. This cut came despite the agen administration's request for an increase in the agency's current budget. Just last year, We heard from farmers, ranchers, cooperatives, and others that have traditionally relied on commodity markets. That stagnant or insufficient funding at the CFTC undermines market certainty and raises risks across the system. If we want safe markets, if we want innovation without exploitation, if we want risk management tools that serve all Americans, then we must give the CFTC the staff and the funding it needs to do its job. Recently, Chairman Seelig put forth his personal vision, since he is the only Commissioner there, for how to impose some structure and parameters on prediction markets. While I recognize that the proposal contains some positive elements, it does not go far enough. I look forward to hearing the witnesses' views on this. My primary interest in this space is protecting consumers and maintaining market integrity. These should not be partisan issues. Again, I wanna thank the subcommittee chairman and ranking member for conducting this hearing and I look forward to hearing from our witnesses. With that, Mister Chairman, I yield back.

Thank you, ranking member, of course you're exactly right about uh us needing more CFTC commissioners. One is uh uh Chairman Seelig's wonderful, but we would take four more. You're exactly right, ma'am. Uh the chair would request that other members submit their opening statements for the record, so the witnesses may begin their testimony and to ensure that there's ample time for questions. Uh, just for our witnesses, we'll introduce you and then we'll let you get started. Uh, as has been our practice, uh, Mister Davis and I will run this, uh, run this hearing together. And so don't be alarmed, uh, if, uh, the ranking member begins to call on you, otherwise instruct the traffic flow. Uh, a coup is not afoot. Uh, we're just working together. Indeed, you should only be concerned if we physically begin fighting over the gavel. That is the, would be the only particular problem. Uh, and in fact with that, uh, we'll alternate introducing today's witnesses.

Thank you, Mister Chair. Our first witness today is Mister Robert Swartz, who is a partner at Morgan Lewis and uh Bac- Bacchitas. He is also the former General Counsel um at the CFTC.

Our second witness is Mister David Bean, the Chairman of the Indian Gaming Association.

And our third witness is Christopher uh Silke, who is the Senior President of the Government Relations at the American Gaming Association.

Fourth we have Mister Carl Kennedy, a Partner and Co-Chair of the Financial Markets and Regulation Practice at Katten, Muchen, Rosenman, LLP.

And next we have our final witness, Mister um Asaf Mir, the Founder of and Chief Executive Officer of Solis Labs.

Thank you to our witnesses for joining us again uh today. You're uh you're an august group and we're gonna proceed, your

Thank you. Good morning, Chairman Johnson, Ranking Member Davis, and Chairman Thompson, and Ranking Member Craig. Uh, as uh you said, Chairman Johnson, I'm Rob Schwartz, a partner in the Commodities and Derivatives practice at Morgan Lewis and Bacchus. Uh before joining the Morgan Lewis law firm last year I spent thirteen years at the CFTC including as its general counsel under chairman Russ Benham. Uh I covered a lot of ground in thirteen years, uh but beginning in around twenty twenty prediction market regulation emerged as a key focus. And now in private practice it's a key focus of mine still, so thank you for the opportunity to appear before you to support your work. Uh now the disclaimer, the views I share are my own and do not represent those of Morgan Lewis, my colleagues, our clients, or any other person or organization. The controversy over whether prediction markets are legitimate trading platforms or a form of illegal gambling is in a sense new, uh sports event markets launched just last year. Uh but in another sense we we've been here before. Uh the trading versus gambling question has come up from time to time, not just for decades. but for centuries and all over the world. Some examples. In sixteen eighty eight, Joseph Delevega, a Dutch author, wrote that the Amsterdam stock exchange where futures and options were traded was uh and excuse me for this a gambling hell. He called trading a game, brokers card sharpers, and speculators skillful gamblers who put up wheels of fortune. But Delevega wasn't just an author, he was a trader on that exchange. And in the very same pages he explained how to use futures and options to hedge commercial risk. At around the same time, rice futures markets developed around Osaka, Japan. In seventeen O five, the Tokugawa shogunate shut one down as a gambling den. But twenty five years later, it formally recognized the Dojima rice exchange as Japan's first officially sanctioned futures market. Our experience in the US was similar. In eighteen sixty seven, police stormed the floor of the In the twentieth century the tide turned. Justice Holmes famously rejected the idea that transactions on that same Chicago Board of Trade were mere wagers. In nineteen twenty-two in the Green Futures Act, Congress asserted a national public interest, in healthy futures markets and in nineteen seventy-four gave the CFTC exclusive jurisdiction over exchange traded futures and options. Then in Dodd-Frank, swaps entered the mix. That was big because the definition of swap is extraordinarily broad. It identifies dozens of types of swaps, it expressly reaches event contracts, and it has particularly open-ended provision for any transaction that in the future becomes commonly known to the trade as a swap. The definition is virtually agnostic as to the subject matter. It could be a farm product, a benchmark, an election, or most anything else. In event contract litigation you often hear Justice Scalia quoted that Congress does not hide elephants in mouse holes. That's true, but the definition of swap is not a mouse hole. The definition is sweeping, and as a result so is the CFTC's exclusive jurisdiction. Now, interpreting the CEA is a legal matter that is separate from the policy debate, and people of good faith question the wisdom of allowing these markets on CFTC regulated platforms. But what's critical to understand is that Congress channeled that kind of question to the CFTC not to the fifty state gambling regulators and not to courts. For its part, the CFTC has strong tools to implement policy, it has the power to keep problematic contracts off of exchanges and it has the authority to stop an exchange from listing a contract that involves gaming among other things if the contract violates the public interest. Part of what's animating the controversy today is that the agency hasn't done that for sports but what it has done is to propose new rules that if adopted could limit what's listed when they're final if the agency has stumbled it can be taken to court. Congress of course has any number of ways to put the controversy to bed like it did in nineteen fifty eight when it prohibited onion futures, or in twenty ten when it forbade futures on box office receipts. If Congress wants to prohibit sports event contracts, it should say so clearly in the CEA. But as things stand, and consistent with Congress's many decades of refusing piecemeal regulation of these national markets by the fifty states, the CFTC's jurisdiction is exclusive. So I thank the subcommittee for its work and for the opportunity to assist in any way that I can.

Thank you, sir. Uh, Chair Bean, you are recognized.

Ha, good day, honorable friends and relatives. It is an honor to be here as chairman of the Indian Gaming Association before this committee. This has been eighteen months in the making and we're thankful for this opportunity. Up front, I want to make clear that Indian country is rural America. We are many things, among them farmers and growers. We support responsible innovation, the use of features to hedge risks and to insure insure fair pricing. However, we strongly oppose the prediction markets that have manipulated a weak regulatory agency to offer nationwide online sports gambling to kids as young as eighteen. We view this issue from a governmental lens, so I'd like to share some historical context. In the nineteen seventies, tribal governments turned to gaming to generate revenue to fund services and programs to its citizens. During that same time, nearly a dozen states engaged in lotteries to fund services to their citizens. Indian gaming is governmental gaming. Every dollar generated by Indian gaming goes to fund health care, education for our children, housing for our elders, public safety, and infrastructure. Indian Gaben also generates jobs. In twenty twenty five alone we generated over six hundred and eighty-two thousand rural American jobs. These jobs provide a stable income and a path to the middle class for our tribal citizen and non-members alike in areas where jobs otherwise ha do not exist. We've worked under IGRA's framework for nearly four decades, carefully negotiating agreements with states to strictly regulate gambling. Every tribe engaged in gaming regulates it to maintain strict age requirements. We invest in problem gambling gambling programs that include treatment, education, self-exclusion, and staff training. Prediction markets threaten these rural jobs and revenue generated to tribal and state government budgets by violating our laws and regulations. They claim that they're innovators, yet they have invented nothing. Prediction market apps offer bets identical to those in legal, regulated sportsbook, money lines, totals, parlays, and prop bets. The only difference is that prediction markets avoid our regulatory systems, designed to protect consumers in the integrity of American sports. Another big difference is that they ignore the strict age requirements and problem gambling programs that we've established. Prediction markets target young people in those in jurisdictions where sports betting is prohibited. They advertise on TikTok and hire influencers who claim that they are a side hustle without revealing the true risks of gambling. In fact, one CEO attempted to equate sports contracts to financial literacy. This is both misleading and dangerous. Today, thanks to a one-person agency, every teenager with a smartphone can now lose their shirt without losing leaving their house or do or dorm room. We're only starting to see the devastating impact on our kids' mental health and financial security. No one voted for this. Congress has not passed any new laws on this matter. This is happening because one person has declared that online sports gambling is legal in every state and on every reservation. One man has taken the CFTC from props to props. Tribal governments are not alone in this fight. We are proud to be here beside our relatives at the American Gaming Association. We are glad to be joined by Unite here, with more than one million casino workers throughout the United States who are fighting to protect good paying American jobs. And finally, we're joined by at least forty state attorneys general who have filed legal briefs and comments to the CFTC. The list includes AGs from nearly every state, from every member of this committee. They are fighting to enforce the laws of their states, your states. Some of those laws prohibit all forms of gambling, some prohibit on-line gambling, and some rely on revenue from gambling to support their communities. In closing, I leave you with these three requests. One, We urge you to advance H R seven eight four zero, the Event Contracts Enforcement Act, which has been referred to this committee. Two, we ask that you ensure that the Clarity Act stops sports and casino gambling through prediction markets and provides that IGRA and state and tribal gambling laws have full force in effect. And three, we urge you to stop the outrageous CFTC proposed rules that constitutes the height of regulatory agency capture, again, We thank you for this opportunity.

Mister Silkey, it's organized for up to five minutes.

