NYS Sues Kalshi

WNYC Studios is supported by Odu. When you buy business software from lots of vendors, the costs add up and it gets complicated and confusing. Odo solves this. It's a single company that sells a suite of enterprise apps that handles everything from accounting to inventory to sales. Odo is all connected on a single platform in a simple and affordable way. You can save money without missing out on the features you need. Check out Odo at ODO.com. That's ODO.com. It's the Brian Laira Show on WNYC. Good morning again, everyone. We've talked on the show before about prediction markets like Kalshi and Polly Market, places where you can bet. And bet is actually a controversial word here, we'll explain. but we'll say bet on things like whether or not the price of Bitcoin will rise or who will attend soccer player Cristiano Ronaldo's wedding. You can also bet on things like whether or not a bill in Congress will be signed into law or whether or not the Strait of Hormuz will open or the release date for Grand Theft Auto 6. Yes, that's a real bet on Calci's website right now. A lot of listeners might wonder if is there really a difference between... these prediction markets, and traditional casinos or sports betting sites, where you're also putting money down on various outcomes that you think may occur. Well, it looks like the state of New York is inclined to say, yes, it's betting, and that matters legally. This week, New York State Attorney General, Letitia James, and Governor Kathy Hochul announced a lawsuit against Kalshi. for running what they see as illegal gambling operations, seeking as much as $36 billion in penalties from the company. A Kalshi spokesman called the lawsuit, quote, political theater from the leadership in our own state. We have a guest on this. To explain, Joshua Mitz, a professor at the Columbia University Law School who specializes in corporate business and transactional law. These days, he's got a special focus on prediction markets, and he is here to help us understand this case. Professor Mitz, thanks for joining us. Welcome to WNYC. Thank you, Brian, and thank you for having me. So Calci allows people to make bets on future events. I just gave a kind of weird array of examples, I guess. Sounds a lot like gambling. You win money if something happens and you lose money if it doesn't. So at least to that point, what Calci said makes its business model different from a regular gambling company might need some explanation. So can you explain it?

Sure. Well, at some level, there is lots of activity under that definition, which could be considered gambling. Think about the stock market where you make money if a stock price goes up and lose money if a stock price goes down. So there has to be some difference between just taking a risk and making money or losing money. And what New York State is really zeroing in on. is that Kalshi offers these contracts, which are connected to the outcome of sports and other kind of gaming-like activities. And this has really been the area of state regulation. So if you think about sports betting, casinos, these are areas where states have traditionally said this sort of activity, this kind of gaming activity, where money is risked. That's really different. from the broader category of risking your money in a financial market. And Kalshi responds is to say, we're not actually the equivalent of a casino. We're a lot more like the stock market. We're a place where you can go on and buy and sell and trade. And the fact that some of these things happen to be related to sports outcomes or sort of traditional gambling, betting activities, that's really beside the point. One of the arguments that Kashi makes as to why it shouldn't be regulated like sports betting is regulated, for example, is that... The house doesn't make money. There's no house, right? People hear this claim in the commercials for Kalshi and others. There's no house. You're trading, they use the word trading rather than betting. You're trading against other individuals. So can you explain the difference between betting and trading as they're trying to convince us that that exists and how you see it in reality? Well, that's why I use the stock market as an analogy, because I think Kashi's argument does boil down to what people are doing is buying and selling contracts. And we're just a platform. We're just a facilitator. We're just a matchmaker between buyers and sellers. It's not exactly, I think, 100% accurate because Kalshi is benefiting from trading activity on their platform through their fee model. And so they are involved. They do have a financial incentive to encourage trading. The fact that they're not on one side or the other is really... beside the point when it comes to their financial incentives. But they are correct that the platforms at their core are a two-sided market. And by that I mean, for every dollar that someone is willing to bet that an outcome will happen, there's going to be a dollar on the other side where someone is betting that the outcome will not happen. And so it is true that these contracts reflect essentially zero sum.