Chairman Johnson, Ranking Member Davis, Chairman Thompson, members of the committee, thank you for the opportunity to testify today on behalf of the American Gaming Association. Sports betting on prediction markets like Cal-Shi and Polymarket makes a mockery of congressional intent in stripping your constituents of important consumer protections and costing your communities a fortune in lost tax revenue. I'll start with a statement that goes to the heart of the issue. Quote, the legislative history directly confirms Congress did not want sports betting to be conducted on derivatives markets, end quote. The AGA agrees. But here is the striking part. That argument was made by Kalshi in federal court less than two years ago. Let's be clear, so-called sports event contracts are sports betting. A customer puts money on a sports outcome and gets paid if they are correct. Forty-one State Attorneys General agree these products are sports betting and must be subject to state gambling laws. Litigation has reached nine federal appeals courts, and lawmakers across the country are responding for one simple reason. These platforms are running backdoor sportsbooks. The AGA supports responsible financial innovation, but what prediction markets are doing with sports gambling is not innovative. Prediction market platforms are using CFTC registration to offer nationwide sports betting while bypassing the state and tribal gaming laws that Congress, states, tribes, regulators, and voters have spent decades building. That matters because the legal gaming industry is an important part of the American economy. It supports one point eight million American jobs, contributes approximately three hundred and twenty nine billion to the US economy, and produces roughly fifty-three billion in federal, state, and local tax revenue each year. Those benefits exist because gaming is licensed, taxed, monitored, and accountable. Prediction markets thumb their noses at that framework. They make sports betting available nationwide, including in states that have rejected sports betting and in jurisdictions where tribal governments negotiated exclusivity through compacts. They avoid the taxes, licensing fees, responsible gaming obligations, advertising rules, consumer protections, and integrity safeguards that licensed sportsbooks must follow. We estimate states and tribes have already lost more than one point two billion in critical gaming tax revenue since these platforms began offering sports event contracts. This sum is snowballing by the day and that money should be supporting education, infrastructure, public safety, responsible gaming programs, and tribal communities. The consumer protection gaps are just as serious. Legal sportsbooks are built around age verification, geo-location, responsible gaming tools, complaint processes, suspicious activity reporting, and regulator oversight. Prediction market sports betting is not subject to comparable gaming-specific requirements. These products can reach users as young as eighteen, even though nearly all legal sports betting in this country is limited to adults, twenty-one and older. Marketing sports contracts as investing is also misleading and dangerous, especially for younger consumers who may believe betting on sports is a financial strategy rather than entertainment with a real risk of loss. This also threatens sports integrity. Licensed operators monitor wagering patterns, report uh report suspicious activity, and coordinate with regulators, leagues, integrity monitors, and law enforcement. If sports betting migrates to platforms outside those gaming specific systems, the risk is that suspicious activity goes undetected, consumers are confused, and confidence in the games is weakened. The CFTC has an important mission. It oversees commodities, futures, derivatives, and emerging digital asset markets. But it was not created to regulate gambling, police responsible gaming, referee sports integrity, or become America's national sports betting regulator. The United States already has more than eighty-four hundred state and tribal gaming regulators with decades of experience doing exactly that work. Congress should act immediate immediately and make three things unmistakably clear. First, sports wagering is gambling, no matter what label a platform puts on it. Second, gambling policy belongs to states and tribes, consistent with federal laws Congress has enacted to protect consumers markets and sovereignty. Third, CFTC registered entities should not be permitted to offer nationwide sports betting or casino style gambling through self-certified contracts. Acting now will protect your constituents, respect tribal sovereignty, preserve state authority, safeguard sports integrity, and ensure the CFTC can focus on the mission that Congress assigned it. Congressional intent was clear. Sports betting should not be traded on financial markets. I know it, you know it, and Cal Sheets' lawyers made clear in federal court that they knew it. I look forward to our discussion today. Thank you.

Mister Kennedy, you're recognized for five minutes.

Chairman Thompson and Johnson, ranking members Craig and Davis, members of the subcommittee, thank you for having me. I'm a derivatives partner at Cat and Musion Roseman, a large international law firm with a well-recognized financial services practice. I'm here in my personal capacity, not on behalf of any client or firm. You've heard a lot today about whether sports event contracts should be allowed or banned. I want to suggest that that's the wrong question. The right question is whether a given contract meets the rules the CFTC already has on its books. Let me explain why, and then respond to some of what you've heard from the other witnesses. Chairman Johnson, I really appreciate your opening remarks that this is a new territory for the CFTC. Since nineteen seventy-four, Congress has repeatedly asked this agency to regulate products nobody could have envisioned in advance. Things like financial futures, energy swaps, credit index swaps, weather futures, and futures and swaps on crypto. That's why Congress wrote the words commodity and swap broadly. Not because it wanted a free-for-all, but because it knew new products would keep showing up. And it wanted the CFTC to be ready for them. Making room for that kind of innovation is exactly what Congress demanded of the CFTC. Sports event contracts are just the newest product to walk through that door. Second, federal jurisdiction over these contracts doesn't erase state or tribal authority over gambling. You've heard from the Indian Gaming Association and the American Gaming Association that this is a sovereignty and revenue problem. I understand that concern, but I think about gold as an example. You can buy gold from a local dealer under state law, trade gold futures on CFTC exchanges, or buy a gold ETF that the SCC oversees. Three regimes, same underlying asset, operating side-by-side for decades without controversy. Sports event contracts work the same way. A person who wants to get exposure to sporting events through a state license or tribal sportsbook, remains completely free to do so. Recognizing that the CFTC also has a lane here doesn't take any away anything away from the state's and the tribe's lane. Third, self-certification is not a rubber stamp. And it's not a loophole. The AGA testimony you've heard suggests that self-certification lets any through anything through unless the CFTC scrambles in time to stop it. That's not how it works. And as required by Congress and CFTC rules, every contract listed on an exchange already has to meet twenty-three distinct core principles including a core principle that requires that the con contract, excuse me, not be readily susceptible to manipulation. On top of that, the special rule, which I fully describe in my written remarks, gives the commission real a real backstop. Within ten days of a listing, it can open a public interest review with a a defined ninety day process. And if the agency finds the contract contrary to public interest, the contract comes down. That's not a loophole. That's active oversight with real teeth. Fourth, despite what you've heard from other witnesses, customer protections already apply in these markets as they do in other derivatives markets. Additionally, brokerage firms that carry customer accounts must register with the CFTC, keep customer money segregated from their own, hold it with approved custodians, provide all customers with important disclosures about trading risks, and answer to yet another regulator, the National Futures Association. These same protections apply to every other product o listed on a CFTC exchange. Nothing about calling a contract sports related removes those safeguards. Now you've heard the IGA and the AGA point to statements Kalshi made in earlier litigation suggesting that the industry itself once conceded sports betting doesn't belong on these markets but what one company has argued in one lawsuit doesn't change the Commodity Exchange Act eq what the Commodity Exchange Act expressly requires. Congress wrote broad commodity and swap definitions on purpose. They then gave the commission a tool to conduct a public interest review for each contract when it's warranted. The that tool is exactly what the commission's June proposal would sharpen. This i type of innovation is what has made the US derivatives markets so successful, and the envy of other countries since the establishment of the CFTC in nineteen seventy-four. So my bottom line is this. A categorical ban on sports event contracts would take away the express judgment Congress gave this agency, right when the Commission's proposing solutions to address the specific s concerns you're hearing today. And a ban wouldn't make the demand for these contracts go away, it would just push the demand offshore to platforms with no CFTC oversight, no segregated customer funds, and no one to call when something goes wrong. The better path is to let the commission do the job Congress gave it, hold every contract to the core principles, apply the public's interest review when warranted, and keep working through the rulemaking process that's already underway. That would be consistent with the agency's long history and its purpose of fostering responsible innovation. Thank you and I look forward to your questions.

Thank you, sir. Um uh, Mr. Amir, you may begin when you're ready.

Chairman Johnson, Ranking Member Davis, members of the subcommittee, thank you for the invitation and opportunity to contribute to this important dialogue about the future of American commodity markets. My name is Asaf Maher and I am the Co-Founder and CEO of Solidus Labs. Before founding my firm I spent my career at Goldman Sachs, the best boot camp I can imagine for the intersection between finance and technology. Testifying today's particularly touch information, two years ago I was proud to be naturalized and become an American citizen. In preparing this testimony I was thinking about my two American daughters, the opportunity that brought me here, and the opportunity my daughters and the next generation of Americans will have. I am a firm believer that much of that opportunity is rooted in America's league of their own capital markets. Strong capital markets and commodity markets in particular have played and still play an instrumental role in powering American innovation and growth. That innovation has always rested a uniquely American combination of freedom and guardrails. Freedom for entrepreneurs to innovate and for consumers to choose, and guardrails that are strong and sensible, that keep bad actors out, and our markets fair. Maintaining this combination is central to my firm's mission. Solidus helps keep markets safe and fair by providing trade surveillance and market integrity technology, designed to detect and prevent market manipulation and other forms of crime. Our solutions were originally designed for the digital assets one of the world's most complex and fragmented trading environments. Today, we work with many of America's and the world's leading financial services institutions as well as with federal and state law enforcement and regulators. While we cover many asset classes, we specialize in navigating frontier markets where the rules of the road are still being harmonized. Over the past two years, prediction markets have become one of our fastest grown climate client segments, and we are proud to work with many of the leading including CFTC regulated DCMs and FCMs. In my testimony I make three main points. First, strong prediction markets, strong predict protections already exist within the Commodity Exchange Act and CFTC regulation, both on paper and in practice. Our day-to-day is spent alongside compliance and teams that are deeply committed to applying these protections effectively. They do so by maintaining highly sophisticated risk monitoring programs staffed by highly trained teams, and powered by best in breed monitoring technology. As one example from one of our DCM clients, in Q two of just this year, their compliance analysts monitored more than a hundred and twenty thousand alerts across more than twenty thousand individual markets, opened more than four hundred formal investigations, and referred more than two dozen cases to law enforcement. To argue that a CFTC regulated prediction market inherently offers no protection, is a keen to arguing that the largest CFTC regular exchanges which settle trillions of dollars transaction each year inherently don't offer sufficient protections to consumers. It is a working system, tried and tested over decades, subject to oversight with the CFTC and required under federal law. All of that being said, my second point is that prediction markets and sports contracts specifically do raise new challenges and pose unique risks to market integrity. The sheer number of contract listed in the millions, the short-lived nature of most of these contracts on average two to three days, the non-standard symbology and the lack of market reference data create a novel data topology that introduces specific architectural challenges right off the bat. Beyond this, the market abuse surveillance landscape is different, the binary nature of outcomes, the combinatorially expensive connections across related contracts and underlying markets, suspended surface area of insider information leakage and the highly differential and often fragmented liquidity across markets and market categories, demand a shift in detection technology and surveillance mindset. To make these points, my written testimony draws on real-world examples and proprietary research. My third point is that these novel challenges are very much addressable. Our team at Solidus built a multi-dimensional trade manipulation detection system to identify bad actors. Our software natively gathers otherwise siloed data sets that are traditionally overlooked. Those include open source intelligence, transactional data, account and KYC data, social sentiment analysis, as well as market events, news and blockchain data when appropriate. We then combine them in real time with order and trade data in order to employ a holistic pattern recognition behavioral analysis. This provides exchanges and other operators within a comprehensive view of trading activity on their platform. This approach is exactly what allows innovators to build while maintaining effective guardrails. It is a true pleasure and honor to provide testimony to this committee, and I look forward to answering your questions.

Thank you, sir. I should have mentioned uh that pursuant to committee rules, members of the full committee uh are allowed to uh wave on to this committee here, and uh we will uh allow them questioning time as well. Uh I will uh start my five minutes, then we'll go to Mister Davis, Mister Thompson uh then on deck. Uh, Mister Silkey, I just wanna start by underlining something uh that you had said about uh and I don't know how many young people are watching this hearing, I suspect not very many, but I hope they all heard you and I hope they all hear me when we say that you know sports betting is not a financial strategy. And I think that is uh really por important to keep in mind, which is why cust protect uh customer protection has to be at the heart of many of these conversations. I think before we understand uh any particular deficiencies in the cu in the customer protection framework, we need to understand where we're at today. So, Mister Kennedy, give us a sense, what are the uh what are the obligations imposed on FCMs and DCMs? When we think about derivatives uh r activity, we normally think about a relatively sophisticated uh end user, uh do the obligations on the FCMs, DCMs, do they change at all? for uh maybe a less sophisticated user.

Well, the obligations of FCMs uh in terms of disclosure, um the FCMs have to provide disclosure that relates to the particular types of products that they offer um to their um uh to their customers. And so if there are additional disclosures relating to particular types of instruments yes the answer to that question is yes and so with respect to event contracts Um, you will see is that many clearing brokers do add specific disclosures relating to the trading of those event contracts.

And so uh talk to us a little bit more, I mean give give the committee a sense of what um what are the uh what are the obligations imposed uh that might help protect customers in the current regime.

Well, so clearing brokers must also uh, in addition just talking about some of the registration requirements, they have to meet a s a significant m number of CFTC compliance requirements before they're able to even be registered. And then once registered, they must continue to demonstrate those requirements. Some of them include um also um having to uh provide risk management programs with respect to the various risks that they face, um ensuring that customer funds are segregated and protected with and and held at um uh custodians, Um they also must um in addition to the disclosures um they must provide complaints. Uh I heard uh um in one of the other witnesses' testimonies that they have to have some kind of complaint hotline. A compl they must have a complaint procedure. Clearing brokers must also have complaint procedures. So and and then the most important piece which I heard and there was a suggestion that perhaps there isn't a requirement with respect to anti-money laundering and know your customer rules FCM's clearing brokers must have anti-money laundering, and and and know your customer rules that are consistent with the Bank Secrecy Act. So I think there are a lot of parallels between the types of customer protections and knowing your customers and understanding the risks assigned to the particular customers that you service that are existing in current uh uh requirements for futures commission merchants and clearing brokers.

Yeah, thank you, sir. Uh, Mister Schwartz, we'll start with you, and if we've got time, anybody else can uh can chime in. It seems to me that if courts s uh uh a allow uh States and or in essence if they uh exclude exchange traded and clear derivative products from the authority of the commission because they resemble or are competitive with sports wagering products that are regulated under state law. That is that feels a little bit like state preemption of the federal government and m maybe there might be a consensus on this uh committee that that or the subcommittee, that that might make sense in that area. Is there a limiting legal principle? that would say that if states then moved into the regulation of other non-sports betting areas that that wouldn't uh in other ways erode the authority given to the commission by Congress.

Uh thank you for the question. I i it's not a hypothetical. In the litigation that's going on right now, uh sports contracts are sort of the best known subject matter, the most common in those cases, but there are is other subject matter. at issue, um elections, entertainment, uh natural disasters, so I I think there really is no limiting principle and uh if the courts ultimately carve out on their own sports uh contracts, I I I think you will see i it's difficult to see an end to court involvement in this question and difficult to see an end to state's assertion of jurisdiction over different products.

With only ten seconds left, I don't think we can probably get another voice, but uh perhaps somebody some other member will pick up the baton, 'cause I think this is a really important legal conversation. With that, Mr. Davis, the floor is yours.

Thanks so much, Mr. Chair. I wanna start with Mr. Swartz and then Mr. Kennedy. As we've seen in evolution of prediction markets,

Uh well uh for my part I've said many many times that the CFTC has, in my opinion, been understaffed since I was there, since it was implementing the Dodd-Frank Act, and certainly now. that uh staffing levels are down twenty percent. The the the agency though has a history of doing more with less. Uh it's been able to be flexible and adapt over time as new financial products have have come online. Uh and it has partnerships with the exchanges with the National Futures Association that uh are are a force multiplier, but uh you you you won't hear me disagreeing that the agency has less in the way of resources than it needs and the public deserves.

Um, thank you for the question. Uh, I agree with Rob. I also worked at the agency actually. Rob and I worked together um several years ago um when he joined, and I was there um during the the time when uh President Obama signed Dodd-Frank into law and um uh the commission received new responsibilities um to oversee the uh trillion dollar um um uh swaps market. Um the agency, to Rob's point, has done a lot with a little. Um in just the two years I was there, the agency uh adopted almost one hundred rule makings under then Chairman Gensler, um which was a remarkable feat um with just, you know, maybe a little over seven hundred staff members. Um and its oversight during that time also included significant um enforcement of of CFTC rules, both the rules that existed before Dodd-Frank and then the r the new authorities they received under Dodd-Frank. Um the agency though um is short-staffed um and um but I do believe that with um additional resources they are about to perhaps receive additional authorities under the Clarity Act with additional resources to address these new asset classes, um, you know, this cash markets and c uh crypto, uh, as well as to deal with the exp explosive growth in prediction markets, I think that the CFTC certainly should receive additional resources. I'm not gonna disagree and suggest that the commission has all the tools that it needs. I think it needs more resources and as a former CFTC alum, um, I think more smart, good people could join the agency and be helpful in its mission.

So, both of you have said that the commission has done a lot with a little p punch, I guess, above its its weight. Um what happens if the resources are not there and we continue to see the evolution that we're seeing today? What impact exists um as a result of the understaffing?

Uh I can start. Um the CFTC has always had to triage enforcement matters. There is a triage unit and it applies criteria to um complaints that come in. It can come in from the office of the whistle-blower. Um a and it has to i it has to make hard decisions because th these are all serious matters. But uh I assume that it would continue to do the same. It would just have to um i it would just have to focus uh its resources where they were available.

Miss Kinney.

Yeah, I agree with what Rob said and and would also suggest that, you know, within, you know, newer technologies, the commission h in fact just recently within the last couple of years improved its surveillance technology after having the same technologies for over a couple of decades um I think the commission could use additional technologies to drive efficiencies in its oversight of, of derivatives markets broadly. Um that is certainly uh helpful. Um Rob would have better knowledge and I think he's mentioned the triage unit. Um but I have seen the do the commission do a lot with with a little, remarkably so. So um I think the commission would continue to operate. It would do the best job that it could. But consistent with my earlier statements, I think uh the commission could always use additional resources.

I yield back, Mr. Chair. Mister Chair, recognize for five minutes.

Well, thank you so much, and thanks to all the members of the panel here on a really, really important um hearing topic. Mister Kennedy, in your testimony you said core principles three and four make the designated contract market DCMs the first line of defense against manipulation and disruption uh please describe the obligation exchanges must meet under CFTC oversight, how they satisfy these core principles, and if concerns raised today are addressed by these core principles.

Well, the uh core principle regime um was added to the Commodity Exchange Act in two thousand under the Commodity Futures Modernization Act. And it was a decision to um allow the exchanges, which are also regulators, they're self-regulatory organizations that are empowered to oversee the markets and on their markets much like w you know we we refer to the National Futures Association or in the securities market FINRA being a regulator. So um these exchanges were um uh given authorities to police their markets. They have core principle, a set of twenty-three core principles that they must comply with. The core principles are principles, they're not prescriptive rules detailing how these exchanges must meet regulatory outcomes. So the think about the core principles as achieving particular outcomes, not as a prescribed formula for every exchange. Financial markets are complex, and requiring every exchange that lists a whole variety of different products to the same prescriptive rules would not be efficient and not be an effective way of managing the unique risks of every exchange so to address your point uh Chairman uh the concerns that are being raised here, there are specific core principles that deal with fair access, that deal with ensuring that uh the participants on the exchange aren't subject to abuse, which could include abuse relating to promotions or marketing. Um it requires that the contracts have financial integrity and can meet their settlement objectives. It requires that um the exchange um uh root out manu market manipulation and prosecute within this the context of their rules how violators of those um of those rules would be treated. That's all to say, alongside of the exchanges having this sort of policing power, the CFTC could also step in. And what you have seen traditionally in derivatives markets is these exchanges working hand-in-hand cooperating with the CFTC to police and go after bad actors so you know these concerns can definitely be addressed by the core principles that are intended to be flexible so that every exchange can tailor its its specific rules to address the unique concerns and risks on its exchange.

So am I hearing that um that these or other core principles be f- uh be further interpreted um or could they be further interpreted to address additional issues raised here today?

That is correct. The CFTC could, for example, there are some core principles that um CFTC has appended to its rules best practices. Those best practices could be enhanced to address the unique concerns of these particular instruments. Um and so I think that the CFTC's proposal is to your point earlier you mentioned is the first rule making you talked about in your opening remarks, about the goals of that rule making. We could see further uh rule makings to address the concerns raised here around customer protection and and market integrity insider trading. Um you could definitely see a lot of that coming for future rule makings.

So so what is the benefits to our markets of a principles-based regulatory approach, and is it your observation that this principles-based approach has been effective?

It is. In my um opening remarks here today I mentioned that um after the two thousand amendments to the Commodity Exchange Act that the CFTC's regulatory regime its principles-based regime has become the envy of of global markets in terms of the way that these markets are being regulated and its flexible approach in giving exchanges which again, are self-regulatory organizations, regulators essentially. the tools that they need and the the you know uh flexibility to address these concerns. And so uh it's it's my view that um our markets are some of the most vibrant and best in the world.