transfers, one, there's always a loser for every winner. And that act of transferring risk, if you will, from some people who think an event is going to happen or not happen to the other group. That is really what makes this market a lot like other financial markets. The challenge for Kalshi is that the same can be said for many traditional gambling establishments because while the house is involved as a formal matter in those transactions, oftentimes the house is not actually taking a directional position. but offloading that exposure to someone else who has the opposite view. So it's kind of a thin basis to distinguish Kalshi from traditional gambling activity. Their better argument probably is that the architecture of these platforms at its core is fundamentally one of trading. It's one in which all kinds of contracts are traded, many of which have never been within the purview of state gambling regulation. Listeners, do you use Kalsi or other prediction market sites? If so, do you also use more traditional sports betting sites? Do you experience a difference between them? Or do you have a question or opinion about the lawsuit being brought by the state of New York that seeks to subject? Kalshi to regulation like more traditional gambling sites and seeks damages from them at the same time. 212-433. WNYC, 212, 433-9-692. Call or text for Joshua Mitz, Professor at Columbia Law School, who has been focusing on prediction markets recently. Professor... How far does the lawsuit go? I read one version that says the state of New York actually wants to put Calci out of business. The problem is that New York is demanding the imposition of a fine in many billions of dollars, which would essentially make it impossible for Kalshi to continue with its operations. The thing also to remember here is that New York is not the only state that's coming after Kalshi. Their business model essentially was to launch in all 50 states and more or less dare the state-level regulators to come for them. And to be fair, they had some federal support. The Commodities Futures Trading Commission has more or less stepped in and said prediction markets are our jurisdiction. So if you look at this lawsuit, it looks like it's New York versus Kalshi. But I think what's actually happening here is this is the federal government versus the states. And Kalshi is essentially wrapping itself in the cloak of the federal government because.

The real war that Kalshi would like to see would be between the CFTC in Washington and the individual states, because Kalshi knows that if the CFTC prevails, then all they have to do is comply with the CFTC's rules. And under this administration, the CFTC has been fairly pro-p prediction markets. They have not really come down hard on prediction markets like some of these individual states. most notably, Democratic states, I mean, blue states, states where the attorney general may have a very different political view than the Trump administration. We have a, you might say, a local celebrity, as one of our listeners just put it in a text, who has a little Kalsi scandal of his own. And of course, he has had a few other scandals of his own, and that's the former member of Congress, George Santos, who basically got kicked out of Congress for making up so much stuff and other things that were related. But he apparently paid a fine because he bet one way on whether he would attend the State of the Union address last year and then made money on, you know, when he fulfilled that prediction. So... Can you talk about that case in particular and whether it suggests a more systemic problem as opposed to just a George Santos problem? Yeah, the problem with these prediction markets is that, you know, anyone can participate, including people who may have control over the outcome. In this case, George Santos, I believe he skipped the state of the union. So he took advantage. He essentially took a position that he would not show up and then profited from not showing up. And that's the kind of thing that... you know, anyone can really do if the market is small enough. It's supposed to be against the platform rules, but in some cases, it's hard for platforms to enforce those rules. We've been talking about Kalshi, but this problem is much worse on polymarket, because polymarket, which is a much larger platform globally, polymarket is completely anonymized. So it's very difficult for regulators to crack down. This is what we studied in some of the research. that you referred to earlier, which is how much of this sort of insider trading or informed trading is happening where people are placing bets because they have an edge on the rest of the market. And this is really damaging to the platforms themselves because who wants to participate in a market when folks like George Santos might be using inside information? And there were other very, very famous cases in the headlines like the Special Forces soldier who traded on the Maduro operation. There have been other corporate employees who've traded on information, on prediction markets that they learned through the course of their employment. So this is a problem for these platforms because it undermines confidence. And this has actually been the one area abuse of these platforms where we've seen.

really a crackdown by federal prosecutors, regulators, and the platforms themselves? Listener asks, are these states in the lawsuit simply looking for a piece of the pie? I think there's a question what the goal here really is at the state level. There's definitely an ideological difference that is animating some of this. State consumer protection regulators, particularly in blue states, tend to be much more concerned about what some might say are paternalistic instincts worrying about consumers essentially wasting their money on activity that. they would regret after the fact. There's no doubt that gambling activity more broadly has become increasingly popular. You mentioned sports betting earlier. These platforms have grown in popularity online. And you can think of Kalshi and Polymarket as essentially the latest iteration. You can also say this isn't the only place where people are taking these kinds of risks. Think about crypto, another big area. And I think it's fair to say that some of these states. are much more concerned with the phenomenon of people engaging in activities that may be harmful to themselves, that later on they would regret. And so there's a degree of aggressiveness there that you're not seeing from Washington, D.C. So others might say the problem is that in Washington, D.C., there's an administration which is benefiting in some way. from this sort of activity, from a kind of embrace of gambling and speculation and is personally, even members of the Trump family, for example, maybe personally benefiting from this sort of activity. So we need these state regulators to step up and do what Washington's not doing. I think that's probably a more plausible explanation of how the states see it rather than just a kind of... you know, money-hungry story of trying to get a piece of the action. On something you just mentioned, listener writes, don't forget to mention that Trump's sons are behind the creation of Kalshi. Corruption, corruption, corruption, writes that listener. Another text says two major issues with calcium off the bat, unregulated, so it effectively lowers the gambling age to 18 and starts gambling addiction earlier, therefore, when it's more likely to stick. Let's take each of these. What about the Trump family and alleged corruption?