Um Mister Mayor, um some stakeholders have suggested traditional markets operate without know your customer protocols, anti-laundering safeguards, integrity monitoring, and accountability or age verification. Has that been your experience? with the CFTC regulated exchanges that your firm has worked with.

Um, thank you for the question. No, that has not been my experience. Um, DCM licensed uh CFTC venues are gathering all the information you've just mentioned, in fact compile it into a larger superset of data to understand whether or not market um uh manipulation is taking place. Um, yeah.

Very good. Thank you. I yield.

Miss Bleszinski is recognized for up to five minutes.

Yep. Thank you uh Ranking Member Davis and and Chairman as well. Um good morning and thank you for the to the witnesses for being here today, appreciate it. You know when it comes to prediction markets, I have two priorities that are at the top of my list. One is consumer protection and the second is market integrity. And more often than not they lead back to the same place, stopping people from exploiting a market with information or influence the average person just doesn't have. It's why I introduced the Predict Act, which is a bipartisan bill uh to bar government officials and families from trading on the outcomes of policy decisions and government actions. If you have access to sensitive information, you should not be able to turn a personal profit on that, is my belief. But elected officials aren't the only people who can move a market they're supposed to play be playing straight in. This extends to other markets like sports, events, prediction markets. And so to start with my line of questions, I'd like to focus on the structural piece first. Uh because of how the CFTC's framework works, the exchanges self-certify their own event contracts. This structure is meant to let legitimate project products reach the market without um regulatory bottleneck. But as more of these products come online, some of them can start to look very from a position on which team wins the game. If you can take a position on whether one pitcher throws a ball on his next pitch, or whether one player makes his first free throw, you built a contract that a single person can decide the outcome of. So my question is about the front-end of this process, the information these companies put in front of the CFTC when they self-certify. So I'm opening up this first question to to any of the panelists. Um how important is it that these that those submissions spell out exactly what conduct a contract turns on in enough detail that a regulator can quickly understand what's being offered and judge whether it's ready it's readily susceptible to manipulation?

Sure.

Thank you for the question. Um there's a lot here to unpack. I'll try to do this quickly. Um so first of all I would say that there's a lot of data sharing agreements today already in place between companies such as ourselves and other companies in the space that gather uh the names of individuals that should be um barred from trading on specific markets. Those static lists are then consumed by kind of software that wouldn't allow them to trade on specific markets. We actually have examples. We found multiple um s uh manipulation scenarios where due to the fact that we consume both names as well as focus on behavioral analysis, We found groups of individuals that were colluding, manipulating let's say one market,

Mm-hmm.

and then we found one individual that was splitting their bets between multiple different kinda uh event contracts, trying to um using uh leakage information that he had to kinda stay below the threshold. So say that when you um combine otherwise very subtle data feeds between, you know, your customer information, uh transactional data that's both deposited with roles, then uh static lists of individuals that should not even be trading on those markets,

Mm-hmm.

alongside order and trade-out, that's your buy, sell, replace, amends, cancels, all of that, you get a very very very comprehensive view into the kind of the fraud journey. I would actually say, just to kinda double-click that, that's actually relatively simple to solve. The complexity arrives in, and I think someone mentioned this here, the related spars uh sports contracts. So around every tournament there is multiple other event contracts that um essentially expand the attack surface um where you also need to be able to correlate those contract to the main event contract and to send whether or not bad actors are

Mm-hmm.

possibly manipulating cross-product um in that regard and so that's really the comprehensive um approach that we take today with some of our clients.

Mm-hmm. Yep. Mister Kennedy, yeah.

Yep. And and uh just to build off what Asif said, in terms of the types of information that sh uh that the commission expects be in the self-certifications. The commission has made clear not only the proposal that it released in June, but also in an advisory that it issued in I believe March of this year, that they do expect that those self-certifications to be comprehensive to explain the risks to address settlement risks, especially around single actor contracts that the single actor could influence inappropriately the outcome of um of the event contract and the settlement of that contract.

Mm-hmm.

In fact, in the um proposal that was just issued, the commission did expressly state that it's highly unlikely that a contract of that nature would meet the public interest threshold that's in the special rule.

Right.

So that's the expectation. The commission has been signaling that that's their concern, and I believe that the proposal, once adopted if as proposed, would address the concern that you're raising.

Mm-hmm. Okay, great. Thank you. I'll yield back. I appreciate it.

We have uh Mister Lucas, Oklahoma, is recognized for five minutes.

Thank you, and thank you to our witnesses for being here today. And I apologize for the voice. It is not late life puberty, I promise. It is critically important that we have this conversation as many of our witnesses have noted that the popularity of these products continues to grow exponentially. Our derivative markets function as risk management and price discovery tools, especially for the ag and energy economies, and we must diligently protect their depth, liquidity and resilience. My number one priority for is maintaining the accessibility and the affordability of our derivative markets, so that our producers can continue to supply the food, fiber and energy our world runs on. I want to thank the Chairman for making this topic a priority for the committee. Today we are specifically discussing sports related events contracts, and how we can assure that the CFTC has an enduring framework for novel derivative products. We have a diversity of opinion represented today and I look forward to that discussion. Uh let's begin with you, Mister Schwartz, and Miss Kennedy you might wanna join in on this too. It is important that a regulatory framework for derivatives supports innovation while safeguarding

Thank you for the question. I I think the best way to answer it is to look at what the how the system functioned before the self-certification process was, uh was established by Congress. Uh, time was that it was a burden on the change to make a showing that a contract was not contrary to the public interest. The CFTC interpreted that to include an economic purpose test, which it defined as uh you had to show that the contract reasonably can be expected to be or has been used for hedging and or price basing on more than an occasional basis. And that was immediately controversial, uh precisely because h i it's very difficult to make that demonstration if the product doesn't exist yet. And over time uh the test the CFTC began to recognize the weaknesses in that test, it began to apply it uh w with uh a a lighter and lighter touch uh until Congress ultimately uh ab abolished and reversed the b the burden so that it would be the CFTC that would have to demonstrate that a contract was contrary to the public interest. Now uh you you get thousands and thousands of contract self-certified

Any thoughts, Mister Kennedy?

Yeah, I agree with what Rob said in terms of the history and post uh two thousand when the Commodity Futures Modernization Act was passed um it it took a few years, but once exchanges recognize the process and the burden flipped, you did see explosive growth in the number of contracts traded. And that explosive growth did uh uh lead to um end users being able to benefit from having additional uh methods to risk manage their contracts. Uh but one thing I wanna highlight too is that in addition to risk management and all that in twenty ten Congress then came back to the commission's purpose and adjusted its purpose to expand it to include additional purposes, that the commission can r- you know, can um allow contracts to address di- purposes beyond just uh the the risk management um um purpose. So, uh it's just to to g- add that the commission believed that there could be additional benefits of having um more products listed than less.

Continue the mis- you, Mister Kennedy, and perhaps Mister Schwartz, thoughts as well. Let's discuss the definition section of the proposed rule. The SEC and the CFTC have issued a joint request for public comment on definitions related to swaps and security-based swaps and how those may affect the treatment of novel products like event contracts. What factors should regulators consider when defining sports-related event contracts as swaps security-based swaps or other types of transactions?

Uh I I think the best way is to hew to the statutory text, which uh if if a event contract is to be characterized as a it has to directly affect the financial condition or the financial statements of the issuer uh the definition of event contract is much broader it allows for a potential uh it to be associated with a potential economic effect. So I think the presumption ought to be that it's a CFTC jurisdictional product, but with uh a carve out for the traditional role of the SEC to police the the financial disclosures and the like uh of uh of uh securities issuers.

Mr. Kennedy, if you have thoughts, I guess you'll have to respond in writing. Without you, you're back, Mr. Chairman.

The uh honorable gentleman from Alabama, you are recognized, mister figures. And then uh we have mister Scott uh on deck.

Thank you, mister Chair, and thank you to the ranking member for holding this hearing uh today. This is actually I think like the the the best, most balanced um you know group of witnesses that I've been a part of in my time in Congress on a hearing. It's kinda like two-on- well kind of like a three-on-two sort of set up here but it's uh but it's good for the intellectual uh debate uh and good certainly for a policy consideration to have such a balanced panel so look forward to getting into this. Um we've held uh several hearings both in full committee and this subcommittee on the importance of ensuring that CFTC is is fully funded, fully staffed and equipped to oversee our evolving financial markets. Uh yet despite recognizing these challenges we have not acted on CFTC reauthorization or provided the resources the agency needs to meet its growing responsibilities. Uh CFTC was was obviously created to oversee agricultural commodity markets and ensure they remain fair transparent and competitive for producers, consumers and businesses uh but we're still asking the same agency with the same limited resources to oversee increasingly complex products, such as uh some of what we're discussing here today uh including prediction markets uh and other emerging forms of speculation. Uh if we continue to expand the agency's responsibilities without expanding its capacity, something inevitably will get left behind. I think that is something we can all agree upon. Uh and for the farmers, businesses, consumers and investors who rely on these markets, that is simply unacceptable. Um we need a well-regulated commodity s market uh to manage risk and for um investors and producers to be able to plan for the future. Uh and as Congress we have to sit here and acknowledge both the potential benefits and potential harms uh created in the products that they regulate including in prediction markets. Um so we have to you know ask ourselves you know i individuals who cannot legally purchase alcohol uh may still be able to participate in financial products that closely resemble I think we can all agree to at least that basic understanding uh even if we can acknowledge differences there certainly some very strong resemblances uh between sports betting um and prediction markets on on sports events um and that obviously can result in significant losses uh we must also consider the broader surrounding markets tied to injuries, natural disasters or geo-political events, some of which have been um in the news here lately. Uh these products raise legitimate concerns about incentives, manipulation and whether financial interests could encourage uh harmful behavior. As these markets continue to evolve, uh Congress has a responsibility to ensure that CFTC has the resources, staffing and authorities necessary to protect consumers, while also preserving the integrity of markets. I uh I wanna begin by asking 'Cause I try to simplify issues. And this hearing is, you know, kind of focused around sports betting or sports markets and predictive markets. Is the solution we seek here uh for predictive markets to be more regulated like traditional gaming markets, or for traditional gaming markets in the context of sports betting to be regulated, similar to predictive markets? I'll start with with you, Chair Bean.

Um thank you for the question. That's one of our our our our biggest concerns, the the impact of um these prediction market online sports betting impact on our youth our tribal youth in general I was mentioning to the chairman that I was just at a tournament this weekend in Arizona.

Yeah.

Um and my nephew was playing, he goes to a high school in Seattle and he he and his classmates, many of his classmates were talking about how they're gambling online and how they're kicking butt. Now these these are young kids and that's who these prediction mark folks are, advert So with your respect to your question about who should regulate or what should be regulated regulated these prediction markets are sports betting and should be regulated as as such tribes and states have regulatory um policies in place. We have agreements with states that prevent underage gambling, responsible gambling, and right now with these markets advertising towards kids it's uh it has a devastating impact On on their their

Um, I'm gonna cut you off just in the interest of time in hearing from the other heavyweights here.

Right.

Uh, so I wanna uh, Mister Kennedy, can you respond to that? Is the is the ultimate issue here giving sports betting in the traditional gaming context? Uh, do you guys see it that that they basically want the same sort of freedom that you guys have? Um, or is it the other way around? How do you respond to that?

I think I go back to my opening statement where I use the example of gold. You have different lanes, everyone has a different lane. So the States have a lane, if you wanna buy gold bullion, you would do that under state law. If you wanna buy a gold future, you would do that on a CFTC market. If you want a gold ETF, you'd buy that, and that's regulated by the SEC. Are should we say that the CFTC's rules should supplant the SEC's rules because it's the same underlier or should it supplant the the uh state l I think choice at the end of the day for a customer that's looking to get that exposure, whether it's gold, an interest rate, or another asset or event is should be left to the user. And, you know, we're a society of free choice and competition. And um I can also use the example of insurance. It's state regulated. Or you can enter into a weather feature that provides you the same coverage. It's all about choice. And I think that there are different rules that should apply to different regimes.

Well, thank you. Uh, you're back, Mr. Chair.

Mr. Scott, you are recognized.

Thank you, Mr. Chairman. I wanna pick up where Miss uh Basinski left off. Um but first I would like to submit for the record a Wall Street Journal article dated July the eighteenth of twenty twenty six the new Washington temptation, inside information and prediction market account.

Without objection, it is inserted into the record.

Um I normally wouldn't do that, but since it is the Wall Street Journal, which is one of the last I think papers that actually engages in real journalism anymore, um I think I will. And there's a very specific accusation made, I won't get into who it's made against in there, of um political uh disclosure leading to polymarket bets, and s um that is certainly one of the things we're concerned about. We saw it saw it with the issue in Venezuela, uh and certainly if members of Congress are engaged in that same activity, the consequences for them should be no less than they are for um a soldier that is putting his life on the line. I wanna go back to you, m Mr. Mayher, because this gets to the question of the integrity of of the system. Uh you've talked a lot, you you pretty much answered the question that I have, which is, yeah, information sharing between parties to stop abusive behavior uh such as insider trading in the prediction markets. But does does the commission agree with your understanding of the importance of the information sharing?

Um

I'll say the following. First of all, in your example, um I think it's very important to draw a line between onshore regulated CFTC venues and and participants and offshore um unregulated uh venues. And the news we're seeing from both we oftentimes conflate them and and by the way there's way to solve what we're seeing also in offshore arena but it's very

Mm-hmm.

different than when we're talking about a CFTC regulated venue um I what we're doing tech manipulation I think goes beyond sometimes the the the principles

Oh, all right. I'm I'm I'm two minutes into a five minute question. Do my my question specifically was does the commission agree with your understanding of the importance of information sharing? That's kind of a either they do or they don't.

They do.

Okay, thank you. And um I've I've never u used Causti other than to look at things, you know, LeBron James, Next Team, a hundred and eighty million dollars bet on that. seems like Miami or Cleveland is probably where he's going. I'm not sure that that's any of our business. Uh but you get into some of the other things on here, and and they are kind of our business. I mean the commodity markets have t have to function. Uh you can't keep Mister Figures from betting on his losing Alabama team against me with my winning Georgia Bulldogs.

Oh yeah. Oh yeah.

Some of that stuff is gonna happen and really doesn't doesn't pr it's none of our business. Um but the kids' issue is our business. And um I wan I wanna give you you, Mister Bean, you m you mentioned the lottery a little bit, you mentioned the the National Indian Gaming Com Commission. Uh i is it true that I mean your revenues are still going up though, right? I mean everything I see shows that with Kausi and all of the other things,

Yes, sir.

your revenues went up five percent, I think people are still buying more lottery tickets than they ever have. Is Did your revenue continue to go up?

It it did, and and you know the the tribal leaders who visited D C last week to talk to senators, you had different uh scenarios where their revenues went down, so while overall it may have went up, um many tribes and tri different regions are are experiencing losses. The increase is nowhere near the explosive increase that we've seen in prediction markets in the last uh eighteen months.

Um alright, Mr. Schilke, federal Federally regulated exchanges are required to administer real-time market surveillance staff internal investigations teams that make timely referrals to the enforcement division of a desi designated regulator. There's a specific set of federal laws and regulations designed to punish bad actors on federal exchanges. What is the state law framework for punishing bad activity on state regulated entities?

Well, thank you for the question. Um certainly there's an ecosystem that's grown since twenty eighteen when states

Right. Let me let me just because I'm short on time,

Sure. Sure.

I appreciate your answer, but why are the FBI and DOJ bringing cases applying federal fraud laws and not state regulators using state laws in the sports bu book corruption cases we've seen?

Well there h there have been states that have have brought cases themselves, but certainly I think the the federal government's involvement in prosecuting uh misdeeds as it relates to sports betting is welcome. We've actually at the American Gaming Association been um in asking for Congress and f for the federal government to uh get more actively involved, uh not only in the integrity side but uh policing off-shore legal gaming, uh that's still prevalent across the country and accessible.

All right. Thank you.

Mister Chair, I don't know if if Mister Figures get a response. I don't know if time r- r- allows on that.

I mean, look, look, I I

But we're gonna recognize um

I I do think predictive markets should limit betting on mediocrity in Georgia football. I do think that.

The gentleman is out of order.

Out of order. Uh, we recognize Mister Jackson of Illinois, and it's time for five minutes.

Thank you, Chairman Johnson. Thank you, Raking member Davis. Uh thank you esteemed panelists for sharing your insights on this uh growing and dynamic market I too am very much concerned about the vulnerability that the youth will experience I'm very much concerned about the um easy accessibility of young people being able to gamble and I do appreciate the uh necessity for market innovation. So let me just jump into the question uh while individual sports contracts may appear relatively small, uh, interconnected markets can produce unexpected concentration of exposure. Uh, what stress testing capital and liquidity standards should exchanges maintain to ensure that the market disruptions never threaten customer assets or confidence in their regulated derivatives market, that if there's a sudden draw, uh, how do we know that the liquidity will be there? Uh, probably to you, Mister Kennedy?

Sure. Thank you, Congressman, for the question. Um so in derivatives markets currently, um all of these contracts are immediately cleared and they are sent to a clearinghouse where the margins are kept until settlement of the contracts. So under the CFTC's regime, in the event that there is any sort of insolvency of any party that's holding customer funds at any time there is a regime that pert protects those funds. from the funds uh that are um of the actual entity, the custodian. Um so whether that's a clearing house or whether that's a clearing broker that holds the funds, those funds are segregated, and in the event of the insolvency of the custodian, those funds can be dispersed and moved either to another solvent entity, um or uh per perhaps returned to the customer.

Okay, well thank you so much.

So there there is a regime for s for for that currently under state.

I appreciate that. I probably ask a follow-up to uh Mister Schwartz. Um and we know that innovation oftentimes moves a lot faster than the regulation, as we can see here on many fronts. Um how should the uh responsibilities be divided in your estimation and probably open to the other panelists between the uh CFTC, state gaming regulators, sports leagues, um any number of exchanges? Any thoughts on that?

Sure. Well, I I think I ref I referred to the exchanges as a force multiplier uh for the CFTC in the enforcement space. Uh their interests are very much aligned in preventing abuse of trading and and wrongdoing on the exchanges, because of course if if people view the markets as rigged, they're not gonna wanna participate, and that applies to retail and institutional participants, that applies to sports event markets and uh traditional derivatives markets. So I I think they can work very well in tandem. A a as to the state regulators uh as I've maintained um they the CFTC has exclusive jurisdiction but the CEA also allows uh states to prosecute violations of the Commodity Exchange Act uh with the CFTC's participation if it wishes but uh it it's state law that's preempted so there is a role. Um but but the system I think fits together Fits together nicely.

Congressman, could I jump in for a second here?

Mm.

There are eighty four hundred uh state and tribal gaming regulators that are enforcing fit for purpose regulations uh every day and so, I've heard a lot about sort of triaging different uh you know enforcement capacities an underfunded agency that is currently operating with one commissioner. Um I think our answer to your question would be leave it to the states and tribes to regulate because gaming policy has always been uh rested by Congress with uh with those entities um and then you can uh have more bandwidth at the CFTC to enforce regulations in these other areas including event contracts that I think uh as people have pointed out uh beyond sports, raise some very significant regulatory concerns whether it be elections or insider trading um or manipulated markets and so that's I think our position on that is leave it to the states uh and tribes to regulate and you don't have to worry about

the CFTC having the capacity to do so.

Yes sir, um excuse me, Mister uh Bing, did you have something you wanted to add?

I did, thank you.

I could barely see you, I'm sorry.

Yes sir, when action violates our laws, it is our business. This is an innovation, this is online sports gambling that one person now says is legal in every state and on every um Indian reservation.

Okay. Uh any other comments? Yes sir.

Yeah, I just wanna jump in to say that I don't disagree when uh we were talking about gambling with a bookie or a house, that it certainly is their business, but we're talking about financial contracts on regul federally regulated, um, markets, uh, it's exclusive jurisdiction of CFTC. If somewhere were to manipulate an interest rate swap or corn future, that's the CFTC's job to, um, police its its markets, and, um, it does not change if the, uh, subject matter of the contract is a sport event, political event, or financial related event.