So I think it's hard to separate the ideological position of the Republican Party, which tends to be more laissez-faire, more sort of loose with individuals taking risks that later on turn out to be financially or otherwise harmful. It's difficult to separate that from the Trump family's personal financial incentives. I believe they're invested in Kalshi or one or two of his sons are invested in Kalshi. But I don't, you know, these platforms rose up on their own. They have dedicated user base. And the link between that and kind of the free market ideology that's that's in Washington right now, it's a loose link. It's an ideological connection. It certainly feeds in. to the perception. There's definitely a public perception that this administration is not eager to clamp down on financial speculation. And crypto is a similar example of this, the Trump coin, these sorts of activities that are encouraging people to take financial risk. Washington seems to be endorsing some of it, seems to be at least looking the other way. On the broader questions concerning gambling, I think this is really important. I mean, we have to ask ourselves as a society how comfortable we are with this. Gambling has a long history in the United States of America and other countries. And there's always been a wide range of opinion on whether we should step in and prevent people from risking their financial future. I'm a financial economist, and I would say the stock market is also a form of gambling. But we've told ourselves, I think sometimes legitimately, stories as to why it's a good thing to have people taking risks like this in certain settings. It's a lot harder to tell yourself a story why it's a good idea for people to take risks on prediction markets. This isn't the kind of speculation that has... benefits to the economy, for example, and helping companies go public and things like that. So I do think we need to ask ourselves as a society if we're comfortable with this amount of risk taking and whether there should be some limit. Studies have shown that over 99% of traders on Kalshi lose money. And here's somebody who lost money. William and Lindenhurst calling in with an anecdote. William, you're on WNYC. Hello. Hello. Can you hear me? I can hear you. Okay, well, what happened was I got an offer online for a $50 coupon from them, and I figured that what have I got to lose? So when I went on to the actual site, it turned out there was another path to get the coupon. So I didn't get the coupon, so I gave them $50 of my own money to put, and I made one of their bets.

that was presented to me, will a Gulf of Hormuz still be closed at the end of the month? And I said, yes, it will be closed. And then when I actually saw what they entered as the bet I made, it was not worded in that way. It was set up almost like some kind of option on a future or something like that. And the value of the bet just went down, down, down, down, and finally just canceled the whole thing and lost the 50 bucks. But everything about that site was duplicitous and not as represented. It was my experience. Interesting. William, thank you, Vemmerich. Well, that's an allegation. Does that sound familiar, though? What he's describing, apparently, at least the way he sees it, he was trying to place a straightforward bet or trade, and then it got converted into some kind of option that made it more obtuse. I think the challenge with these platforms is that they're really moving quickly, you know, the data are moving quickly. It's not always clear what a user is doing when they're interacting with the platform. And I think what the caller is describing. sort of gets to the point we were just discussing around how much regulation there should be of these platforms. So should we have state regulators stepping in, looking at these stories and saying, look, you need to make the process clearer or potentially if in fact something went wrong going after the company and saying, hey, what happened here, Kalshi? I mentioned earlier. A statistic, I just want to clarify the Wall Street Journal. This is in a May article that 67% of polymarket profits go to the top 0.1% of accounts. And there have been similar studies that essentially at least 70% of accounts are on these platforms are losing money. And I think if you look at who makes most of the money, it is, as I said, something like 0.1%. at least on Polymarket. How does that happen? Who are those people and what is it they know that the rest of us don't know? That's just it. They know something the rest of us don't know. And what my research has found is that there are, there's this small number of people. And you can see this on Polymarket because their blockchain identities are visible. And this is the concern with both Polymarket and Kalshi. Kalshi, we don't have quite this level of granularity with the data. But there's no reason to think it's any different. These are people who have.