Right, thank you, gentlemen, very much. I yield back. And in the future I hope that we can also find some um females to be participants to participate in this burgeoning market. I yield back.

Uh there is no shortage of uh hot-and-button issues facing Congress. Sometimes there is a shortage of members who are really willing to roll up their sleeves and dig deep to understand uh the complexities of a situation. Uh, Mr. Mann is uh working hard to uh be a leader in this space. We're grateful to have him here. Mr. Mann, you are recognized for five minutes.

Well, um, thank you, Mr. Chairman, thank you to you and um, Mayor Davis for your leadership on this, a much needed and healthy discussion, I believe. Um, so kudos to you both. I represent the first district of Kansas, which is roughly sixty um, not roughly, it is sixty um rural communities in the central and western part of Kansas. Y you know, my ag producers rely heavily on CTF C CFTC regulated markets to hedge risk every day. So we gotta make sure that the CFTC's able to do that job as as the role and the strain on that agency continues to get pushed um to the max. Why is it coming on us to properly fund them and make sure that they have the resources they need to do their job? Like I said, appreciate the discussion, just a couple of question. Um for you first uh Chairman Bean, in your testimony You raised concern that the Clarity Act would permit sports event contract through the language related to protecting decentralized finance software developers. That concern is at odds with the careful work the committee did to limit any relief in the decentralized finance safe harbor activities related um to the spot markets. The language in the bill reflects a careful compromise between the emerging D five community and the traditional derivatives industry to protect software developers promote innovation. but also ensure that businesses cannot act or use a software protocol to avoid registration as a DCM or as an FCM can you expand on your concern with clarity, give us clarity on your concerns with clarity and a and where you feel like the legislation missed the mark.

Well this this bill Uh thank you, this bill stands up decentralized finance systems without guardrails. Um it could authorize the central prediction market to issue smart contracts on sports gambling or even casino games, we are urging the Senate to include simple savings clause that preserves the Indian Game and Regulatory Act and state and tribal gaming laws, and codifies the current CFTC regulations that prohibit DCMs from listing contracts relating to involving or referencing. The language in the Clarity Act opens the door to expand beyond its current illegal activity in the sports betting space into the gaming space. Up.

I think it's important. Uh, Mister Schwartz, um, would you care to comment, you've examined the Clarity Act, do you believe the DeFi provisions provide an opportunity for the unregulated offer of derivatives?

Thank you, Congressman. I I read the language the same way you do. I think the DeFi uh carve-outs are for spot uh spot transactions and uh swaps are also carved out of the definition of digital commodity, so I I don't share that concern.

'Kay. Um well I appreciate um you know two po posing views on it, but I think that some of this committee needs to continue to to look at it and

Yes, uh Yes, excuse me. Thanks for the question. Um, so in twenty ten uh Dodd-Frank added a provision uh to the Commodity Exchange Act called the special rule, um which essentially gave the commission well clarified that the definition of swap is quite broad. But then it said it could include a number of event contracts and included a list of enumerated activities that the commission said we know our definition is broad but we're gonna give you commission the authority to decide. if with respect to these specific activities, these contracts should be against or are against public uh interest. And if it is, we're gonna give you the authority to require that those contracts come down. The commission in twenty eleven adopted a rule um where the language wasn't as clear. I think when you look at the commission's actions, in you know, in consist consistent with the statutory language, they in two instances did try to take actions to determine whether those contracts were against public interest. But I think some people who are reading the existing language in forty eleven think that it's a complete per se ban of all event contracts that relate to those activities. And they've made those statements in court and they've made those statements in public. Um but the commission's actions following the adoption of the twenty eleven rule aren't consistent. So the new rule making that you cite would address that concern. It would match the language of the rule with with the s- the statutory authority. And in fact the commission states in its proposal that to read in the interpretation that some people are claiming is ridiculous it would be a per se violation of the Administrative Procedure Act for the commission to decline, to make that determination where Congress required them or said like, look, this is the way you have to do it on a case-by-case basis as as opposed to a whole cloth ban.

Got it.

Well, thank you all f thanks for the clarification, thank you all for being here, and I yield back.

Thank you. The Honorable Macdonald Rivett, Michigan's recognized for five minutes.

Thank you very much. Um, this question is actually for our Mistress Kennedy and Schwartz. Uh, I represent Michigan, part of it anyway. So a week ago the chairman of the CFTC issued an order directing Kelsey to ignore a court order to cancel contracts entered in by Michigan resi residents. in violation of Michigan law. And the the chairman has every right to disagree, um but what he did not just urge them to appeal, he issued an order forcing Kelsey to defy the court's orders, which puts Kelsey in a really inevitable position um of having to choose between ignoring a court order or ignoring a commission order. Um both of which actually uh put Kelshi at risk to civil penalties. Um so I'd I'm just would love for you to comment on what that says, particularly when and I'm l writing this down, we need to leave things to the states and look at the regulation of state law. Um this seems contrary to that, particularly when we have a singular federal official uh to just order registrants to ignore court orders he disagrees with.

Yeah, I I think It certainly was an extraordinary action, and I think more than anything else, it speaks to the need for clarity in this space, because you're right, an exchange like Kalshi that is caught in the middle of its federal regulator and a court order, I I I don't know what I don't know what the best advice would be. I think under the uh uh in this situation, Kalshi actually had followed the court order by the time the commission issued its order telling it not to, so it was too late, but it certainly was. Uh it certainly was a flex.

Uh okay, so when you're asking this committee to uh to have faith in a system that relies on uh state laws, state regulation, this um notion of uh a a a group of regulators that are working together, and you see the head of the CFTC say, oh well it just yes, but ignore everything that I disagree with. Um it it it's uh it it it stretches credulity about the ability to actually do what you're suggesting.

I I I think we'd all like to see better cooperation. Uh the the explosion of litigation is not something that we have seen before, just as the order that came out from uh the commission,

Mm-hmm.

Chairman Selig, was not something that we have s it had been forty-six years since the commission had issued any order under its emergency authority. So we we are in an extraordinary situation, and I think everybody would like to see better cooperation.

Likely a um also a indication of the lack of staffing and other members of the commission. Mister Kennedy?

Um not much to add. I I agree that um additional clarity is probably best here, and um we would we would like to to see more cooperation. I I think a lot of these issues are being debated right now in the courts about federal um e exclusive jurisdiction over these markets um but yes, I think um these are you know extraordinary acts and extraordinary times, so I I I think um it would be best to to have more cooperation.

Congresswoman, could I jump in for just a second here?

Absolutely.

Um so I I think it's uh important to point out that last fall before the government shut down the CFTC actually one of the the only things that they did uh in this space back in twenty twenty five was to issue a memo to all of their registrants, uh basically to tell them to plan for this exact um sort of situation where a state court or another court um would have an adverse ruling that would impact uh, you know, positions of their customers, and they should be prepared to unwind those. Uh Chairman Selig, who uh would testify before the Senate in the fall that he would defer to the courts uh on these policy matters, uh rescinded that memo, but uh I don't think it should have been a surprise to Kalschi um that this happened, um and certainly as as others have pointed out, I think it's a extraordinary flex, uh if you will, that the CFTC has gone from uh uh from not being involved in this space and and allowing the courts to decide to now uh telling one of their registrants to uh intentionally uh ignore a a a ruling of a of a court in your state.

Not potentially ignore, the directive was to absolutely ignore,

Yes.

I think that it's a um it is a stark reality of when we have philosophical conversations here um in this committee room and then what we see actually implement implemented and the complete violation of good faith, in many of the things that are being offered to us today. Thank you. I yield back.

The gentleman from Indiana, Mister Messer, has recognized for five minutes.

Uh thank you. Thank you very much. Appreciate that. Um I wanna start off with a response to Mister uh Figuerea's uh question when he was uh dealing with derivative markets and the CFTC and mis uh Mister Kennedy said, the CFTC should leave it up to the consumer to make the decisions I'm I'm a little troubled with that and I would like maybe to elaborate on what she meant.

Right. I was saying to leave it to the to the customer to decide what type of um regulatory lane in which they'd like to see exposure the to reach the exposure. So if I go back to my gold example or to my state insurance and example, if a customer decides that they want exposure to gold and they want to purchase an ETF, they are certainly free to do so. Um they pick a regulatory lane, it's subject to particular rules in order to uh buy a share of an ETF. They have to follow certain rules. They have to deal with certain SEC registered brokers. There are rules that apply, there are tax rules that apply. There is a regime for that. If instead that particular customer wants to purchase a gold future, they would go through a CFTC broker to an exchange that's regulated by the and they would receive certain tax treatment that was uh determined under Dodd-Frank for that particular instrument.

Okay.

Um and so if they want gold bull

Uh well that okay, that that's that's helpful.

Yeah.

Uh but then um I would clearly delineate that sports betting has proper lanes as well, and uh and and and that would i okay.

Agreed, agreed, agreed. And and so exposure to a sport event, if someone wants to choose to go to a casino and deal with a house, and have the house set the odds, and wager, they can do that too for entertainment purposes. But they see a different purpose for choosing a CFTC regulated market, they can do that too. And so they have choices. And with those choices come uh consequences, regulatory consequences.

Okay, Mister Schwartz, uh some interpret uh the special rule uh on events contracts under section five C of the Commodity Exchange Act as a prohibition on event contracts that involve relate or reference gaming. Uh can you, g given your experience as a regulator and litigator, could you explain how you interpret section five C of the s of the uh CIEA?

Right. Uh so the the way it is written, it is not a prohibition but a a delegation of authority to the CFTC to scrutinize certain contracts for consistency with the public interest. It is discretionary authority. Uh I I have called it a yellow light rather than a a red light. Clearly Congress had concerns with the kinds of contracts that are are enumerated in the statute, but uh again that was a judgment that was channeled to the CFTC rather than to other uh o other decision makers.

Okay. Uh if Congress were to prohibit contracts n involving those uh five enumerated categories in section five C, how challenging would it be for the commission to implement?

Well, I I mean I think uh it would go about its business the way it has always gone about business. So, you know, to use the onion and box office receipt examples, uh y y you know, those are if they receive a self-certified onion contract, it's easy to to toss it out. Now there there are are difficulties inherent in identifying certain contracts that fit within these categories. For example, uh what constitutes gaming or how are you gonna apply uh a uh the the category uh contract on something that violates state law, are we gonna you know, is one state enough, are we gonna look at antiquated uh statutes, but the the CFTC to its credit has actually started to address that in its uh its proposed rules. Uh it has a history of dealing with uh complicated prohibitions that it has to apply to a given contract contract readily susceptible to manipulation it's it's not uh readily apparent uh how you assess that but the CFTC has a body of experience to do that. And and it's able.

'Kay, thank you. Uh, Mister Kennedy, in in his testimony Mister uh Mayor addressed the fact that not all sports related event contracts are created equal and therefore uh posed uh different regulatory risks the CFTC's proposed rule making uh works to confront these risks by bringing clarity to the public interest test, prescribed by Congress. Uh, Mister Kennedy, can you explain how the commission d uh distinguishes different types of sports related event contracts under the public interest standard?

Sure. It within the proposal issued in on on June twelfth, uh the commission made a difference uh i i in terms of its public interest factors that it would consider between broad sports outcomes and contracts tied to single actors or integrity sensitive sporting events like injuries or officiating um contracts um and so those would be or would include contracts that deal with final scores and point differentiations in contrast with single actor officiating a um uh contracts or injury contracts, those would be held to a highly likely to uh be contrary to public interest.

Okay. Thank you. I yield back.

And, Mister Kudrow, for why are you so organized for five minutes?

Thank you, Ranking Member, Mister Chair. Um, Mister Bean, um, real briefly, if a sports book fails to protect consumers or prevent insider betting, do tribes and state regulators have the ability to investigate, to find, and to revoke a license?

Thank you for that question. Yes, yes we do. We have regul regulations in place that have been scrutinized by the National Indian Gaming Commission scrutinized by state gaming commissions and our own, gaming regulatory bodies within the tribes.

Okay. We've seen recently very egregious acts of insider betting in prediction markets. Most recently the President's Teleprompter Technician placing a hundred thousand dollars in bets on Kalshi on his speeches. Is there any established oversight and safeguards for accountability for prediction markets like what tribes and states currently have for gaming?

We don't see any safeguards in place. As you heard today from the testimony, the CFTC is short-staffed and lacking in resources, so they simply don't have the regulatory system in place. They rely on these prediction market companies to self-certify.

Self-certified.

May I?

Mister Kennedy briefly.

Yeah. Yes. Um, as I mentioned in my remark,

Mm-hmm. Mm-hmm.

So they're regulators. And in fact, that um, it's exact violation that you're mentioning was found by Kalshi. They surveilled it. They had systems that found it.

Mister Kennedy, respect, we have a couple of other questions. Um, I do believe you can put lipstick on a pig, it's still a pig, you can even AI that pig. It's gambling, it's gaming. I know you've got different lanes like the types of golds and higher trading, and But then if at the end of the day we're talking about gambling on a sports event here. Mister Bean, I do wanna just continue off of that line of questioning though. Tribes have invested a sig and states have s invested significant amounts of resources to social welfare programs to combat um, you know, problems with gambling, consumer protections, responsible gaming. Um, how has these event contracts and the rise in protection markets undermined quite frankly the ability for you to enforce your own gaming laws, to be able to actually have these programs be to the benefit uh of community and people. It's almost like they acknowledge double standard right now. How has that made you more of ineffective in some of these social welfare programs, and your ability to quite frankly to enforce those gaming laws you have on tribal lands?

Tri- uh, thank you for that question. Tribes and states have, under the the regulatory framework of the Indian Gaming Regulatory, tribes and states have negotiated compact agreements to regulate activities like prediction market uh online illegal online sports betting undermine our tribal sovereignty state sovereignty and those very agreements in place that were designed to protect the integrity of the game to protect consumers to prevent against underage gambling to promote responsible gambling and and you had the um question from the representative from Michigan you know the CFTC chair i promoting lawlessness by advising these prediction companies to ignore court order. That is an example of how tribal sovereignty, state sovereignty is being undermined.

Thank you. Um, and and I just have a basic question, and it is connected to to gaming and to prediction markets as well. For each of the testifiers here today, do you believe that we need to respect and should and must respect, especially as Congress and the federal government, should we be respecting states' rights? Yes or no?

Uh of course. Yes. Absolutely.

Yes.

Yes.

I a hundred percent agree with you. And in eleven states like Hawaii, Hawaii doesn't allow any kind of gaming gambling at all, but eleven states specifically outlaw sports betting. What this is doing is creating an alternative. And it's been marketed, by the way, so you can talk about how it's a different thing and it's a different lane, a different kind of gold. But we actually have prediction markets that have been, you know, promoting this extensively, publicly, that this is an alternative to sportsbook. This is gambling at the end of the day, and this flies in the face of states' rights, for states that have clearly said we do not want gaming, we do not want sportsbooking in our states. Um, and and I will just end it with this. Thank you very much for letting me weave onto this committee. Quite frankly, this is regulatory arbitrage. It's just creating a double standard. We have a higher standard for tribes and states that have taken the time and invested significant amount of resources to make sure that the ill effects of gaming do not fall on its people and we have a self-regulatory system that quite frankly is a danger to our people. Thank you very much, Mister Chair, Ranking Member, I yield back.

And Mister Taylor is recognized for five minutes.

Thank you. Uh, Chairman Thompson and uh, Subcommittee Chair Johnson and Ranking Member Davis. for holding this hearing and I wanna thank the witnesses for appearing here today, and though it's a considerable imposition on your time, we appreciate you being here with us today. Um in a short period of time, prediction markets have become a multi-billion dollar industry, and some experts anticipate the prediction markets will be a trillion dollar industry by the end of this decade. Uh what was once an once a nascent industry is now here to stay, which makes hearing like this, like the one we're having today, even more important. Uh this hearing's vital to the uh financial future of Americans, so I apologize for my colleagues earlier bringing in the ugly relics of the past, like the relevance of SEC football. Mister Kennedy, I'll start with you. Um, it's been noted that the CFTC is significantly smaller than the thousands of state and tribal employees involved in gambling regulation. I think this undercounts the number of people involved in derivatives market regulation. Can you please explain how the FCMs, the exchanges, and the National Futures Association all work cooperatively with the CFTC uh to police derivatives markets.

Uh thank you for the question Congressman. Um yes so um I think Rob's um um the term he coined uh the regulatory sort of multiplier helps uh i explain what exchanges as self-regulatory organizations, the involvement of NFA with the clearing brokers, um how you have multiple regulators and registered parties surveilling these markets, looking at customer trading, identifying instances of potential manipulation, escalating these issues, and working collaboratively and collaboratively, talking to each other regularly. Um, so to suggest that we're l by looking only at the CFTC's employee numbers, um, that that's the only sort of an a part of the analysis, I think is misleading. Looking at the um p the uh cooperation and the collaboration between multiple regulators, including the the exchanges which are regulators, I think is a better assessment of the capabilities of these markets to enforce uh and surveil.

Thank you. Um, Mister Schwartz, during your time as General Counsel of the Commission, how did you see the interactions between CFTC, NFA and DCMs working in practice?

Well, uh, on the enforcement front it's very impressive. Uh, as I alluded earlier, uh, the agency's interests in preventing wrongdoing on exchanges are are very much aligned with the exchange's interests in preventing wrongdoing on exchanges. If the markets are viewed as as rigged, it's bad for business. Uh for the National Futures Association's part, if the industry falls into disrepute, that is contrary to its core mission. So there there are referrals all the time. Uh you have seen one of the exchanges uh very

Thank you. Mister Mayor,

Thank you.

one thing we hear a lot about in the news is the acts insider trading that have taken place using prediction markets. You work very closely with prediction market platforms to detect possible acts of insider trading and to uphold integrity of these platforms. Do you feel the CFTC proposed rule would provide adequate oversight of prediction markets to prevent insider trading?

Thank you for the question. Um I would say there's two angles for it. First of all from the commission perspective, uh yes, we believe that the current frameworks that exist today provide the the the the guidelines for DCMs to uh put in front a compliance program that's comprehensive in order to detect market uh manipulation inside our trading. To Rob's point, I'll also mention that it's important to keep in mind that the DCMs themselves, um before waiting for any additional clarity from regulators, are taking the extra step usually to make sure that there is proper level playing field in order to usher in mainstream adoption. Ultimately that's their goal, they wanna make sure there is good level playing field and to usher in both retail and institutional one day. And so the everyone has the incentive to make sure there is a level playing field.

Okay. Are there are you aware of any gaps that Congress needs to step in uh with legislation to address?

I am personally not aware of any gaps um that we've heard from the trenches working with compliance professionals, but I would leave it to the legal experts on the panel to opine on that.

Thank you all very much again for being with us today, and I yield back.

Miss McClean-Delaney, you are recognized. Mister Bresnahan, you are on deck.

Uh thank you, subcommittee chair and ranking member. Thank you to all the witnesses here. Um, really examining how prediction markets and market integrity in sports is an incredibly important issue and I just wanna make sure they're all cogn cognizant of the impact on the health and well-being of its users. Um, I uh spent the bulk of my life in communications and technology, particularly on how um media impacts kids' health and well-being. Um, in fact, I founded the DC office of uh Common Sense Media and served as its Washington Director for almost fifteen years. Uh earlier this year, Common Sense released a new report on boys in gambling, which shows that more than a third of boys aged eleven to s seventeen gambled in the past year. And when it comes to sports related gambling, twelve percent of boys between eleven and seventeen said they said they spent real money. So gambling and sports betting is increasingly becoming an obsession and I hate to even say an addiction. for some susce um susceptible youth, boys and girls, but it seems to um hit a lot of boys very hard. Uh prediction market operators are not required to follow state responsible gaming advertising rules. This is different from most licensed sportsbooks, which are prohibited from running ads on platforms with a large underage audience. However, prediction markets are increasingly open to anyone eighteen and older, as you know. And recently I was sent by um someone an example of a social media advertisement posted through a paid partnership. It's a short video of a cartoon dog dancing on a surfboard while turtles and dolphins jump out of a rainbow colored water with a caption um how life is you know uh better with um you know prediction markets rather than sports books. I don't know about you, but to me this is like marketing towards our youth And prediction market ads like this have been pushed heavily on social media platforms like Facebook, TikTok, and Instagram, um with many millions of underage users seeing them. So I ask you all on this panel panel here on, and I'm sure you've thought about this issue because it comes up a lot, and I'll leave it to you, but do you believe that prediction market sports wagers do or do not pose any risk of on-line youth gambling addiction? And furthermore, given what I've shown, should they not warrant the use of responsible gaming message requirements and youth advertising consumer protections? Yes or no, and why? And if I have time, I have a brief follow-up.