connections or access to inside information or who might have put something together. And so I think what the bottom line for your listeners is if you're going on these platforms, based on all the research we've seen, your expectation should be that you're going to lose money. And you probably will lose, if not everything that you wager, the data suggests you're going to come out, you're going to come out with a loss and that only a very, very small fraction of the participants on these platforms. are walking away with significant profits. Is that different than sports betting sites? Well, we know that... Gambling activity in general, you know the phrase the house always wins. I think part of these platforms allure is that they're making it seem that for some people at least, you know, there's a realistic chance of winning or you might think you know what's going to happen in geopolitics. When you get beyond, you know, will this horse win the race or who's going to win the World Cup and you start looking at some of these other areas, people walk in with a lot of confidence and yet they still lose. And I think this is an important message for everyone listening to this, that you're probably not as smart as you think you are. You probably don't have information that you think you do. And you probably are going to lose money. Yeah, somebody suggested to me recently that because I know a fair amount about the world, because of the nature of my job, that I should go on the prediction markets and predict, you know, bet on some political outcomes, which I have never done and have no interest in doing. And I think the rules of my news organization prohibited anyway, you know, so that I don't slant coverage to help bring about an outcome that I might profit from. But here's another text that's concerned about young people. It says as a high school teacher and parent, the youth engagement is shockingly high for this stuff, which is categorically not the same as some kids at school betting on the NCAA basketball tournament, for example. Do you agree? Well, Kalshi, to its credit, has more of a customer verification system than polymarket, but people can go on polymarket essentially anonymously. And there are ways to get around identity verification. It's not supposed to be happening, but it can happen. And I think the youth exposure is, in fact, one of the biggest, personally, one of my biggest concerns being a parent myself. apps are colored and designed and styled, marketed with kind of flashy, you know, it's very easy for young people to be drawn to them. I remember commercials, the various sports games. We were watching as a family, and there was Kalshi and my kids, younger kids, but they turned to me and said, what is Kalshi? And I had to explain this to them. So I think this is a concern on parents' minds. And this is an area where you might think,

We need state regulators exactly for this purpose because Washington is really not focusing on underage use of these platforms. Maybe we need New York and other states to step up. Then what would it, if they win the lawsuit, or let's say if the prediction market sites were regulated the same as sports betting sites, what would change? Well, there's a licensing process the company would have to go through and regulatory oversight. And that oversight might get complicated because you have 50 states and it would start to get quite thorny. But at the end of the day, it might be a better outcome for consumers. As you said, there are online sports betting platforms which do register and are with the states and are regulated by the states. So it is a possible model. It might take away some of those profits. it might be better for consumers in the long run. And we're just about out of time, but I'm still thinking about that stat you gave, that such a tiny percentage of the people who use the prediction markets actually profit from them, it really goes against the image that they're trying to portray by saying there is no house, you're trading against other individuals. Because in theory, if this is individuals trading against each other on whatever prediction, then somebody's going to win and somebody's going to lose each time, and you would have roughly a 50-50 split in winners and losers, wouldn't you? Well, I encourage everyone to look at the Wall Street Journal's report from May. What they talk about is the use of algorithms and highly sophisticated traders who are building statistical models. And so the reason why such a small number of accounts capture the profits is that it's not another person on the other side. It's a sophisticated algorithm. Sometimes it's a small number of individuals with access to information that the rest of the market doesn't have. So it's really quite dangerous. You have to go into it knowing that unless you have an algorithm with you, unless you have access to information that others don't have, your expectation should be that you will lose money trading on these platforms. Right. I'm going to throw in one more because I can't resist, because this is so interesting. A senior vice president of the Cato Institute, the Libertarian think tank, told the New York Times that he actually wants people with insider information, I guess like the guy in special forces who bet on when Maduro is going to be. leaving office in Venezuela, that this guy at Cato actually wants people with insider information to make these bets. Do you understand even the thinking behind that? I guess he thinks it would be good for public policy for some reason.

There's an economic justification for these markets and that we can look and see the price or the probability and learn something from it. Lots of people think there's going to be a ceasefire with Iran so that probability that price goes up and we learn something from it. That argument may have some force in the political or geopolitical context. It's really quite hard to translate that to sports or other settings when it's really coin flip, what's going to happen. Nobody knows the future. Nonetheless, even if this is valuable for sophisticated market participants, there's a real question whether that's how it's being used by most people out there in the marketing to kind of the general public is not based on this idea that there's a small handful of people who are using these markets to convey sophisticated information. It's rather the exploitation of your average teenager or your average young person. And that's why the statistic of 0.1% capturing most of the profits on polymarket, why that statistic is so important is because it says that, sure, maybe there is a small group of people who are making money and using these systems in this way. The vast majority of you are not, and you should be aware of that. And certainly in sports and these other markets, it's really a coin flip. All right. Well, we'll see how the trial of that soldier in the Venezuela-Muduro incident turns out. We'll see how this lawsuit by the state of New York turns out and whether Calci and maybe other prediction market sites continue to exist after that. Joshua Mitz is a professor at the Columbia Law School who specializes in corporate business and transactional law with a special focus on prediction markets. Thanks so much for joining us today. Thank you for having me.