Sure, yeah. And I mean, uh uh of course there is an addiction risk, but I I think maybe overlooked is w when I was at the CFTC, I saw a lot of people get into a lot of trouble because they were over their heads. in other markets. I think that's uh i insufficiently uh appreciated. The CFTC also has an office of consumer education and outreach. That that may be a valuable tool to help uh i in this space. If exchanges are on college campuses, maybe the OCEO oughta be on college campuses as well. I I have two teenagers who, not to make light, but they make stupid decisions every single day, not to stick it to the two of them. So they need Uh you know they need information, they need direct engagement, so I I it it's not limited to sports, uh I I think it's very important in in any market that may appeal to retail.

And I might have the uh people move on down the panel just quickly but thank you I I hear you, thank you so much.

Thank you, the the the possibility for addiction is tremendous, and that's one of our biggest concerns, the impact on on native youth and youth youth overall. These folks are targeting all kids advertised on social media as you stated, uh on sports gambling, uh as money a money hack. side hustle. They're even trying to equate sports gambling to financial literacy. The CFTC acknowledged the addictive uh potential of prediction markets and opted to do nothing about targeting eighteen to twenty year olds. Now earlier I had menti shared a story about my nephew who's a student at Seattle Public Schools he and his classmates have been gambling you know through CalShe apps.

Yeah.

You hear of people in new

So do you think we should have gaming message requirements and youth advertising consumer protections, yes or no?

Y yeah and those are present in through the tribal and state compacts that are in place throughout the nation.

Thank you.

Congresswoman, yes, uh I would just say for the state and tribal regulated gaming industry we take age access very uh very seriously and obviously uh as I stated in my testimony, twenty-one is the age of access in most states for uh betting on sports. It's pretty clear that the prediction markets have

Even though a lot of eleven to seventeen year olds seem to be engaging in it, yes.

Well, uh you know, even we're even successful in finding people who find work-arounds through their parents or otherwise, and that's a a broader conversation. But I think, you know, one of the the really important elements here is the blurring of the line between gambling and investing. Um we're very clear about what our product is. It's entertainment, uh it comes with risk. You should not bet more than you can afford to lose. Uh the idea that some of these prediction markets are going around, calling this a financial derivative, and suggesting that you can pay your rent with it, or going to college campuses and having um fraternity brothers market to get people

Yeah.

to sign up I think is is gross and something that would never be allowed by our industry.

So,

Yes.

Can I just say yes and yes, or no and no on the other? Do you uh uh gaming message requirements in youth advertising, consumer protections, yes or no?

I I think that would be appropriate for so many people's work, not just yeah.

I think it's an important topic that should be discussed. Absolutely.

Thanks. Um and I'll I'll submit another question for the record. Thank you and I yield back.

Mister Bresnahan, you are recognized.

for being here today. In the past few years we've seen prediction markets and as an industry grow at a pace that few would have expected so I think that kind of rapid growth creates new challenges for the CFTC particularly when it comes to oversight market integrity, uh in protecting consumers so today I'd like to focus my questions on the consumer safeguards that are currently in place and what Congress can do to ensure platforms are operating responsibly, and that Americans who choose to use them are adequately protected. Uh, my first question will be for Chairman Bean. In an interview earlier this year, you were quote quoted saying, when you look at these sports betting, illegal online, unregulated sports betting contracts, there are no guardrails. There's no ar- age verification, there's no verification of funds, and you don't really know who's placing the bet. Can you elaborate on the details and what you meant by that?

It exactly that, that there are children who are allowed to engage and I just cited and at the time I didn't have the example of my nephew, but you know we were a week ago in in San Diego at a gathering of tribal state legislators in gaming states, um they had a young man a story of of a young man who got into debt, you know, through gambling through these apps and have created a foundation with his mother to promote responsible gambling. With respect to the age verification, that's that's what I meant. What was the other part of the question? I'm sorry.

The second there was a can you just elaborate on the details of what you meant by that? I mean was that an example outside of your nephew's specific occurrence or have you had other examples of other younger people that have fallen victim to this?

Y yeah, at that time, th I mean I was referring to a a young man on a you know freshman in college, he's went into three hundred thousand dollars in debt. Um That is an example of no safeguards in place, not knowing your customer, not knowing the source of funds. Those that's problematic in and of itself.

So, Mister Kennedy, I wanna ask you specifically about the idea of verifying the age of users, and how you protect consumer funds. Are there rules related to how the CFTC registered entities address these issues?

Yes, there are. Um, as I mentioned in my um opening statement um and uh couple of times, that exchanges and the brokers that provide uh access to customers have to comply with the Bank Secrecy Act anti-money laundering and know your customer rules. You have to indicate your date of birth. You have to provide a lot of information, including in some cases social security information they will collect. So they collect a lot of information on their users on the front-end, and they know exactly who they are. If there are fraudulent sort of onboarding uh uh practices that take place, there's technologies that can detect that um and um and act and procedures that these exchanges and and brokers will take.

Mister Mir, do you believe CFTC regulated exchanges know who are placing orders on the exchange?

Yes, uh to say otherwise is is factually wrong. Um in fact we have examples in my written testimony of uh manipulation scenarios, we found um that uh essentially we're able to tie together multiple different accounts, we're trading in collusion with one another, um so not only are we able to know who is the person that's trading, we're also able to then tie them into their kinda neighbors or neighboring accounts in case they're colluding.

Have you ever detected someone fraudulently putting information in that wasn't an accurate representation of who they were?

Um I believe there are cases like that, yes.

Mister Silkey, in your statement you said the prediction market platforms were operating quote " without the safeguards required of state licensed gaming operators". I obviously come from a state with legalized gambling, Pennsylvania. Uh what are those safeguards and how does that compare to the prediction market platforms?

Sure, and and I we appreciate that the Pennsylvania Gaming Control Board has been a a leader in I think articulating the, just those concerns directly to uh the delegation, but certainly I think one of the ones that uh we've highlighted here that the the CFTC and the uh the principles-based regulation don't speak to is responsible gaming. I think that's at the core of uh of the gaming regulation at the state uh and tribal le level, recognising that some people may have uh addiction issues. Um and so I think that is one um in terms of uh uh the marketing around uh the product. Uh certainly self-exclusion lists are a big part of uh of you know, making sure that people who have gambling problems are not exposed to uh marketing and advertising and can't uh engage with the product um and so I think that's one of the biggest uh departures where um it not only is it not addressed, but uh the prediction markets say this isn't even gambling uh and so there doesn't need to be any real fit for purpose regulations there.

Uh I appear to be out of time, I have one more question that I will submit, and I yield, Mister Chairman.

Normally the uh clock plays a virtuous role in keeping us moving. I think uh the five minute limitation maybe limited our ability to fully examine Ms. McDonald-Ribbets uh line of questioning. Uh but with regard to these dueling CFTC and court orders, Mister Schwartz, let's just take a minute or two to make sure we've filled out the evidentiary record here. This is a situation where the Michigan court asserted jurisdiction over a federally regulated exchange and ordered them to close existing open positions, which to my knowledge is unprecedented. I mean w how did we get here? What happened?

Well, uh the State of Michigan brought an enforcement action against the Calchi exchange and uh it sought uh an injunction against uh Calchi conducting these sorts of activities within the State of Michigan. And w whereas some states when they have prevailed in their enforcement actions in other states, the the remedy has been just to um on a going forward basis uh uh allow uh only in-state residents to trade out of their positions but we hadn't seen a remedy like this before that you have to actually close out the the positions.

I mean tearing up contracts, regulated at the federal level.

Uh Correct. And uh I I said that this was um, uh you know, a an unusual uh an unusual instance, it had been forty six years, but it does have some resemblance in some ways to past uses of the emergency authority by the CFTC. Uh they they in the past have been based on disruptions to cash markets for traditional commodities. But the underlying issue was that you would potentially get prices on the exchange that didn't really reflect supply and demand. And that in this instance i i there was a threat that the prices on this, and other markets would not reasonably reflect the real forces of supply and demand because people would have to account for the possibility that their positions would be closed out. So it's very different context, but but some of the underlying issues uh there's an echo there.

Yeah, thanks for putting a little bit more meat on that bone. Uh, b excellent witnesses, excellent line of questions, uh clearly a high level of engagement by members on the subcommittee. I'm grateful for that. Uh, uh, Mister Ranking uh member, any Uh comments uh by way of closing.

Now thank the wi witnesses for coming forth today and for the discussion. Thank you so much, Mister Chair.

Yeah, and I would just uh try to share maybe five four or five things quickly that I think we heard today uh number one uh the CFTC does have uh some important work before it, it is used to doing more with less and yet I do think resource adequacy is a legitimate question the committee should continue to explore. Number two, everybody agrees about the importance of market integrity and customer protection. Number three, I do think this subcommittee needs to continue to explore whether or not there are sufficient tools to ensure market integrity and customer protection. Uh number four, uh maybe finally, I mean courts are speak courts are acting in this space, the commission is acting in this space, I do not believe that the committee, that Congress, should be silent. I do think there is work for us to do here. Uh, I agree uh with Chair Thompson's statement that this will not be the last hearing we have in this space. I think we have an obligation to try to drive toward finding out what is the common ground. More than one of our witnesses said that there is need for additional clarity. Uh, it may be that the courts and the commission alone can provide that needed clarity, and yet, if we don't ask, whether or not there's an important role for Congress. We are not doing our job, and I'm so grateful that everybody uh came uh with a serious focus on attempting to answer those questions. Uh with that, under the rules of the committee, the record of today's hearing will remain open for ten days to receive, uh ten calendar days to receive additional material and supplementary written responses from the witnesses to any question posed by members. A number of members indicated they would be submitting questions for the record. And with that um Uh thank you, Mister Ranking Member, this hearing of the subcommittee on commodity markets digital assets and rural development is adjourned.